ByLawyers News and Updates

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

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.

Contamination

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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.

Foreign residents capital gains tax withholding

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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%.

Cooling off

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

An estate agent is not an agent for the purpose of receiving a cooling off notice.

Tan v Russell [2016] VSC 93 will come as a surprise to most property lawyers. It concluded that the vendor’s estate agent is NOT an agent for the purposes of receiving a cooling off notice pursuant to s 31 Sale of Land Act.

The right to cool off from a residential contract is a statutory right created in 1982. It is reflective of the Age of the Consumer that has prevailed since the Trade Practices Act of the 1970s and is a watershed in the transition from caveat emptor and caveat vendor. It says to a purchaser ‘beware, or at least think about your decision quickly’. Consumer protection legislation is generally interpreted in such a way as to protect the consumer, but this case has taken what might be described as a literal view and has relied on authority, certainly High authority, but authority that is from a different age – the white picket fence view of the 1950s.

Section 31 Sale of Land Act permits service of the cooling off notice on ‘the vendor or his agent’. The purchaser served the notice by email on the vendor’s estate agent named in the contract, being the estate agent who had been negotiating with the purchaser on behalf of the vendor. The vendor argued that the estate agent was not an ‘agent’ within the meaning of s 31.

Peterson v Maloney [1951] HCA 57 was cited as authority for the proposition that an estate agent’s authority is limited to finding a buyer and, in the absence of specific authority, does not extend to an ability to bind the vendor. In short; an estate agent is NOT an agent in the common law sense of agency. This, and similar cases were concerned with the actions of the estate agent and whether the vendor was bound by those actions. However the role of the estate agent in the cooling off scenario is not to take action that might bind the vendor but rather to be a recipient of a notice, a conduit to the vendor. Hence it is possible to distinguish such cases as there is no need to find that the vendor’s estate agent in the cooling off scenario needs to do anything on behalf of the vendor, it just needs to receive the notice and, presumably, bring that notice to the attention of the vendor.

Even if the estate agent is not an agent in the strict common law sense, the purchaser argued that s 31 established a statutory agency whereby the vendor’s estate agent was authorised to receive delivery of the cooling off notice. This argument was rejected on the basis that the Act referred to estate agents in other sections and so could have, but did not, refer to the estate agent in this provision. To do so would have required s 31 to read ‘the vendor, his agent or his estate agent’ which, with respect, would appear to most readers to be a tautology. Again, rejection of this argument appeared to focus on the potential for action by the estate agent affecting the rights of the vendor, whereas it is the action of the purchaser in serving the cooling off notice which affects the vendor, not the passive receipt of that notice by the agent.

The purchaser had three days to act. There was no address for the vendor in the contract. There was a conveyancer listed but perhaps the same argument would apply to the conveyancer. This makes a nonsense of the section. With respect, the decision is wrong.

The REIV authority is being amended. The LIV contract will be amended. In the meantime, exercise care when cooling off.

Tip Box

  • Cooling off notices cannot be served on estate agents
  • Whilst written for Victoria this article has interest and relevance for practitioners in all states

FAQs – By Lawyers Contract for the Sale of Land NSW

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By Lawyers introduced a new contract for the sale of land for New South Wales earlier this year and have hosted a number of informational webinars about it for solicitors and conveyancers. Those webinars raised a number of questions which we have published here.

If you have any questions not covered here, please email us at askus@bylawyers.com.au.

2016 edition of the contract was released in May.

General FAQs

Q: Can this contract be used in practice now?

Yes, and its use continues to grow as practitioners become aware of its existence and benefits.

 Q: Given it is alternative to Law Society Contract for Sale, what if the purchaser’s solicitor/conveyancer refuses to use this version?

There is no prescribed contract for the sale of land.

It is for the vendor to decide the contract not the purchaser and it is not for the practitioner acting for the purchaser to jeopardise the transaction due to his personal preferences.

The Law Society contract is not the only one used. Several major firms use their own contract. The Barangaroo contract is an example which we understand has also adopted electronic execution to cater for the Chinese market.

Q: Is this contract available in LEAP Documents if we haven’t changed to LEAP Conveyancer yet?

Yes.

Q: Will LEAP take away access to the Law Society contract at any time?

Most unlikely. This is a matter for LEAP.

Q: Is there a time frame suggested that all parties should move to use the 2015 contract or Law Society contract rather than 2005?

We understand that the Law Society will cease providing 2005 contracts in January. You will need to confirm with them.  The By Lawyers contract is immediately available.

Q: Does the contract include the standard conditions from the law society as well (blue pages)?

No. This contract is a new contract quite separate from the Law Society contract.

Q: Can this contract be used for sale/purchase of properties in Queensland? 

No.

 

FAQ – Email and exchange questions

Q: Even if you do the exchange via email, can’t you still just mail out the contracts to the other side to “formally” complete the exchange and so you are holding the original signed Contracts…

This is a misunderstanding of the process. The exchange takes place when the vendor’s signed contract is emailed back to the purchaser. That emailed contract is the original and the one actually signed and retained in the office is a copy of the electronic original.

Q: If the contracts are exchanged via email do you still send the original paper contract to the other side?

No. The original is the electronic contract.

Q: If part of an exchange is ensuring that the contracts are identical, how is that carried out if they are emailed as part of the exchange and not physically checked in-house?

The purchaser’s electronic contract is checked against the vendor’s before returning the counterpart which can also readily be checked by the purchaser if they wish.

Q: When sending a contract by email on behalf of the purchaser, do you date it before sending and the vendor’s representative dates it when returned?

If the contract is to be exchanged the day that you send it then date it before you scan and send it. The vendor will do likewise. If the exchange may be on another unknown day then send it undated and the vendors copy returned to you will be dated that day and that is the date of exchange. The vendor may print and date the purchaser’s print version if he so chooses.

Q: Further to question about what date to list on contact for electronic exchange, do we list the cooling off date from date vendor send back signed copy?

Exchange is effected on email delivery to the purchaser’s solicitor which is the start of the cooling off period.

Q: What about when the agent does the exchange and it is incorrect, i.e. things which have been agreed between the parties have not been changed in the contract prior to exchange. Do we email a subsequent amended contract? Normally after exchange there are no changes.

The usual rules apply that any changes must be agreed and included in writing in the contract or in a separate document referred to in and supplemental to the contract.

Q: Is there a facility to electronically amend the document to add the date of exchange to the contract signed by the purchaser?

If that was considered necessary then it is printed dated and scanned in.

 

FAQ – Deposits

Q: Normally a deposit is released only if the vendor is purchasing a property; however it appears this contract allows it for any reason, what is the background for this?

Because it can be difficult to recover the deposit paid in a second transaction to which the purchaser is not a party it is not uncommon for such a request to be met by the response – get a deposit bond.

Sometimes the vendor is in need of cash urgently and the deposit is released to secure a price reduction.

As there are many reasons for release it is considered best left to the parties to negotiate.

The important part of the condition is the creation of a charge on the property securing repayment if it is released.

It is worth noting that the deposit release clause, like some other clauses in the terms and conditions, is activated by checking a box in the summary.

Q: With reduced deposits, are you suggesting or recommending that if the vendor will accept a 5% deposit, you just show that as the amount on the front page, rather than 10% and have a special condition dealing with a claw back in the event of default?

Yes. We doubt that a court will see a payment made after the exchange as an earnest for the transaction. There are a number of cases on this issue.

Q: If the release of deposit is ticked, can the deposit be released for any reason? Normally it’s only released for the purchase of another property.

Once the release of the deposit has been negotiated then all that is required is to tick the box which triggers condition 3 (c) in part 2 of the contract. If you wish to add any other conditions to the release then it would be necessary to draft a condition for inclusion as a special condition on page 4 of part 1.

 

FAQ – stamping questions

Q: Can you tell us again what the Office of State Revenue attitude will be to PDF documents.

OSR are well acquainted with stamping documents signed electronically. When sending it to them simply state that it is an original electronic contract.

Q:  If you have a provider who stamps can they stamp a PDF?

Yes.

Q:  You say the PDF exchanged copy becomes the original. For the purpose of stamping, can this be printed and the stamp applied to the printed version?

Yes.

Q: To stamp contract in house under EDR do we just need to print the PDF original and stamp it?

There is little point in doing so as long as the electronically stored contract is available if required by OSR.

Q: You mentioned the OSR requiring the original document for stamping. So how do we deal with that when contracts are exchanged electronically?

The OSR stamps a print version of the original electronic contract.

 

FAQ – Warranties, inclusions, and conditions

Q: What happens if you do not have a survey and have no way of knowing if there is encroachments on the property? One of the warranties appeared to warrant that there was no encroachments, from memory.

This is normally the subject of a special condition which is now included as a warranty in the contract. If the vendor knows of an encroachment and discloses it then the purchaser must accept it. If the purchaser does not get a survey then caveat emptor. If the purchase gets a survey after exchange showing an encroachment other than fencing then the purchaser may rescind the contract provided it is a material breach not known to the purchaser and the purchaser would not have purchased the property had he known of the encroachment and the vendor fails to remedy the encroachment.

Q: There is not much room for additional inclusions, I suppose we would have to have an annexure?

The space expands as words are added.

Q: If we want to amend some of these conditions for example insert a specific interest rate, how do we do that?

Type in the special condition or annex one. See page 5 of the summary.

Q: What about swimming pool clause regarding non-compliance SPA 1992 and Local Government Act and Regulations disclosure and purchaser taking as is and P not entitled to requisitions, objection, etc.?

See the warranties both statutory (reproduced in the summary) and contractual (clause 6). See clause 19(f) for taking as is.

Q: Off Plan Contracts form large part of our work and yet there is no section in LEAP conveyancing precedents or 2015 contract deals with off plan. What our options in this regard?

Within the library of special conditions are precedents for real property subdivision and strata development.

 

Can I copy the contract?

Q: Are we able to copy the contract without affecting the copyright provisions?

The contract is available as one of our precedents to those that use LEAP Conveyancer or subscribe to our Conveyancing Guide through our website.

Q: You said anyone can use the contract and that there is no breach of copyright. Does this apply whether or not you are a LEAP subscriber?

No. you must be using LEAP or have subscribed to our publication. Apologies for any misunderstanding.

 

 

 

 

Adjustment of rent

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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

Self managed superannuation funds

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Many clients choose, often on the advice of accountants, to establish a private superannuation fund rather than invest their superannuation in an industry or retail fund.

The fund is established by a Superannuation Deed and the fund itself is not a legal entity. The Trustee of the fund is the relevant legal entity, holding the assets of the fund on trust for the members of the fund. The Trustee may be one or more natural persons, usually members of the fund, or the Deed may appoint a corporate Trustee. It is the Trustee that enters into contracts on behalf of the fund and becomes the registered proprietor of property owned by the Fund. Section 37 Transfer of Land Act prohibits the notation of a trust on a certificate of title so, whilst reference to the purchaser on a contract as being AS TRUSTEE FOR or ATF is permissible, no reference to the trust capacity is permitted on the Transfer of Land. Accountants, and the ATO, prefer to see reference to the trust capacity on the contract but it is not strictly necessary.

Superannuation funds cannot purchase a property that is used as a residence by a member or related party but can purchase other residential property, or commercial property. Subject to contribution rules, a member can transfer a property to a SMSF and a duty exemption exists pursuant to s 41 Duties Act provided that no consideration is paid by the fund to the member. Alternatively, a member might sell a property to the fund, thereby extracting funds from the fund, but duty must be paid on the value of the property transferred. The Trustee must lodge a Notice of Trust Acquisition pursuant to s 46K Land Tax Act but land held by a Trustee of a SMSF does not attract special land tax.

As superannuation contributions receive the benefit of substantial tax concessions, Government policy requires protection of superannuation funds to avoid dissipation of those funds. Therefore borrowing by a SMSF is regulated and may only be conducted in accordance with the Limited Recourse borrowing regime. This requires the establishment of a separate bare trust, the purpose of which is to hold the property on trust for the trustee of the SMSF, borrow any necessary loan funds using the property as security and, upon repayment of those loans funds, transfer the property to the SMSF Trustee. The loan agreement that the bare trustee enters into acknowledges that, in the event of default, the lender has Limited Recourse to the property that has been purchased and offered as security and that there is no recourse to other assets of the SMSF.

If the bare trust has been established prior to entering into the purchase contract then the purchaser will be the trustee of the bare trust. If the Trustee of the SMSF has entered into the purchase contract before establishment of the bare trust then the SMSF Trustee nominates the trustee of the bare trust to be the transferee.

PRECEDE

Self Managed Superannuation Funds are active participants in the property market.

Tip Box

•It is the Trustee of the SMSF rather than the Fund itself which must be the purchaser and registered proprietor

•SMSF may borrow to fund a purchase but those borrowings must be in accordance with the Limited Recourse Loan regime

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

Conveyancing NSW

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Conveyancing updates

JANUARY 2017
  • ALERT – Requisition Fees – From 1 January 2017, LPI will charge fees for requisitions sent in relation to documents, plans and associated instruments lodged for registration. The fee for a requisition in relation to a dealing, application, request or caveat will be $50. The fee for a requisition in relation to a plan or associated instrument will be $100.
DECEMBER 2016
  • Contract for sale of land – By Lawyers 2016 – Part 1 of 2 – Included Co-Agent on the front page
NOVEMBER 2016
  • Update information regarding strata schemes for commencement of the Strata Schemes Management Act 2015 the Strata Schemes Development Act 2015 and their accompanying regulations on 30 November 2016. Expand commentary on priority notices which can be lodged via PEXA from 28 November 2016.
  • Include reference to OSR Purchaser Declaration on required precedents
OCTOBER  2016
  • Retainer instructions – Sale and Purchase of real property – added s. 47 requirements
  • Costs Agreements
    • 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.
    • 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 Real Property – clause added on payment of fees when purchaser not proceeding
SEPTEMBER 2016
  • Purchase of Real Property
    • added case law concerning off the plan contracts for sale
    • reviewed Detailed Cover Sheet to include Mortgagee
  • Sale of Real Property
    • content added in discussion of case law concerning off the plan contracts for sale
AUGUST
  • Sale of Real Property
    • Retainer Instructions – clarify home building warranty for owner builders
    • commentary has been expended to include discussion of circumstances where co-ownership of property can be brought to an end via partitioning
  • Purchase of Real Property
    • commentary on caveat after exchange moved and new commentary on priority notices added
    • further content added on Foreign Resident Capital Gains Withholding Payments
    • Retainer instructions – include reference to purchaser declaration and surcharge duty. Update home warranty information.
MAY
  • By Lawyers Contract for Sale of Land has been updated to 2016 Edition.
  • Included foreign resident capital gains withholding payments when over $2 million to all necessary precedents, commentaries and contracts.
  • Added to Commentary – Verification of identity including new RPA Conveyancing Rules.
APRIL
  • New ‘to do list’ item – Foreign resident CGT withholding payments check.
  • File Cover Sheets for all publications have been completely re-formatted for a better look.
MARCH
  • Alert for swimming pool certificates required from 29 April 2016 added
  • 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.
JANUARY
  • Added commentary in Purchase on declarations of trust and a potential double stamp duty pitfall.

Retail repairs revisited

by

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Section 52 Retail Leases Act 2003 makes the landlord of retail premises responsible for maintaining the structure, fittings, plant & equipment and appliances. But for how long?

Traditionally leases were drawn by the landlord’s lawyer and offered to a prospective tenant on a ‘take it or leave it basis’. All the power lay with the landlord. However such a disproportionate relationship is anathema to the consumer protection society and retail tenants, like their residential cousins before them, have become the beneficiaries of protection designed to create a more balanced relationship between landlord and tenant.

Section 52 implies into every retail lease a maintenance obligation on the landlord. This may be contrasted with the traditional approach of foisting repair obligations (excluding the euphemistic ‘structural’ repairs) on to tenants. In a retail environment the obligation to maintain (and therefore repair) primarily falls on the landlord, although leases continue to try to pass ‘residual’ repair obligations on to the tenant.

A number of cases have considered the length of time of the maintenance obligation. From the beginning of the lease the landlord must maintain the premises. For a relatively short term lease, such as 2 years, it might be expected that the premises might not deteriorate substantially and this maintenance obligation might not be too burdensome. However for a long term lease, such as 10 years, it might be expected that substantial maintenance may be required. Indeed, a tenant may take advantage of a number of options to extend the lease to a period of 15 or 20 years. The landlord could expect that the level of maintenance required in such circumstances will involve a substantial cost that needs to be taken into account when negotiating rental.

Ross-Hunt P/L v Cianjan P/L [2009] VCAT 829 considered the landlord’s obligation to repair the air conditioning in a retail office. Air conditioning falls within s 52 and is a facility that deteriorates over time. The cost of maintaining the air conditioning system can be significant and the replacement cost at the end of the life of the equipment can amount to a substantial proportion of the annual rental. The lease had been renewed and the Tribunal concluded that the need for repairs to the air conditioning arose early in the renewed term and was the landlord’s responsibility. The Tribunal concluded that the ‘comparator’ date was the date of renewal. This means that the condition of the premises at the date that complaint is made is compared with the condition of the premises at the last renewal and the landlord is responsible for maintaining the premises in the condition that they were at the time of the last renewal.

Versus v ANH Nominees P/L [2015] VSC 515 however cast doubt on this ‘comparator’ date, at least in respect of damage to the premises requiring repair that arose during the previous term and had not be repaired before the expiration of the previous term. The landlord had argued that the renewal created a new comparator, that the premises after renewal were in precisely the same condition that they were in at the time of renewal and that the landlord therefore had no obligation to improve the premises. Croft J. rejected this argument on the basis that the landlord cannot be permitted to be in a better position after renewal precisely because the landlord had failed to fulfill its s 52 duties during the previous term. Such an outcome would also be contrary to the ameliorating and remedial intention of the Act.

Croft J. also commented that there is no basis to suggest that Parliament could not have intended the landlord to have a continuing repair obligation in a particularly long term lease, such as 20 years. Provided that the landlord observes the repair obligation during the term, the premises should be in a similar state of repair after 20 years, fair wear and tear excepted, and the continuing obligation to repair should not be excessively onerous.

Tip Box

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

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