ByLawyers News and Updates

Subdivision – Off the plan sales – Materially affects

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Many properties are sold ‘off the plan’. This is the phrase used to describe a property that is a lot on a proposed plan of subdivision, meaning that the plan of subdivision creating the lot has been drawn but it is not yet registered at the Land Titles Office.

Historically, it was not permissible to sell ‘off the plan’. Until amendments to the Sale of Land Act 1962 it was basically illegal to enter into a contract for the sale of a piece of land unless that land had its own title. Unfortunately the subdivision process can be very time consuming as the infrastructure required for the plan to get to a stage where responsible authorities are satisfied that the plan can be registered and separate titles issued is often substantial. In the case of land subdivision, this involves the provision of roads and services; and, in the case of building subdivision, it involves construction of the building. However the market consisted of vendors who were keen to secure purchasers for these separate lots and purchasers who were keen to secure their ‘little piece of heaven’ and so the restriction on sale that was a dampener on economic activity was eased.

However, in recognition that such contracts generally involve a developer and a consumer and therefore are conducted in an uneven bargaining environment, some restrictions still apply to such sales. These restrictions also recognise that there is likely to be a substantial delay between contract and settlement. Indeed, this very month, an obligation to include a conspicuous Notice to that effect in every off the plan contract has come into force. Other statutory provisions relating to such sale include limitation on the amount of the deposit and an obligation that it be held on trust, an obligation to include information about land surface works, a default period for registration (sunset clause) after which time the purchaser may avoid the contract and protection against changes to the proposed plan. These obligations require the inclusion of various provisions in the contract and these are included in the General Conditions.

Despite the fact that off the plan sales form a substantial part of the market, there have been relatively few decisions that have considered the meaning of these statutory protections. In the apartment market, there were some proceedings involving dissatisfied purchasers in the early days of the Docklands project, but those complaints tended to relate to price rather than off the plan issues. In the land subdivision market, the lack of cases probably reflects the fact that it is just too expensive for John Citizen to consider taking a land developer to Court in relation to such matters.

In recent years off the plan sales have become popular in an area that is something of a combination of the other two areas. Urban renewal and infill housing has created a market for small land subdivisions that involve the subdivider either constructing a home on the subdivided land or arranging for that construction. This scenario produced the recent case of Joseph Street P/L v Tan [2012] VSCA 113 discussed in the September 2012 column and has now produced Besser v Alma Homes P/L [2012] VSC 460.

This case involved a 4 lot plan of subdivision of a large block on a main road in Caulfield and the purchaser entered into an off the plan contract for a ‘front’ unit for $1,250,000. The contract included a copy of the proposed plan of subdivision which included a plan showing a common driveway between the two front blocks giving road access for the two rear units and revealed that an owners corporation would be created with each unit having a 25% entitlement and liability. After registration of the plan the purchaser became aware that the lot entitlement and liability had changed so that each front unit had an entitlement and liability of 1 out of 202 – less than 0.5%. This unilateral decision by the developer had apparently been made on the basis that the front units would not use the common property and, on a liability basis, could be seen to advantage the front units.

However this proposal had not been communicated to the purchaser, who took the view that the change amounted to “an amendment to the plan of subdivision which will materially affect the lot” thereby entitling the purchaser to avoid the contract pursuant to s 9AC of the Sale of Land Act 1962. The vendor argued that the change to the lot entitlement and liability schedule was not a change to the plan, but that argument was rejected. Similarly, the vendor’s argument that the amendment did not “materially affect” the lot was, not surprisingly, rejected. Pagone J. alluded to the loss of voting rights consequent upon the amendment, but the affect on insurance entitlement in the case of a combined building policy would also be a powerful reason to find material affectation.

Interestingly, the fact that the notification of the amendment and the purchaser’s avoidance was made after registration of the plan was not an issue. Section 9AC(1) does include the words ‘before the registration of the plan’ but presumably the vendor accepted that as notification came after registration of the plan, an attempt to limit the purchaser’s avoidance right to prior to registration would be doomed to fail. The interaction between s 9AC and s 10, which also creates an avoidance right but is limited to exercise prior to registration, is uncertain and legislative clarification of the purchaser’s rights in this regard is needed.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Subdivision – Off the plan sales – Best endeavours – Part 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The April 2011 column considered the case of Joseph Street Pty Ltd v Tan, a decision at first instance reported at [2010] VSC 586. The case has now been reversed on appeal, reported at [2012] VSCA 113.

The effect of the Court of Appeal decision would appear to make the entering into of a s 173 Planning and Environment Act 1987 Agreement compulsory for developers in all circumstances where the municipal council is prepared to enter into such an Agreement.

The case involved a ‘villa unit’ style development of 6 single storey units in Box Hill. Units were sold off the plan with settlement to be after registration of the plan in accordance with common practice. The builder that the developer had contracted to undertake construction failed to do so and the developer was forced to find another builder. As a result, construction was not completed within the time allowed by the contract for registration of the plan (the sunset period) and the developer rescinded the contract.

The purchaser refused to accept rescission and sued for specific performance of the contract on the basis that the vendor had failed to use ‘best endeavours’ to have the plan registered. It had been established at first instance that this obligation consisted of both an express contractual obligation and also as an implied obligation.

The Full Court identified that registration of the plan could only be achieved when the council had issued a Certificate of Compliance, but that there were two methods by which the developer could obtain that Certificate and thus fulfil the contractual obligation to secure registration of the plan:

  1. the developer could complete all the building works to the satisfaction of all relevant service authorities; or
  2. the developer could enter into a s 173 Agreement with Council after entering into agreements with service providers.

Evidence given on behalf of the developer suggested that the s 173 Agreement option was limited to ‘greenfield’ developments and had not been contemplated by the developer as an option. However evidence from the council suggested that s 173 Agreements were common in ‘smaller’ developments and indeed the planning permit issued in respect of the development had referred to the possibility of just such an Agreement.

The effect of the s 173 Agreement is to give the council the ability to register on the ‘parent’ title (the title to the unsubdivided land) the requirement that the development be constructed in accordance with the planning permit issued in respect of the development. If council has the benefit of such an Agreement then, subject to the satisfaction of other relevant authorities, council is able to be satisfied that the development will be built in accordance with the permit and council’s planning responsibility in relation to supervision of construction is thereby satisfied. If construction is not in accordance with the permit, council is entitled to enforce the s 173 Agreement against the developer and all subsequent registered owners.

The s 173 Agreement process appears to be a shortcut to registration of the plan, as a certificate of compliance may be issued by council well in advance of completion of all construction and infrastructure works. The requirement that the developer enter into satisfactory agreements with infrastructure providers is a pre-condition to a s 173 Agreement and such arrangements may be tedious to negotiate, but once achieved registration of the plan can quickly follow.

This might cause concern for a purchaser if the only requirement on the vendor is registration of the plan. As can be seen from the above, this could be achieved well before construction is complete, but no purchaser is going to want to pay for a half finished property. Thus a purchaser needs to be satisfied that settlement will only be due after both registration of the plan and issue of a certificate of occupancy. Whilst there is much to be said against a certificate of occupancy being a true reflection that all works have been completed, it is at least an objective confirmation that most works have been completed. A better test is a satisfactory report from the purchaser’s building consultant, but few developers are prepared to countenance such a hurdle.

Whilst the Court of Appeal in Joseph Street may have identified a shortcut that was open to the developer, it is interesting to note that the developer was not aware of that possibility and there is no suggestion that the purchaser ever suggested to the developer that such a process was available, let alone that the developer refused to follow that course. Apparently, the mere fact that the option was available and not taken was enough to satisfy the Court that the developer had failed to use his best endeavours. A true case of ignorance is no excuse.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Lawyers selling real estate

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Legal practitioners are licensed to provide legal advice. Estate agents are licensed to sell real estate. Both professions operate, in part, in the real estate industry and at times the distinction between their respective roles may become blurred. Indeed, the 1990s saw a push in Victoria for lawyers to take a more active role in the industry, along the lines of the Scottish model where lawyers are actively involved in the marketing of real estate. This desire to broaden their area of influence may well have been a response by lawyers to the perceived contraction of their work base resulting from the rise of conveyancers. The fact that an agent’s commission will usually be between 10 and 20 times the average legal bill for a transaction might also have played some part.

A lawyer wishing to gain an estate agent’s licence could reasonably expect to be able to satisfy the various formality requirements and so it is possible to hold both a licence to practice law and a licence to sell real estate. Not many lawyers choose to do so, but it is possible. Anecdotal evidence suggests that most lawyers prefer to practice in an environment that recognises the different skills associated with the provision of legal advice, as opposed to the marketing skills associated with a sales environment. This may be described as a collaborative method of practice, with the lawyer developing a working relationship with one or more estate agents designed to deliver the two separate skill sets to the client from two distinct sources. However this method of practice is susceptible to allegations of conflict of interest and the lawyer must take care to ensure that the client is aware that the lawyer’s loyalties lie with the client, notwithstanding a close working relationship between lawyer and agent. The dark side of this collaborative model is inappropriate referral by one participant to the other, sometimes involving payment for that referral, but such situations are rare.

However a lawyer might also be involved in the sale of real estate on behalf of a client without holding an estate agent’s licence. Section 5(2)(e) Estate Agents Act 1980 recognises an exception to the obligation to hold an estate agent’s licence for:

Any Australian legal practitioner (within the meaning of the Legal Profession Act 2004) for the purpose only of carrying out the ordinary functions of an Australian legal practitioner.

The breadth of this exception was tested in Noone v Mericka & Ors [2012] VSC 101.

Peter Mericka is an Australian legal practitioner and has for a number of years conducted a legal practice known as Lawyers Real Estate. This practice ‘combined’ the role of lawyer and real estate agent and offered vendors a ‘one-stop shop’ with a fixed fee for both the sale of the vendor’s property and the legal work associated with that sale. This is akin to the Scottish model and the costs for this ‘combined’ service were more than a lawyer’s standard conveyancing fee but considerably less than a standard estate agent’s commission. Mericka gained an estate agent’s licence in 2010 but had conducted his business prior to that time on the basis of the exception in s 5(2)(e). This drew the attention of Consumer Affairs Victoria, which is the regulatory authority pursuant to the Estate Agents Act, and alleged that Mericka had contravened the Act by selling real estate without holding an estate agent’s licence.

Sifris J. concluded that whilst the ordinary functions of an Australian legal practitioner might include the selling of real estate on behalf of a client ‘where it is required or is incidental to the provision of legal services to a particular client’ the activities of Mericka did not come within the exception. These activities involved ‘ongoing and systematic marketing and advertising in connection with the sale of clients’ properties’. It was the repetitive nature of the services offered which lead to the conclusion that the activities took the work outside of the ‘ordinary functions’ of a lawyer. Indeed the judge described this work as ‘engaging in the business of a real estate agent’.

The consequence was that Mericka had contravened the Estate Agents Act for that period of time during which he was unlicensed and had also engaged in misleading and deceptive conduct by advertising that he was entitled to sell real estate on behalf of clients without having an estate agent’s licence. Imposition of a penalty was adjourned to another day.

Sifris J. also decided that the exception could never apply to an incorporated legal practice as it is limited to an Australian legal practitioner and this, by definition, must be an individual, albeit an individual practising alone or in partnership. This anomaly should be addressed as there is no reason why a practitioner who has adopted the perfectly acceptable practising method of utilising an incorporated legal practice should be discriminated against. The same may be said for a practitioner practising in a multidisciplinary practice, another mode of practice recognised by the Legal Profession Act. Indeed the motivation for establishing a multidisciplinary practice is to encourage lawyers to expand their areas of practice into ‘nontraditional’ areas, and a multidisciplinary practice that involved the occasional sale of client’s property is a logical area for expansion.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Wills and estates – Death in the house

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Death can impact on a conveyancing transaction in a number of ways, whether the death occurs prior to commencement or during the course of the transaction.

Survivorship

One common example is where one joint tenant dies after the parties have separated. The survivor claims the whole of the property by survivorship, but the beneficiaries of the deceased argue that the separation of the parties severed the joint tenancy and that survivorship does not apply. It is impossible to provide a categorical formula for resolving such disputes as each case will very much depend upon the length and circumstances of the separation. The one thing that is certain however is that the lawyers will, as always, be regarded as the bad guys no matter how the dispute is resolved.

Sales generally

The fact that a registered proprietor has died does not necessarily mean that a proposed sale has to go ‘on hold’. There may be good reasons why an asset should be disposed of promptly after the death of the owner, but equally good reasons why the estate of the deceased may take some considerable time to be finalized. A sale in such circumstances need not await all of the formalities of a grant of probate as an executor of a will is entitled to enter into a contract to sell an asset of the estate even though the executor has not obtained a grant of probate at the time the contract is entered into. The sale is made subject to the executor obtaining a grant of probate and the proposed settlement date takes that condition into account, for instance by specifying settlement ‘on the 1st June or 14 days after the vendor obtains probate’.

However an executor in such circumstances cannot enter into a terms contract as the executor is not ‘presently entitled to become the registered proprietor’ as required by s 29D Sale of Land Act.

This ability to ‘intermeddle’ with estate assets is only available to an executor named in the will and is not available to a person who may intend to apply for a grant of letters of administration of a deceased estate as such an appointment is very much at the discretion of the Court.

Sensational deaths

That someone died in a house that is now for sale is a reasonably common event. To date such circumstances have not caused the common law any concern and fall within the ambit of caveat emptor – let the buyer beware, so a vendor in such circumstances has no duty to bring the death to the attention of a prospective purchaser. That someone was murdered in the house does not alter the common law’s view, but modern statutory principles of misleading and deceptive conduct may impose additional vendor disclosure obligations. A case involving such circumstances came before the New South Wales Administrative Decisions Tribunal late last year in the context of disciplinary proceedings against an agent involved in such a sale: Hinton & Ors v Commissioner for Fair Trading [2006] NSWADT 257 and Hinton & Ors v Commissioner for Fair Trading [2006] NSWADT 299. Whilst the comments do not directly bear on the vendor’s obligations, it is noted that the vendor did in fact agree to release of the purchaser from the contract when the purchaser became aware of the circumstances of the death after entering into the contract.

A vendor proposing to sell such a property might consider including a special condition in the contract to the effect that the purchaser is aware that the former owner died whilst residing in the property and that the death occurred in unusual circumstances.

Death during the course of the contract

If a vendor dies during the course of the contract, the vendor’s lawyer should advise all parties concerned of the death and take steps to establish the ability of the legal personal representative (either executor or administrator) to complete the transaction – (1989) Law Institute Journal 1149 (December) – which may require a ‘temporary’ grant (ad colligendum bona) if settlement is imminent. Whilst the ‘easy’ solution would appear to be to rely on existing documents (particularly if the transfer of land has been signed by the deceased in anticipation of settlement) such action is fraught with danger. The same may be said of relying on a transfer signed by an attorney under power when the donor/vendor has died.

Settlements conducted in such circumstances are liable to be challenged by the ‘prodigal son’ or other unexpected potential beneficiary of the deceased’s estate who finds that the main asset of the estate has been disposed of and distributed on the basis of a transfer which took place after the death of the deceased.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

What you need to know about the the Personal Property Securities Act 2009

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By Lawyers

Many practitioners have expressed concerns as to how the new legislation will affect them, and expressed fears they will overlook actions they should take.

This is written to assist in quelling those fears.

What must a practitioner look out for?

Generally a practitioner will need to either search the registry to establish that personal property is not encumbered, or to register a security interest that has been documented to ensure the priority of that interest.

Registration and search will be the everyday actions that practitioners take to protect their client’s interests. Both are simple processes and in time will become second nature.

Security interests covered by the Personal Property Securities Act (PPSA) include:

  • charges;
  • mortgages and pledges;
  • conditional sale agreements;
  • sale of goods subject to retention of title;
  • hire purchase agreements;
  • consignments; and
  • leases of goods.

The central fact to remember is that the Act provides a method of establishing priority of competing interests in personal property. It does not affect the efficacy of agreements vis-a-vis the parties and it does not apply to real property.

Existing agreements and arrangements need not be recreated, however if required there are security agreement precedents provided in the Step-by-Step publication.

There is a two-year grace period to allow for the implementation of the new arrangements and registration of security interests.

However note security interests in goods supplied on retention of title basis will not necessarily have the benefit of the transitional grace period, so consideration should be given to registering them after commencement of the Act.

Existing charges registered with ASIC, and many other financial arrangements such as those recorded in registers of encumbered vehicles, will be automatically migrated to the PPS Register.

To assist practitioners to avoid any oversights we have included reminders or cues in the instructions checklists for sale of business, mortgage, lease, and sale and purchase of real estate.

The PPSA will not be of much relevance to conveyancers unless there is personal property included in the sale that sensibly might be subject to finance. A search of the registry to ensure it is unencumbered is easily made. This doesn’t mean searching for the usual fixtures or minor inclusions in residential sales, but rather something such as an expensive ride on mower.

On the other hand, when acting on the purchase of a business a search should be made to ensure that the goodwill, stock, plant and equipment are not encumbered.

Practitioners will clearly not be caught out when issues are specifically raised by clients – for instance, in relation to such matters as retention of title clauses in their terms of trade – as they will have time to research our commentary and other sources and to direct the client to the array of available information.

The main arrangements clients will need to reconsider are as follows:

  • Supply contracts that contain a retention of title clause may require registration as purchase money security interests to protect the interests of the seller.
  • Equipment leases or bailments of more than 12 months may require registration to protect the interests of the equipment owner.
  • Leases of more than 90 days duration of serial numbered goods may require registration to protect the owner’s interests.
  • Some charges in joint venture agreements may need to be reviewed.

The usual transactions that will trigger the need for action are when a client wishes to secure a debt on personal property or when a client is buying or lending on security of personal property.

Some examples
  1. Sale of business with money left in, secured on any part of the business such as stock, plant and equipment, goodwill and licences: a common situation.
  2. Sale of personalty with vendor finance: a common situation.
  3. Companies giving directors or shareholders charges over assets to secure loans: a common situation.
  4. Provision of goods subject to retention of title until paid: clients will need to review their terms of trade and decide whether they need to register and if so, whether they will register or simply take the risk with their regular customers.
  5. Lease of personalty: not often seen in small practices.
  6. Sale of real estate with fixtures or fittings that are subject to finance agreements that need to be discharged: unusual.

The Personal Property Securities Register has developed five interactive tutorials to assist practitioners:

  • Getting started;
  • Creating a registration;
  • Creating an account;
  • Searching the PPS Register; and
  • Creating a secured party group.

For further information about how the register works:

Email: enquiries@ppsr.gov.au
Phone: 1300 007 777 (1300 00PPSR)

Tip Box

Whilst written for Federal practitioners this article has interest and relevance for practitioners in all states.

Retail lease – Predominant use

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Predominant Use

By Russell Cocks, Solicitor
First published in the Law Institute Journal

Section 4(1)(a) of the Retail Leases Act 2003 provides that the Act applies to premises:

wholly or predominantly for –

  1. the sale or hire of goods by retail or the retail provision of services

The Act was designed to protect retail tenants, specifically tenants of large shopping complexes where there was a perception of disproportionate bargaining power. However the Act is not limited to large complexes, although some of the provisions apply to a ‘retail shopping centre’, which is defined as five premises owned by the one landlord, and additional restrictions apply to such premises.

As the Act applies to retail premises generally, it may apply to shops and offices in strip shopping centres and even to stand alone premises in residential or industrial areas that have a retail use. Thus a solicitor who provides services to the public from a suburban office and a panel beater in an industrial estate may be entitled to the benefit of the protections provided by the Act.

It is important to understand that it is the use of the particular premises that determines the applicability of the Act, not the character of the tenant. Thus a solicitor is no doubt engaging in retail services and the solicitor’s office will be subject to the Act, but a separate storage facility rented by the solicitor as part of the legal practice will not be covered by the Act as those premises are not used for the provision of retail services to the public.

This distinction between retail and non-retail premises is simple when separate premises are used, but the distinction is less clear when the same premises are used for both retail and non-retail purposes. Such a situation might arise, for instance, where a business rents a large warehouse facility to manufacture furniture but also has a ‘front of house’ retail sales component. Determining whether the premises are ‘retail’ will depend upon whether the ‘predominant use’ of premises is retail and two obvious tests for determining the predominant use in such a situation are the comparative area occupied by the various uses and the proportion of income derived by each use. In the present example it is likely that the manufacturing facility would occupy the majority of the area and the income derived from retail sales would be a small proportion of total income and thus the predominant use is manufacturing, and so the Act will not apply.

The dictionary meaning of ‘predominant’ is ‘greatest’ or ‘most important, powerful or influential’. However the question is not so much what is ‘predominant’ but rather ‘predominant’ what? Consideration of whether the retail component of the business occupies the ‘greatest’ amount of the area of the premises or generates the ‘greatest’ proportion of income would appear to be relevant tests, but they are not the only factors to be taken account: see Elmer v Minute Wit Enterprises P/L [2002] VCAT 1101.

That case concerned a shop in a strip shopping centre that was rented by a tenant who sold antique furniture, a scenario that would ordinarily be retail premises. However the tenant’s principal business was conducted from nearby premises and the shop was used only for display and storage, only being opened when an inquiry was directed to the principal place of business. This, in addition to other reasons, justified a finding that the premises were not retail premises within the meaning of the Act and introduced a ‘time’ test into the mix.

A similar ‘time’ test was adopted in Evans & Ors v Thurau P/L [2011] VCC 1354. The subject property was an apartment in a ski lodge which was subject to a requirement in the head lease that the apartment be available for rental through the head tenant to members of the public when not in use by the subtenant. It was argued that this meant that the property was ‘holiday accommodation’ and therefore ‘retail premises’ and that the dispute should therefore be before VCAT. Judge Anderson concluded that the fact that the snow season was limited and that the subtenant could, if they choose, occupy the premises for the whole of that season to the exclusion of the public meant that the predominant use was not retail. The fact that a retail use was one of the possible uses was not enough.

It can been seen from these cases that the determination of whether the ‘predominant use’ of premises is retail will depend upon a number of possible factors, some or all of which may play a greater or lesser role in the determination in each case. Apart from what the lease itself may provide, the courts may consider the area occupied by the retail component, the income earned by that component and the time that the retail component is utilised.

It will be interesting to see how these factors will come into play when an inevitable question comes up for determination. That will be a dispute arising from premises used for retail sales conducted entirely by phone, fax or internet, a typical call centre environment. Such premises do not include physical access to the premises by members of the public, but certainly involve retail sales. No doubt one party will argue that public access is an integral part of retail sales within the meaning of the Act, an argument that appears to have some merit when the purposes of the Act are considered.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Co-owners and easements – Two topics

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

This column is concerned with two cases on entirely different topics, but connected by a similarity in the name of the principal parties and the fact that they are recent decisions in the Real Property List of VCAT, a jurisdiction that is growing in importance for property lawyers. Pavlovic v GEADSI Nominees P/L [2012] VCAT 997 (Pavlovic) concerns an easement and Pavlovich v Pavlovich [2012] VCAT 869 (Pavlovich) concerns co-ownership.

Pavlovic took place in a fairly conventional inner suburban setting. The two protagonists were neighbours, with Pavlovic having purchased his property in recent years with the intention of renovating and living in the property and GEADSI having constructed three units on the adjoining property some 15 years previously. At that time GEASDI had obtained from the then owner of the Pavlovic property consent to construct a stormwater drain across the Pavlovic property and a stormwater pipe had been constructed such as to take the stormwater from the GEADSI land through the Pavlovic land and to a laneway at the rear. This pipe was below the surface of the ground and Pavlovic was not aware of the pipe when he purchased the property as it was not recorded as an easement on the title, not evident to a physical inspection and he was not otherwise been informed of its existence.

Pavlovic intended to construct improvements in the backyard and discovered that the soil was so saturated that it would be necessary to remove the soil at a cost of $15,550 before commencing construction. Additionally, it would be necessary relocate the pipe to prevent the ongoing saturation of the soil below the improvements. Pavlovic wanted the pipe removed. He commenced these proceedings for an order pursuant to s 16 Water Act 1989.

GEADSI argued that the pipe constituted an implied easement and that Pavlovic, as subsequent purchaser, was bound by that easement. The Tribunal rejected that argument, effectively finding that the consent given by the previous owner did not create a proprietary right and was not enforceable against subsequent owners. An argument based on a prescriptive easement was rejected on the basis that the right to use the pipe arose by consent. The recent case of Kitching v Phillips [2011] WASCA 19 was referred to. Effectively, the Tribunal was of the view that the original temporary solution to the drainage problem should not be allowed to impact on the proprietary rights of the new owner – a glowing endorsement of fundamental Torrens principles. GEADSI was ordered to pay the costs of removing the saturated soil and to remove the pipe.

Pavlovich on the other hand concerned an application by a co-owner pursuant to the ‘partition provisions’ of the Property Law Act 1958, specifically s 228. The parties to the proceedings were registered joint tenants and, unusually, the application was not for a ‘partition’ as that word is generally understood but rather a transfer from one co-owning joint tenant to the other joint tenant. Whether VCAT had power to do so occupied the first portion of the judgement, with a conclusion that the power conferred by s 228 did indeed authorise such a transfer.

The parties were mother and son. There was evidence that as part of a downsizing exercise the mother had purchased a property but was unable to gain temporary finance, so the son was added as a joint tenant. Shortly after, the loan was repaid from the proceeds of sale of the mother’s original property and so the subject property was owned as joint tenants, although the son had effectively made no financial contribution.

Ten years later the mother applied for an order that the son transfer his interest in the property to the mother. The mother argued that it had always been intended that the son would do so when the loan was repaid. The son argued that it had been agreed at the time that the son would remain as joint tenant and then ‘inherit’ the property upon his mother’s death as gifts were made to other siblings that would be ‘offset’ by the son taking the property. Essentially the issue was a factual one and the Tribunal accepted the mother’s version.

The Tribunal concluded that whilst the son was a legal joint tenant, beneficial ownership resided entirely with the mother, therefore the son was ordered to transfer his interest in the property to the mother so that she would become sole legal and beneficial owner. Concern was raised, but dismissed, that because the Tribunal was therefore finding that the son had no beneficial interest, he could not be a co-owner within the meaning if the Act and VCAT therefore had no jurisdiction.

This is similar to an argument raised in Garnett v Jessop [2012] VCAT 156. Jessop was the sole registered proprietor and Garnett sought partition on the basis that he had made contributions and therefore held an equitable interest on the basis of a constructive trust. VCAT dismissed a submission that only legal (registered) owners qualify as ‘co-owners’ within the meaning of the Act and held that a party claiming an equitable interest is a ‘co- owner’ and therefore entitled to seek partition.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Lease – Landlords beware

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent. Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent. It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact. However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis [2006] VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”

That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises. Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion. The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.

The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was overholding in accordance with the terms of the ‘standard’ lease. The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks. Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.

This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546. This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods. The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.

The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant. The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.

The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods. The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods. Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies. This argument was accepted.

The landlord relied upon two clauses in the lease to justify its actions. Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘reentry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant. The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’. It followed that such a clause is contrary to public policy and therefore void. It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.

The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.” The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.

This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods after termination of the lease. It simply means that such clauses must be very carefully drawn.

Addendum: Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546 reconsidered by Supreme Court at Asian Pacific Building Corporation Pty Ltd v SharonLee Holdings Pty Ltd [2013] VSC 11.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Pre-packs – Do they have a place in Australian insolvency practice?

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

You may have noticed the occasional reference in the media to fraudulent phoenix activity and attempts by government agencies such as ASIC (Australian Securities and Investments Commission) and the ATO (Australian Taxation Office) to ‘crackdown’ on serial offenders, particularly in the building and construction industry. Phoenix activity typically involves the transfer of the business assets of a company to a new entity, with creditors being left behind with no real prospect of payment.

There has been recent discussion in the profession about the distinguishing features of a phoenix and a bird of a different feather known as a ‘pre-pack’. In the United Kingdom, pre-packs are a legitimate and accepted means to phoenix the business of a company. In Australia, there is no formal pre-pack procedure although variations of the process are often used by those who specialise in the area, particularly in the turnaround sphere. Where this occurs, the bona fides of the directors are often treated with scepticism. However in many instances, the transfer of assets from one company to a related entity may in fact be in the best interest of all stakeholders of the insolvent company.

In this newsletter, we explore phoenix activity and examine the pre-pack concept.

What is a phoenix company?

A phoenix company is usually considered to be one which is established to carry on the business of an insolvent company, using the assets and employing the staff of the insolvent company, but without accepting liability for its debts. In most cases, the members and directors of the phoenix company are the same or at least related to those of the insolvent company. The business rises from its burden of debt in a new corporate entity, using the same or a similar name, but the creditors of the insolvent company are left to recover what they can for the amounts owed to them through the liquidation process.

Is phoenix activity fraudulent?

Current legislation does not explicitly prohibit phoenix activity. However the process is one that can be easily abused with the result that the activity is often referred to as being fraudulent. Examples of phoenix activity generally considered to be fraudulent include:

  1. transferring the business and/or assets of a company to a new entity for less than fair market value and/or on terms considered to be uncommercial;
  2. establishing a corporate structure for the express purpose of defeating creditors by incurring liabilities through that company whilst keeping assets safe in a related entity;
  3. deliberately incurring company debt immediately prior to the transfer of the business and/or its assets, without having any expectation that the company would be able to pay that debt.

In order to combat such activity, remedies are available within the Corporations Act, which has a number of provisions dealing with breach of duties by directors as well as provisions designed to protect creditors in the event of insolvency. Proven breaches of these provisions can result in civil and/or criminal penalties. Furthermore, the ATO is strengthening its powers using the director penalty notice regime by providing disincentives to fraudulent phoenix activity by making directors personally liable in certain circumstances for their company’s unreported unpaid superannuation and pay-as-you-go withholding amounts.

The applicable provisions of the Corporations Act are as follows:

  1. If the phoenix sale of a company’s business and assets is for less than fair market value or on terms considered to be uncommercial, then it may be challenged as an uncommercial transaction (section 588FB), as an unreasonable director-related transaction (section 588FDA), or as a transaction to defeat creditors (subsection 588FE(5)).
  2. If the sale is not in the best interest of the creditors, the directors may have breached their duties to the company and its creditors. These duties include the duty to act with care and diligence (section 180), to act in good faith and for a proper purpose (section 181) and to not improperly use their position or any information obtained because of their position to gain advantage for themselves or cause detriment to the company (sections 182 and 183). Should it be proven that the breach of any of these sections occurred with either deliberate intention or recklessness, then the breach may result in criminal liability for the director/s (section 184).
  3. Pursuant to subsection 598(2), where the court is satisfied that a person is guilty of fraud, negligence, breach of trust or duty and the company has suffered loss or damage as a result, the court may make such orders as it thinks appropriate in relation to that person.
  4. If employees and employee entitlements are not handled correctly, the director risks committing the criminal offence of entering into a transaction with the intention of avoiding employee entitlements (section 596AB).
  5. If the directors do not prevent all unnecessary liabilities from being incurred once they realise a company may be insolvent, or likely to become insolvent, then they may have breached their duty to prevent insolvent trading (section 588G) and risk being held personally liable for those debts. If the failure to prevent liabilities from being incurred is proven to be dishonest, then the breach may constitute a criminal offence (section 588G(3)).

Proponents of pre-packs argue that, if properly completed, directors will avoid breaching the above legislative provisions.

What is a pre-pack?

A pre-pack is a sale process through which the sale of the business and/or assets of an insolvent company is agreed prior to the appointment of an insolvency practitioner, whose task is to review the sale terms and, if thought appropriate, ratify the sale. The model adopted in the United Kingdom has elements that would not be considered acceptable under Australian law and practice. For example, in the United Kingdom, an insolvency practitioner will work with management to arrange the sale of the business and assets and, after those arrangements have been made, he or she will then be formally appointed as administrator. The conflict of interest is obvious. The pre-pack model, modified to suit the Australian environment, has three distinct steps, namely:

  1. Preparation
  2. The directors will have the business and assets of the company valued by a reputable valuer. The sale of the company’s business and assets should be based on this valuation to ensure that fair market price is obtained.
  3. The directors should prevent all non-essential debts from being incurred. In doing so, they will reduce any exposure to insolvent trading.
  4. Execution
  5. The directors then arrange the sale of the company business and/or assets to another entity, for fair market value. A conditional contract would be executed together with an agreement to operate the business under licence. To prevent the appearance of any impropriety, the completion of the contract should be subject to ratification by an administrator who would in the ordinary course seek creditor input.
  6. The employees of the company would ordinarily be transferred to the new company, which will accept responsibility for their accrued entitlements.
  7. The business continues being operated by the new company.
  8. Ratification
  9. The insolvent company then appoints an administrator (or possibly a liquidator), who will investigate the sale, test the market if appropriate, and report to creditors. The expectation of management is that the sale will be ratified. If that transpires then the administrator will complete the sale.
  10. If the sale is not ratified, then the contract will be rescinded. Responsibility for operating and selling the business would then revert to the administrator.

Importantly, the insolvency practitioner to be appointed administrator should not advise on the process. This ensures that, following appointment, the administrator can act, and be seen to act, independently of those involved in the transaction.

If, for some reason, a sale was completed prior to appointment, then it is likely that the company would be wound up by way of a creditors’ voluntary liquidation. In those circumstances and as in any winding up, the liquidator would review the sale, and in the event it is found to be unreasonable, then he may, if commercial to do so, seek to overturn the sale under the voidable transactions provisions of the Act. The liquidator would then realise the assets for the best price possible.

Why pre-pack and not administration?

The voluntary administration regime was introduced in 1993, and was designed to provide a flexible mechanism for a company’s affairs to be administered in such a way that maximises the chances of the company or its business remaining in existence or, if that is not possible, results in a better return to creditors. It does this by imposing a moratorium on the company’s creditors, giving an administrator time to investigate the company’s affairs and consider a proposal for the company’s debt to be compromised. The proposal can take many forms and, if accepted by creditors, the company will then enter into a Deed of Company Arrangement (DOCA).

As the legislative framework for flexible restructure is already in place, then why bother with a pre-pack sale? Critics of the voluntary administration process argue it is cumbersome, intrusive, costly and detrimental to the business. Proponents of pre-packs claim they offer a better chance for existing management to save their business and for creditors to maximise their return. They say pre-packs do this by:

  1. ensuring the continuation of the business in a new entity;
  2. preserving the goodwill of the business and its suppliers and customers;
  3. maximising the value of company business and assets;
  4. avoiding a costly trade-on administration pending a sale.

In addition, creditors should have the comfort of knowing the sale is subject to review and ratification by an independent administrator. However, there are other considerations that need to be taken into account, namely:

  1. The company will still have go through the administration process and bear the consequential costs of the administrator possibly testing the market and dealing with enquiries which may extend to entering into negotiations for the sale of the business and assets.
  2. The appointment of an administrator and the subsequent winding up of the company will still leave the directors exposed to potential claims under the Corporations Act – for example, claims resulting from trading whilst insolvent. This means that the directors may still have to consider propounding a DOCA as part of the pre-pack process, further adding to the costs that might be incurred.
  3. The directors or owners of the entity acquiring the business and assets will need to arrange funding not only of the agreed purchase price but also ongoing working capital. In many instances buying the business and assets of a company will not be a practical option.

Conclusion

The debate surrounding phoenix activity continues, in which the cost to the community is contrasted with the efficiency and other benefits of the pre-pack process. Should directors who phoenix the business of their companies be held more accountable? Or should the interests of creditors in an increased commercial return supersede government concerns over the director’s bona fides? The government is considering further legislative amendments to inhibit deliberate, cyclic, fraudulent phoenix activity. In this regard you might be aware that earlier this year, the government introduced what is commonly called the Similar Names Bill, which sought to amend the Corporations Act to make a director of a failed company personally liable for its debts where the related entities had the same or similar names. We understand this Bill has made no progress but it is an indication of the government’s intentions.

Whilst the voluntary administration regime already provides a mechanism for the restructure of a company’s business, it is often criticised. Proponents of pre-packs argue that a pre-pack sale of a company’s business will in many instances deliver better results than can be achieved through a standard administration, and that sufficient safeguards already exist within the Corporations Act to protect creditors’ interests. We consider that, in certain circumstances, a formal pre-pack process may be more effective than voluntary administration. We also consider that the concept deserves to be further explored.

This article was written by O’Brien Palmer insolvency authors. They are a specialist practice with national affiliations, focusing on corporate and personal insolvency and business recovery. They are committed to assisting solicitors help their clients understand and navigate the complex realms of insolvency.

The ATO rises and ups the ante – ATO granted new powers to pursue directors

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By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

The Tax Laws Amendment (2012 Measures No.2) Bill 2012 received royal assent on 29 June 2012 and has commenced operation. This bill extends the existing director penalty notice (DPN) regime to make directors personally liable for their company’s unpaid superannuation in addition to pay as you go (PAYG) withholding amounts. This legislation acts retrospectively in respect of PAYG liabilities. It is more urgent than ever that directors be aware of the PAYG and superannuation liability position of their companies to ensure they do not become personally liable for the debts of those companies.

The new regime enables the Australian Taxation Office (ATO) to take action under the DPN system for all PAYG and superannuation debts that remain unreported and unpaid from 29 June 2012, including PAYG liabilities incurred prior to the commencement of the bill, which remain unreported for more than three months. Further, directors who fail to comply with their reporting requirements may become liable to pay the new PAYG withholding non-compliance tax, which can be set-off against PAYG credits due to directors. If directors have not reported on these liabilities for the period ending 31 December 2011, it is already too late.

Although it may take some time for the ATO to implement and utilise these new powers, company directors are risking increased enforcement action if they fail to deal with outstanding tax and superannuation liability now. The following is a guide to the director penalty notice regime and a summary of the changes which have taken effect.

Directors to become personally liable for unreported PAYG

Where a company’s PAYG liabilities remain unreported to the ATO for more than three months after the due date, the ATO may make directors personally liable immediately; and, although still required to issue a DPN prior to commencing enforcement action, the appointment of an administrator or liquidator to the company will no longer prevent directors from becoming personally liable for the company’s tax debt. The due date for reporting purposes depends on the company’s PAYG withholding amounts:

  • small withholders – $25,000 annually or less, 28 days after quarter end; and
  • medium withholders – $25,001 to $1 million annually, 21 days after month end.

Most companies which haven’t reported to the ATO on PAYG liabilities for the quarter ending 31 March 2012 will have until 21 July 2012 to report, or their directors risk being made personally liable for the amounts outstanding. For the June 2012 quarter, the final date will be 21 October 2012. Lodgement dates vary from month to month and companies lodging via a tax or BAS agent have an extra month.

Directors to become personally liable for unreported superannuation guarantee charge

Where a company has not paid superannuation by the 28th day after the end of each quarter, it is required to lodge a superannuation guarantee charge (SGC) statement by the 28th day of the following month – that is, in the second month. In circumstances where the statement is not lodged on time, the ATO can now make directors personally liable for outstanding superannuation, by issuing a DPN. This includes making directors liable based on estimates of SGC owing, rather than merely on reported figures, and liability will arise three months after the relevant lodgement date. Therefore the lodgement date for a June 2012 quarterly SGC statement would be 28 August 2012, with personal liability arising from 28 November 2012.

PAYG withholding non-compliance tax

In certain circumstances, directors and associates of directors will be prevented from obtaining PAYG credits in their individual tax returns where the company has failed to pay withheld amounts to the ATO. These amounts will be the lesser of the amount that the company has failed to remit to the ATO or the amount of tax withheld by the company from the director’s income.

The new DPN regime

In order to recover a director penalty from a director (in respect of PAYG or superannuation) the ATO must issue a DPN and wait until the expiration of 21 days from the date of the notice to commence proceedings. Personal liability is not triggered if within 21 days of the issue date:

  • the company complies with the obligation;
  • an administrator is appointed to the company; or
  • the company is placed into liquidation.

The critical change is that, where three months has lapsed since the due date, and the underlying liability remains unreported and unpaid, there is no relief from the director penalty by placing the company into administration or liquidation.

Therefore, the key issue under this new regime is that, in order to avoid personal liability, all liabilities should be reported no later than three months after the due date.

What do these changes mean?

To ensure directors do not become personally liable for company debts, directors should take the following steps:

  • ensure that business activity statements and other reporting requirements are lodged with the ATO within the required timeframes;
  • ensure that PAYG and superannuation amounts are reported and remitted to the ATO and relevant superannuation funds within the required timeframes;
  • increase the monitoring and awareness of their company’s taxation and superannuation liabilities, and act promptly where problems are identified;
  • increase the communication with the ATO where debts have been incurred beyond the company’s ability to meet them within the required timeframes;
  • seek immediate advice from their accountant or an insolvency practitioner at the first signs of trouble; and
  • if a DPN is received, then immediate compliance is required to ensure that the corporate veil is not pierced.

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