ByLawyers News and Updates

Off the plan duty concessions

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Duty concessions available for off the plan sales need to be understood by both vendors and purchasers.

Vendors selling off the plan properties often emphasise the potential for ‘huge stamp duty savings’ and, indeed, duty is calculated on such transfers at a concessional rate, making them appealing to potential purchasers. But unless the parties understand the extent of the concession the purchaser may be disappointed and the vendor potentially liable for misrepresentation.

The duty concession is available wherever the contract anticipates building work being performed during the course of the contract, on the basis that duty is calculated on the value of the property as at the contract date, and is not payable on the value of any building works constructed between contract and settlement. The concession is available whether the property is a stand-alone home, a unit in a small development or a lot on a multi-storey plan of subdivision. It is also available, on a proportional basis, provided that any construction is to be undertaken, with the full concession available if total construction takes place during the contract, diminishing to no concession if construction was complete as at the contract date.

Calculating duty is an important task for the solicitor for the purchaser but can only be undertaken on the basis of information provided by the vendor in the form of an Off the Plan Statutory Declaration that provides the basis for calculating dutiable value. The vendor’s obligation to provide this document arises from GC 10.1(a)(ii) of the standard contract that requires the vendor to do all things necessary to enable the purchaser to become registered. The purchaser is unable to register the Transfer until duty is assessed and duty cannot be assessed in relation to these transactions without the Declaration.

The vendor may choose to use the Fixed Percentage Method or Alternative Method to calculate the cost of construction. Unless the contract requires the vendor to adopt the Alternative Method, the vendor will generally adopt the simpler Fixed Percentage Method. The percentage of the contract price allocated to construction is:

  • single dwelling 45%
  • multi-dwelling 60%
  • high rise 75%

If construction has not commenced as at the contract date then the concession will be calculated by reducing the contract price by the amount equal to the full construction cost calculated by reference to the Fixed Percentage and then calculating duty on the reduced consideration.

If the contract price is $600,000 and the contract is signed prior to commencement of construction then duty is calculated as follows:

Single dwelling

Contract price $600,000

Less: 45% construction cost $270,000

Dutiable value $330,000

Multi-lot

Contract price $600,000

Less: 60% construction cost $360,000

(up to 3 storey)

Dutiable value $240,000

High rise

Contract price $600,000

Less: 75% construction cost $450,000

(4 storey & above)

Dutiable value $150,000

If construction is 25% complete when the contract is signed then the cost of post contract construction will be reduced to 75% of the construction cost. The deduction from the contract price will therefore be less, resulting in a higher dutiable value and higher duty as the percentage of post contract construction deceases.

Tip Box

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

Priority notice

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Land Titles Office will introduce the Priority Notice in December 2016

As part of the shift from paper-based conveyancing to electronic conveyancing the Land Titles Office will introduce Priority Notices in December 2016. This facility is viewed by the LTO as an important tool in the prevention of fraud in the electronic environment and is supported by s 91C Transfer of Land Act.

Traditionally the paper title has been a bulwark against fraud, with a person dealing with the title having an expectation that the paper duplicate would be produced at settlement. However, removal of the paper title in the electronic environment, hastened by the bulk conversion of over 2 million titles held by the Big Four banks on the weekend of 22 October 2016, means that the ‘protection’ provided by a paper title is diminishing. Priority Notices are intended by the Registrar to constitute a ‘unique baton’ to provide protection during the settlement period.

It is intended that a person dealing with the registered proprietor of land will lodge a Priority Notice to foreshadow that a dealing will be lodged at a future time and will thereby ‘protect’ that dealing. The Priority Notice can only be lodged electronically (presently using PEXA) whether the foreshadowed transaction will be conducted in paper or electronically.

Priority Notices resemble the familiar caveat in many ways. Indeed, there is little difference between the two and practitioners may be hard pressed to decide which of the two to lodge.

Virtues of the Priority Notice are:

  • will appear on any search of the relevant title;
  •  gives notification to the world of an intended dealing;
  •  may be lodged in respect of any intended dealing;
  •  temporarily prevents the registration of any other dealing; and
  • gives priority for 60 days from recording of the Priority Notice on the Register to the instrument foreshadowed in the Priority Notice;

A person lodging an instrument, such as a Transfer of Land, within 60 days of lodging a Priority Notice foreshadowing that Transfer is therefore entitled to expect that the Transfer will be registered in priority to any other dealing lodged during that 60 day period.

Disadvantages of a Priority Notice are:

  • cannot be amended;
  • consent cannot be given to registration of a dealing not protected by the Notice;
  • can be withdrawn and re-lodged, but priority will be lost to any dealing awaiting registration;
  • lapses after 60 days; and
  • a subsequent competing dealing lodged in the 60 day period will be registered immediately the Priority Notice expires.

From the Registrar’s point of view, the Priority Notice regime is an improvement on Caveats as the Registrar is NOT obliged to give notice to the registered proprietor of lodgement of a Priority Notice. There is no doubt that the obligation to give notice (often to an old address) imposes a considerable administrative burden on the Registrar, as does the need to play a role in the removal of caveats by disgruntled registered proprietors. The Priority Notice regime involves much less participation by the Registrar and refers all disputes immediately to the court, with the potential to make orders for removal and compensation. Presumably, as the Priority Notice has a limited life span of 60 days, disputes may be resolved by the effluxion of time, although there will no doubt be circumstances where a registered proprietor may need to seek the assistance of the court.

Caveats appear to provide all of the benefits of Priority Notices and few of the disadvantages in that caveats:

  • may be amended;
  • consent can be given to registration of a dealing: and
  • do NOT automatically expire.

It is this latter point that will have practitioners thinking. 60 day settlements are common, as are 90 day settlements. Both can unexpectedly blow out and so lodging a Priority Notice when entering into a 60 or 90 day contract may find the Priority Notice expiring shortly, or even well, before final settlement leaving the Transfer unprotected. A protocol of lodging 30 days prior to the anticipated settlement date may overcome this problem, but leaves the prior contractual period unprotected.

The small price differential between lodging a Caveat or a Priority Notice will not affect this decision.

Like many of the changes flowing from electronic conveyancing, we will just have to see how they work out at the coalface.

Tip Box

  • Whilst written for Victoria this article has interest and relevance for practitioners in all states.
  • Priority Notices are intended to provide protection against fraud.
  • The limited lifespan of Priority Notices may cause concern.

Lease – Retail lease cost

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A lease of land is essentially a contractual relationship between the landlord and tenant. The lease also creates a proprietary interest in the land in favour of the tenant and the tension between contractual and proprietary rights has been reflected in the law relating to termination of the lease for breach by repudiation. See Progressive Mailing House P/L v Tabali P/L [1985] HCA 14.

As a contractual relationship, the law allows the parties to negotiate the terms of their agreement in relative freedom, subject to limited restrictions in relation to illegality and the like. This freedom presumes that the parties are of relatively equal bargaining power, as the freedom to negotiate is of little value if one party has relatively little power within the negotiations. And yet the three fundamental contractual relationships that occur in day-to-day life – buying, borrowing and renting – have rarely involved parties of equal bargaining power.

Vendors have traditionally been protected by the doctrine of caveat emptor, lenders by the requirement that any amount claimed be repaid before a complaint is heard and landlords by the ability to dictate the terms of the agreement. But the world has changed in the last 50 years and the age of the consumer means that vendors have pre-contract disclosure obligations, lenders are subject to consumer credit codes and tenants are provided with statutory protection, such as the Residential Tenancies Act and the Retail Leases Act.

One area where the ability of the landlord to dictate the terms of the lease has been removed is the area of the landlord’s legal costs associated with the lease. Traditionally, the lease prepared by the landlord for signing by the tenant would provide that the tenant is to pay the landlord’s legal costs relating to the lease. Such a contractual provision is now statutorily prohibited in the residential and retail markets and, whilst still prevalent in commercial and industrial leases, is now more often subject to negotiation by a tenant exercising bargaining power in the face of an awareness that such obligations are not ‘set in stone’.

Section 51 Retail Leases Act prohibits the landlord claiming legal costs in respect of the lease and any contractual provision contrary to this prohibition is void pursuant to s 94. The prohibition is wider than simply prohibiting the landlord from claiming costs from the tenant, as the Act prohibits claiming costs ‘from any person’. This prevents the landlord requiring payment from a party associated with the tenant, such as a guarantor. The prohibition also prevents the landlord from recovering any costs associated with the landlord obtaining the consent of a mortgagee of the freehold to the lease, if the lease includes such a requirement. Further, the prohibition is not just in respect of costs on the lease but rather costs associated with ‘the landlord’s compliance with this Act’ and therefore also prohibits a claim for costs in respect of the disclosure statement.

Assignment

Section 51(1) allows the landlord to claim from the tenant the landlord’s reasonable legal costs associated with an assignment of the lease. Presumably this is based on the fact that the assignment is requested by the tenant and therefore the tenant should bear the costs. The landlord may also claim any costs associated with seeking mortgagee’s consent to the assignment.

It is normal that a tenant who sells a business and seeks an assignment of the lease to a new tenant will be required to bear these costs and general condition 7.6(b) of the LIV May 2014 copyright contract of sale of business adopts this view, correcting a reversal in the previous LIV contract.

If, as part of the assignment, the incoming tenant requests a variation to the existing lease, such as by way of the addition of further terms, the landlord is effectively able to recover the landlord’s costs in agreeing to such a variation within the broad scope of the consideration of the application to approve the assignment.

However, a landlord must exercise caution in the situation where the outgoing and incoming tenants agree that the landlord will be asked to enter into a new lease with the incoming tenant. If the landlord agrees, the new lease is a retail lease and the landlord is prohibited from claiming costs and cannot rely on the ‘assignment’ exemption. The prohibition on key-money (s 23) would appear to prohibit the landlord placing a premium on consent and a landlord may therefore find itself agreeing to a new lease at its own cost. However, the landlord is able to negotiate the terms of the lease, including rent, and may therefore be satisfied to enter into the new lease notwithstanding costs are not paid by the tenant.

Renewal

Renewal creates a new lease and the general prohibition against costs applies. If the tenant also seeks a variation in addition to renewal, this is simply part of the negotiations and the landlord is not able to seek costs relating to those negotiations. Just as the landlord must recover its costs within the rent for a new lease, it must also do so if negotiating a variation upon renewal.

Tip Box

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

Criminal Magistrates’ Court VIC

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Criminal Magistrates Court

OCTOBER 
  • Costs Agreements
    • Included reference to time limit for bringing costs assessment, total estimate of legal costs section with provision for variables, and authority to receive money into trust.
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting and grammatical improvements.
SEPTEMBER 
  • Intervention Orders
    • Further information added on applying for intervention orders
    • New further information link to SmartSafe’s Legal Guide to Family Violence Intervention Orders
APRIL 
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
  • Commentary added under Bail regarding The Bail Amendment Act 2016 which will commence on the 2nd May 2016.
FEBRUARY
  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.

Agreement to lease

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

‘An agreement to lease is as enforceable as a lease’

Property lawyers deal with leases all of the time; sometimes in the context of a relationship between landlord and tenant, sometimes where a property that is to be sold is leased and sometimes in more obtuse ways, such as in relation to the assessment of duty or tax.

Generally speaking, such leases will be in a written form and the terms of the lease will be readily identifiable. However, unlike contracts for the sale of land which the law requires to be in writing and signed by the parties, the law has long recognised that a lease relationship can be created in a less formal way than a written and signed lease. Hence, courts will enforce a lease if the court can be satisfied that the parties reached an agreement to lease and this has given rise to the mantra of ‘an agreement to lease is as enforceable as a lease’.

Walsh v. Lonsdale (1882) 21 Ch D 9 is the historical authority for this proposition and Waltons Stores (Interstate) Ltd v. Maher [1988] HCA 7 restated the proposition in the modern language of estoppel and unconscionability, concluding that a court will enforce a written agreement to lease where it would be unconscionable for a party to the agreement to resile from that agreement.

2016 has seen something of a flurry of cases, at all levels, concerning agreements to lease:

North East Solutions P/L v. Masters Improvements Aust. P/L [2016] VSC 1 analysed the obligations of parties who entered into a written agreement to lease which included a term that the parties would negotiate in good faith to resolve any disputes that arose during the term of the agreement. The enforceability of the agreement to lease was never in doubt; the issue was the meaning and extent of the ‘good faith’ obligation and whether one party had breached that obligation.

Risi P/L v. Pin Oak Holdings [2016] VCAT 1112 also related to a written agreement to lease but found that the lease prepared pursuant to that written agreement should be varied to comply with an oral agreement that the parties made prior to entering into the written agreement to lease. The landlord had sought to include a demolition clause in the written lease and the Tribunal ordered that the demolition clause be removed as it had not been a term of the agreement that the parties had concluded.

Crown Melbourne Ltd v. Cosmopolitan Hotel (Vic) P/L [2016] HCA 26 saw the issue return to the High Court in a slightly different form. The tenant entered into a 5 year lease with an expectation that the tenant would be offered a further term. No promise to do so was included in the written lease nor specifically offered to the tenant – all the tenant could rely on were words to the effect that the tenant would be ‘looked after’ when the lease came up for renewal. The Court was not satisfied that these words meant to there was an agreement for a new lease or even an obligation on the landlord to submit terms for a new lease to the tenant for negotiation.

The concept of ‘business efficacy’ has also crept into the language of these cases with courts apparently prepared to analyse the conduct of the parties through the ‘business efficacy’ prism.

Tips

  • Whilst written for Victoria this article has interest and relevance for practitioners in all states.
  • Courts will enforce informal agreements to lease.
  • Adequate proof as to the terms of any such agreement remains essential.

Owner-builder insurance

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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

Business and Franchise VIC

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Business and Franchise 

OCTOBER 
  • Costs Agreements
    • Included reference to time limit for bringing costs assessment, total estimate of legal costs section with provision for variables, and authority to receive money into trust.
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting and grammatical improvements.
  • Purchase of Business – Clause added on payment of fees when purchaser not proceeding.

April 

  • File Cover Sheets for all publications have been completely re-formatted for a better look.
  • New precedent added – Enclosure – Applying for Trade Marks

February 

  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.

County Court Civil VIC

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County Court Civil 

OCTOBER 
  • Costs Agreements
    • Included reference to time limit for bringing costs assessment, total estimate of legal costs section with provision for variables, and authority to receive money into trust.
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting and grammatical improvements.

APRIL

  • File Cover Sheets for all publications have been completely re-formatted for a better look.

FEBRUARY

  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.
  • County Court commentary (VIC) – has been reviewed and updated to reflect County Court Vic practice note changes. These include:
    • Common Law Division (PNCL 1-2016) – this practice note provides information on the operation and management of the Common Law Division (divided into the General, Defamation, Medical, Applications, Family Property, WorkCover, Serious Injury and Confiscation Lists).
    • Commercial Division – these practice notes ensure that practitioners and litigants are that the Commercial Division offer flexible arrangements to circuit matters to ensure that litigants in issuing in those courts are not disadvantaged. These include Banking and Finance Lists, Building Cases Lists and Expedited Cases List.

Mortgages VIC

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Mortgages

OCTOBER
  • Costs Agreements
    • Disputes section improved, fields for client and firm details added, trust account details added, solicitor’s lien added, execution clauses for individuals and corporations added and general formatting and grammatical improvements.
    • Included reference to time limit for bringing costs assessment included total estimate of legal costs section with provision for variables and included authority to receive money into trust.
JULY
  • The commentary was amended to note that from 1 August 2016, authorised deposit-taking institutions (ADIs) must register stand-alone mortgages and discharges via PEXA.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
FEBRUARY
  • Making life a little easier for practitioners – look out for Blank Deed, Agreement and Execution Clauses folder in the matter plan at the end of each Getting the Matter Underway.

To be or not to Airbnb

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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.

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