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.

New Business & Franchise publication for Western Australia

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CaptureBy Lawyers is pleased to announce a new publication: Business & Franchise for Western Australia.

The guide and precedents include everything that is needed to successfully execute the sale or purchase of a business in Western Australia.

The By Lawyers Uniform Contract for the Sale of Business is also included in this guide. The uniform contract has been designed to take both parties through the transaction and covers everything from warranties by seller shareholders, guarantees by buyer shareholders, the completion deliverables to effectively release PPSR security interests, to the transfer of all of the business assets including copyright works, trade marks and supplier contracts.

The By Lawyers uniform contract also follows the ASIC requirements for the transfer of business names and allows the user to customise the competition restraints to ensure that they are enforceable and suited to their client’s circumstances.

The Commentary compares different business structures, sets out the tax consequences of sale price apportionment, explains the tax treatment of stock and business assets, long service leave and other employee entitlements and discusses many other issues that can arise in business conveyancing such as the role of the premises landlord and franchising.

A subscription to this publication is $89 plus GST per month for a minimum of three months.

To learn more, please visit our website.

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.

Leases NSW

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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.
SEPTEMBER 
  • LEASE – Retail – Annexures A and B – Mortgage consent fees have been updated accordingly.

Off the Plan Sales – Best Endeavours – Part 2

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Summer2012_BuyingOffThePlan_landingThe 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 fulfill 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 thes 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.

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

See also: Off the Plan Sales – Best Endeavours – Part 1

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.

Personal Property Securities Act and conveyancing

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Conveyancing is concerned with the transfer of land and improvements from one owner to another. The doctrine of fixtures means that the improvements on the land are considered by the law to be part of the land and therefore a contract for the sale of real estate simpliciter does not involve the sale of personal property and the Personal Property Securities Act (PPSA) has no application to such a contract.

Vacant land

Subject to what is said below in relation to corporate vendors, a vendor’s response to an inquiry from a purchaser about the PPSA in the sale of vacant land is to simply confirm that the contract does not relate to personal property and the PPSA is not relevant.

Residential sales

However, it is traditional for land contracts to include a provision for the sale, in addition to the land, of chattels – or now, goods – that pass with the land. In the residential context this includes such things as carpets, blinds, light fittings and the like which add no real value to the land but which vendors generally leave upon departure and purchasers, often vehemently, expect will remain with the property. It is estate agents who traditionally complete this part of the contract and, in a rush to make a commission, little care is likely to be taken to distinguish between chattels and fixtures. It is therefore not unusual to find “stove, hot water service and swimming pool pump” listed as goods, whereas they are truly fixtures and not subject to the PPSA.

Items that are in fact goods will almost invariably fall within the exemption in s 47 PPSA that excludes personal or domestic items valued at less than $5000. Therefore, the vendor’s response to a request for release in such circumstances should again be that there is no personal property sold pursuant to the transaction that is subject to the PPSA.

The PPSA may be applicable in contracts for the sale of land that also include the sale of a substantial item of personal property. Generally, this will be in the context of a substantial commercial or industrial property and the parties will be alive to the possible application of the PPSA. In that case the quite complex provisions of general condition 7 of the contract of sale guide the release procedure.

Company charges

Prior to the introduction of the PPSA a charge against an asset of a company could be registered at ASIC (Australian Securities and Investments Commission). These charges were ‘migrated’ to the PPSA. Registration was not limited to personal property owned by the company and could in fact extend to a fixed and floating charge over all of the assets of the company, including real estate. The significance of registration of such interests and the need for their release was recognised in Naval and Military Club v Southraw Pty Ltd & Anor [2008] VSC 593, and it is best to conclude that the safest course of action is to search the PPSA register and insist upon release of such charges.

The purpose of release is to prevent a claim after settlement by a third party claiming an interest under the charge. However once the purchaser is registered as proprietor of the land the principle of indefeasibility will mean that the purchaser takes the property free of any such interest. Therefore, the only concern relates to the period between settlement and registration, during which time the dispute would be between two unregistered interests, the first of which (the charge) would have priority in time. However, the purchaser would be entitled to argue that the chargee was entitled, indeed obliged, to register the charge on the title by way of caveat and failure to do so constitutes postponing conduct.

The chargee might argue that a caveat would only have achieved notice and that the purchaser had notice (or constructive notice) from registration on the PPSA. However, s 300 PPSA specifically provides that registration on the PPSA register is not to be deemed constructive notice so a purchaser who does not search may be in a better position than one who does.

Release

The predecessor to general condition 7 acknowledged the possibility of a letter of comfort in relation to such charges but general condition 7 now only envisages a formal release of PPSA charges. The purpose of release in this context is to overcome ‘notice’ and it would appear reasonable that, should the purchaser search the PPSA register and thereby gain notice of a charge, then obtaining a letter of comfort (as distinct from a formal release) should mean that the secured party would be unable to argue that the purchaser should be subject to the secured party’s interest when comfort has been given by that secured party in respect of that interest.

This article has interest and relevance for practitioners in all states.

A Personal Property Securities publication is available on By Lawyers.

Conveyancing QLD

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Conveyancing

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.
    • Clause on recovery of fees added when purchaser not proceeding.
AUGUST
  • Purchase and Sale of Real Property commentaries – further content on Foreign Resident Capital Gains Withholding Payments added.
  • Sale of Real Property – commentary updated to include discussion of how co-ownership may be brought to an end via partitioning.
JUNE
  • Update First Home Owners’ Grants for 1 July 2016 changes.
MAY
  • Foreign resident capital gains withholding payments amendments made to Commentaries and Retainer instructions.
  • Include foreign resident capital gains withholding payments when over $2 million to all necessary precedents and to do lists.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH
  • New section included in the commentary on powers of attorney for land transactions to accompany power of attorney precedents.
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.

Conveyancing SA

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Conveyancing

OCTOBER
  • Sale and Purchase of Real Property – added in commentary discussing foreign resident clearance certificates.
  • Purchase of Real Property Commentary – clause added on payment of fees when purchaser not proceeding.
  • New Precedents
    • To do list – Sale of real property
    • To do list – Purchase of real property
  • 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.
    • Clause on recovery of fees added when purchaser not proceeding.
AUGUST
  • Sale of Real Property – commentary updated to include discussion on bringing co-ownership arrangements to an end via partitioning.
  • Sale and Purchase of Real Property commentaries – added further content on Foreign Resident Capital Gains Withholding Payments.
MAY
  • Foreign resident capital gains withholding payments amendments made to Commentaries and Retainer instructions.
  • Include foreign resident capital gains withholding payments when over $2 million to all necessary precedents and to do lists.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH 
  • New section included in the commentary on powers of attorney for land transactions to accompany power of attorney precedents.
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.

Conveyancing TAS

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Conveyancing

OCTOBER
  • Added commentary discussing valid clearance certificates for foreign residents.
  • Costs Agreements
    • Clause added on payment of fees when purchaser not proceeding
    • Added client and firm fields company execution clause trust account details solicitor’s lien.
    • 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.
AUGUST
  • Sale of Real Property – commentary updated to include discussion on bringing co -ownership arrangements to an end via partitioning.
  • Sale and Purchase of Real Property commentaries – further content on Foreign Resident Capital Gains Withholding Payments added.
MAY
  • Foreign resident capital gains withholding payments amendments made to Commentaries and Retainer instructions.
  • Include foreign resident capital gains withholding payments when over $2 million to all necessary precedents and to do lists.
APRIL
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH
  • New section included in the commentary on powers of attorney for land transactions to accompany power of attorney precedents.
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.

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