By Russell Cocks, Solicitor

First published in the Law Institute Journal

The current domestic building warranty insurance regime came into force 20 years ago and it remains largely a mystery to most property lawyers.

Donald Rumsfeld was referring to weapons of mass destruction when he made his infamous comment about ‘knowns, known unknowns and unknown unknowns’ but he may just as well have been referring to the owner builder warranty insurance scheme that has plagued Victorian conveyancing lawyers for 20 years. Whilst insurance is generally a matter relating to the quality of a property and not a matter going to title, it is the draconian consequences of getting the insurance situation wrong that makes this issue one of the great disasters of conveyancing. Quality issues do not generally create a right of avoidance but failure by the vendor to comply with the owner builder insurance obligations does allow the purchaser to avoid, an outcome that can have disastrous consequences for the vendor’s adviser.

KNOWN

What is known about the scheme is that an owner builder who performed building works in the 6.5 years prior to the sale is required to include a Condition Report in relation to those works in the contract and (if the works exceeded $16,000) obtain warranty insurance. It is important to note that the obligation to provide the Condition Report is absolute and does not depend upon the cost of the works.

KNOWN UNKNOWN – what works?

But knowing that the scheme applies to building works creates the first unknown – what building works trigger the obligation?

Section 137B(2) Building Act creates the requirement if a vendor ‘constructs’ a building and the definition of ‘construct’ (s 137B(7)) includes repair or alteration of the building. Clearly adding a room, for instance, would be construction and the requirement arises. But what about essentially cosmetic works that might involve work that could be described as ‘home handyman work’, such as retiling a bathroom or moving a doorway? Where do we draw the line?

A convenient threshold might be to differentiate between works that require a building permit and works that do not, although that arbitrary line is itself somewhat problematic. Essentially, substantial works require a permit and cosmetic works do not. But the Act, by contemplating an obligation even when a building permit has NOT issued, makes it clear that the requirement does relate to non-permit works and so we must presume that this unknown is in fact any and all works undertaken on the home – any repairs or alterations no matter how minor.

UNKNOWN UNKNOWNS – when?

Harder still is the problem of determining when the works were performed.

By s 137B(7) the Act provides a series of alternatives for determining when the 6.5 year period, known as the ‘prescribed period’, commenced. Starting from the contract date, the vendor must look back either:

1. 6.5 years and see whether an occupancy permit or certificate of final inspection was issued; or
2. if not, then look back 7 years to see whether a building permit was issued; or
3. if neither of the above, then look back 6.5 years to see whether the owner has certified that construction had commenced.

Works performed during any of those periods trigger the requirements. The first two alternatives are based on an objectively determined event but the third is a very subjective basis for determining the prescribed period and adds to the prevailing sense of unreality that surrounds the vendor’s obligations in relation to owner builder insurance.

Tip Box

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

Owner Builder works may require a Condition Report and warranty insurance

Even cosmetic works may trigger requirement

For works in preceding 6.5 years

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A recent case has considered the legal basis of short term holiday rental arrangements

Disruptive innovation is a term used to describe new products in an existing market that create a new market and a new value network and eventually displace established market leaders. Whilst it is a term of recent invention used to describe elements in the modern economy, the T Model Ford created disruptive innovation in the transport market over a century ago, eventually displacing the horse and cart.

Regulation of Uber, a disruptive innovation in the passenger transport market, is occupying the attention of government and the media at the moment and Airbnb is a fellow traveller, disrupting the holiday accommodation market. Whilst recent inventions of the modern economy, it is reassuring to know that these disrupters are, in the final analysis, bound by black letter property law.

Swan v. Uecker [2016] VSC 313 is a decision by Croft J. in the Victorian Supreme Court by way of an appeal from VCAT. The landlord had applied to VCAT for an order terminating the lease on the basis that the tenant had breached the lease by entering into a contract with Airbnb and subsequently accepting ‘guests’ at the property. The landlord argued that by doing so the tenant had subleased the premises in breach of the terms of the lease, thereby entitling the landlord to terminate the lease However VCAT dismissed the application on the basis that the tenant had retained the right to access the premises during the period of the guest’s stay and therefore had given the guest a license to occupy the premises, rather than a sub-lease, and that the licence did not amount to a parting with possession such as to constitute a breach of the lease.

Indeed, the contract between the tenant and Airbnb described the guest’s right as a licence but Croft J., adopting a substance over form approach, confirmed that merely describing an agreement as a licence did not save it from being a lease if the ‘touchstone’ of a leasing relationship, exclusive possession, passed to the guest. The tenant argued that the short nature of the typical guest stay of 3 to 5 days made that possession akin to the rights of a hotel guest but Croft J. rejected the analogy and held that the length of time associated with exclusive possession was irrelevant, concluding that exclusive possession for one day may be sufficient to establish a lease.

Croft J. was careful to caveat that this decision should not be seen as authority for the proposition that an Airbnb guest will always be held to be a tenant, rather than a licensee. If the rights of the guest fall short of exclusive possession of the leased property then it is safe to say that the guest will have a licence, rather than a lease, both as to form and substance. This would have been the case in Swan if the guest had have adopted the option of occupying one room in the property, rather than taking possession of the entire property. It might also have been the case if the Airbnb contract and advertising had have reserved to the tenant the right to access the property at any time during the occupancy of the guest, although the market acceptability of such an arrangement is problematic.

The importance of the decision is to confirm that disruptive or not, these innovations remain subject to established legal principles.

Tip Box

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

Airbnb rental arrangements are subject to normal common law leasing principles.

Exclusive possession will generally mean that the arrangement is a lease rather than a licence.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Issues of contamination remain an area of uncertainty for property lawyers.

The sale of real estate occasionally raises the issue of contamination affecting the land and there have been few cases to guide practitioners in dealing with such matters.

Examples of common contaminates in a domestic or commercial environment are asbestos, in homes and outbuildings or commercial premises, and petroleum products in land previously used for commercial purposes but now perhaps desired to be used for residential purposes.

The concept of ‘affecting the land’ calls attention to the vendor disclosure obligations set out in s 32 Sale of Land Act but a careful consideration of those provisions fails to reveal any statutory obligation, in the absence of a formal notice relating to the contamination, to disclose the existence of contamination. Whilst the relatively recently introduced s 48A Sale of Land Act may have extended remedies for breach of the Act, establishing a breach may itself prove difficult.

Contamination may therefore be described as a defect, perhaps a latent defect, but certainly a defect as to quality and not as to title. The underlying principle in relation to quality defects remains caveat emptor and a purchaser who discovers contamination after entering into the contract or, indeed, after settlement may have limited recourse against the vendor.

One exception to caveat emptor is misrepresentation, either fraudulent, negligent or innocent, but fraudulent misrepresentation is notoriously difficult to prove and the other varieties each have their own problems of proof. Statutory misrepresentation, in the form of a breach of the Australian Consumer law may well hold more fertile grounds but the average purchaser of a domestic or small commercial site will often find the costs of such proceedings forbidding.

Metropolitan Fire and Emergency Services Board v. Yarra City Council [2015] VSC 773 involved combatants which were anything but the ‘average citizen’. These parties were able to fund a hearing that occupied 22 sitting days, 2 Senior Council and 6 Junior Counsel to determine whether Yarra Council was responsible for contamination on land that had been occupied by the former Richmond City Council and came into the hands of the Board after 100 years of use as a municipal tar pit and subsequently a quarry and an abattoir. The Environment Protection Authority had issued a Clean Up Notice and the Board sought damages for the cost of the clean up from the Council on the basis that the Council had caused or permitted the pollution. Whilst the Board advanced many arguments to support its claim, only an argument based on Council’s liability under s 62A Environment Protection Act was successful.

It is the other, unsuccessful, arguments that are of more interest to property lawyers. These were, in summary:

Statutory Duty – the Board was not entitled to rely on the Council’s breach of s 45 Environment Protection Act as that was the province of the EPA;

Planning Duty – despite the Council being the responsible authority for planning, this did not create any additional duty to the Board;

Non-Pollution Duty – this was couched in terms of a tortious duty and rejected on the basis that the loss was not foreseeable, but reference was made to the underlying principle of caveat emptor, the touchstone of property lawyers;

Demolition Duty – again, based on the Council’s various statutory duties;

Disclosure Duty – which sounds like a property law argument but was also couched in tortious terms and relied on the case of Noor Al Houda Islamic College v. Bankstown Airport Ltd [2005] NSWSC 20 involving non-disclosure of asbestos. This argument was rejected largely because the Court was satisfied that the Board had been aware of many reports relating to the contamination and had given release and indemnities to its vendor, the State of Victoria.

The ratepayers of the City of Yarra may well feel hard done by as they have been fixed with responsibility for a very expensive clean up of pollution caused by the City of Richmond and the City did not even receive the proceeds of sale as the State Government had revoked the Crown Grant and sold the land to the Board, wisely including releases and indemnities in that contract.

Tip Box

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

A vendor’s duty of disclosure in relation to contamination is based on the Environment Protection Act.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Publisher’s Note: This legislation was amended. From 1 July, 2017 all sales of real estate of $750,000 or more made from 1 July, 2017 will be presumed to be made by a foreign resident and therefore be liable to a 12.5% withholding payment unless the vendor obtains a Clearance Certificate from the ATO.

For sales for the period 1 July 2016 to 30 June 2017 the rates below apply.

The ATO is concerned that foreign residents are not paying capital gains tax and has introduced a ‘withholding payment’ regime obliging purchasers to withhold and pay to the ATO 10% of the purchase price on account of the vendor’s CGT liability. To better understand this measure, I attended an ATO Information session.

I was greeted in the foyer by Person ONE who directed me to a line where, eventually, Person TWO checked my photo ID and then directed me to an adjoining line where, eventually, Person THREE asked me to sign in. He then directed me to Person FOUR who invited me to take a seat in the foyer. Eventually, Person FIVE invited me to join a group being escorted to the lift and we were shown into a lift, only to find that that lift did not stop at the right floor, so we returned to ground, changed lifts and, eventually, found ourselves on the eighth floor where we were met by person SIX, who escorted us to the seminar room. We were advised that sanitary and sustenance facilities were available but that we would need to be escorted to those facilities by one (or perhaps more) of the large cast of escorts standing at the back of the room. As the level of participation of the escorts in those sanitary and sustenance activities was not disclosed, I spent a very uncomfortable 2.5 hours not willing to find out.

Despite the need for prior registration and this rigorous security campaign, there were not enough copies of the papers available for the 100 odd people in attendance – that does not bode well for all of these $200,000+ payments that are going to be pouring into the ATO from 1 July.

The most important aspect of the withholding regime is for vendors and purchasers to understand that ALL $2m+ transactions are subject to the tax UNLESS the vendor obtains, and provides to the purchaser, a Clearance Certificate. In the absence of a Clearance Certificate, the purchaser must deduct 10% of the purchase price and remit it to the ATO immediately after settlement. Failure to do so will make the PURCHASER liable to the ATO for the amount.

The key to the vendor obtaining a Clearance Certificate will be the vendor’s current registration with the ATO as an Australian resident taxpayer. This places a premium on early consideration of the consistency between the name of the registered proprietor and the registered taxpayer. If the vendor has tax records that PRECISELY match the title registration then a Clearance Certificate will issue online. This is expected to be 80% of the time. However, if there is a discrepancy between the name on the title and the name of the taxpayer, the application goes off-line and delay will be inevitable while the vendor provides the ATO with additional documentation to align the registered proprietor with a registered Australian resident taxpayer.

Clearance Certificates will be available on-line from 27 June 2016, are valid for 12 months and may be used in respect of more than one property. Authentication is problematic.

If the purchaser does not receive a Clearance Certificate then the purchaser is obliged to remit the withholding payment and does so by completing a Purchaser Payment Notification on-line and receiving a Payment Reference Number allowing for payment on-line, at a Post Office or by mail. The ATO will issue payment confirmation to both the purchaser and the vendor.

Of enormous practical importance is the question whether the 10% withholding is to be 10% of ‘the price’, a relatively simple calculation, or is GST to increase the withholding and will adjustments effect the withholding? As presently advised, it appears that a flat 10% of the contract price will be acceptable but hopefully a Ruling will be available before 1 July.

The Law Institute will be publishing a Special Condition to be added to the contract of sale to take account of these new obligations.

Tip Box

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

Vendor

Check consistency between ownership and tax records. Apply for Clearance Certificate on-line.

Purchaser

Unless the vendor provides a Clearance Certificate you must withhold 10%.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Rental properties present challenges at settlement and care must be taken when adjusting rent and dealing with a security deposit.

The starting point is GC 15 of the standard contract. But for an ‘adjustment’ condition in the contract, no adjustment of the purchase price would occur and the parties would simply have to accept that rent is in arrears or advance. But an adjustment condition allows the parties to adjust rent as at the settlement date on the basis that the vendor is entitled to the rent up to the settlement date and the purchaser is entitled thereafter.

No formal assignment of the landlord’s rights is required as s 141 Property Law Act confers upon the owner from time to time the right to recover rent due in respect of the property. Whilst it is common to enter into a Deed of Assignment or Transfer of the tenant’s rights under a lease, no such formality is required in the case of the transfer of the landlord’s rights to a new owner.

In the unusual situation where rent is paid up to the day of settlement, no adjustment between the parties is required. Where rent is paid in advance, the vendor must allow to the purchaser the amount of the prepayment beyond settlement day. Rent is deemed to accrue from day to day (s 54 Supreme Court Act) so rent is to be reduced to a daily rate and the rent for the number of days pre-paid is to be adjusted against the vendor. If rent is payable monthly, the monthly rent is multiplied by 12 and divided by 365 to give a daily rate. If rent is payable weekly, the amount is divided by 7 to give a daily rate.

Rent in arrears tends to present greater difficulties, not so much for the purchaser but for the vendor. In the absence of a Special Condition in the contract, the vendor cannot require the purchaser to allow to the vendor by way of an adjustment any rent due, but unpaid, at settlement. If the rent is in arrears, no adjustment is required. It is for the vendor to seek to recover arrears from the tenant and the vendor is aided by s 56 Supreme Court Act in this regard. This section provides that if the purchaser recovers arrears from the tenant, then the landlord is entitled to the arrears that relate to the pre-contract period. However a purchaser might not be inclined to issue proceedings against the tenant and the vendor would be wise to include a Special Condition requiring the purchaser to do so.

Alternatively, the vendor might issue proceedings against the tenant for arrears BEFORE settlement, as the vendor has the right to rely on the terms of the lease until settlement.

Security Deposit

A lease will regularly provide for the payment by the tenant of a security deposit to be held by the landlord to secure the performance of the tenant’s obligations under the lease. It is important that the purchaser makes arrangements for the transfer of this security deposit as the tenant will be entitled at the end of the lease to have the purchaser (as landlord) account for that security deposit. If the vendor holds that security deposit in the form of a cash bond, then adjustment may be achieved by the vendor allowing as an adjustment in favour of the purchaser the amount of the bond and the purchaser depositing that amount in an account under the control of the purchaser. Section 24 Retail Leases Act requires the landlord to hold the security deposit in an interest bearing account on behalf of the tenant and interest must be considered when undertaking this adjustment.

The tenant may satisfy the security deposit requirement by providing a bank guarantee. This presents particular difficulties upon the sale of the freehold. The guarantee will be made out in favour of the vendor and such guarantees CANNOT be assigned. Banks will only make payment to the NAMED beneficiary, so a NEW guarantee must be put in place to take effect from the date of settlement. This creates logistical difficulties, particularly if the lease does not include a clause requiring the tenant to provide a replacement guarantee in the case of a sale.

Tips

• Rent is adjusted at settlement
• Arrears of rent are the vendor’s problem
• Security Deposit must be transferred at settlement
• Bank guarantees cannot be transferred
• While written for Victoria this article has interest and relevance for practitioners in all states