ByLawyers News and Updates

Sheriff’s sale – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A sheriff’s sale is one of the true curiosities of the world of property law – to borrow a phrase, ‘a riddle wrapped up in an enigma’. The urban myth conjures up visions of the dastardly sheriff riding in on his pitch-black steed to wreak havoc on the ‘innocent’ villager. As a recent case confirms, there is not likely to be a Robin Hood in the wings waiting to swoop in at the last minute to set things right; indeed, quite the contrary.

Kousal v Suncorp-Metway Limited [2011] VSC 312 cast the defendant bank in the role of an innocent bystander seeking the direction of the court. The plaintiff was the purchaser from the sheriff and sought to require the defendant to make the certificate of title to the property available to allow for registration of the transfer from the sheriff. Herein lies the reason why the matter had proceeded to this point: the owner of the property and person most likely to suffer the harsh consequences of the sheriff’s sale was not a party to the proceedings and had steadfastly failed to take appropriate steps to protect his interests. As a consequence the law, like a steamroller, had followed its unrelenting course to ‘justice’ and the case became another episode in the tales of sheriff’s sales.

The story began as a simple debt claim in the Magistrates’ Court. A creditor claimed payment from the debtor (the ‘innocent villager’ in our tale). Irrespective of the merits of the claim, it appears that the debtor did not contest the claim and judgment was entered. This failure to engage in the legal process, repeated time and again, by the judgment debtor is the true cause of the problems that arose as, whilst many such judgments go unenforced, this judgment debtor was the registered proprietor of real estate and thus susceptible to the sheriff’s sale procedure.

The judgment of the Magistrates’ Court was raised to the Supreme Court and a writ of seizure and sale was issued. These were previously known by the far more exotic – and perhaps appropriately theatrical – name of fieri-facias, commonly abbreviated to fi. fa. This writ calls upon the sheriff to sell the judgment debtor’s assets and account to the creditor for the proceeds of sale to the extent of the judgment and costs, and to the judgment debtor for any balance. The likelihood of a mortgage to a third party, the role played by the defendant bank in this case, serves to add a further complicating factor. The sheriff only has power to sell the interest of the judgment debtor in the property, and therefore any sale is subject to all encumbrances affecting the property at the time of sale. Thus the mortgagee bank was not liable to lose the protection of its mortgage; it was simply being asked in these proceedings to make the title available to allow for the registration of the transfer of the interest of the judgment debtor by the sheriff to the plaintiff.

The plaintiff had entered the fray as an existentialist Robin Hood. Rather than fight off the sheriff and return the villager’s home, the plaintiff became the purchaser at the sheriff’s sale, first bidding $100 and finally $1000 for the right to take a transfer from the sheriff. Given that the property was apparently valued in excess of $600,000 and the mortgage was around $400,000, the prospect of a $200,000 profit appeared to be good shopping.

At this point the sheriff’s sale process appears to have gone feral. A person can lose their home, in which they have an equity of $200,000, and the judgment creditor, who initiated the process, stands to receive nothing, as the sale price of $1000 would not even cover the sheriff’s costs. Whether the villager is an idiot or not, that cannot be justice. Mukhtar AsJ. also expressed concern in relation to this outcome and repeated a call first made in 1982 for a review of this procedure, which appears to be ‘ill adapted to modern conditions’.

Without doubt, the judgment debtor/registered proprietor should have done more to help himself. He sought the assistance of a private lawyer, but regarded that as too expensive. He followed the usual trail around the various free legal services, but appeared to weary of the travel. No doubt a lack of English greatly affected his understanding of the significance of the documents that he received, but by the end he would have needed a wheelbarrow to transport them and yet he still came before the court and shrugged his shoulders, unable to see the steamroller diligently rolling towards him. Mukhtar AsJ. made orders that ensured that the process could not proceed without coming to the attention of the person most affected by the orders, even though not a party to these particular proceedings, but in the end concluded that ‘[t]he Court can do no more’ (para 41).

Mukhtar AsJ. identified a number of areas of concern in relation to the sheriff’s sale process:

  1. that the prospect of a sale being made without any reserve price can lead to a perception that the property is being sold under value and call into question the duty of the sheriff to the judgment debtor to sell for the ‘best price’ (para 35);
  2. that the application for a sale without reserve, which can be made after an unsuccessful sale with a reserve, should not be made ex parte, but rather with notice to the judgment creditor;
  3. that consideration should be given to holding sheriff’s sales on-site, rather than at the sheriff’s office, with additional advertising. The implication is that a sheriff’s sale ought more resemble a traditional auction; and
  4. that, in appropriate circumstances, a court may need to set a ‘not below’ price, something of a misnomer in a ‘no reserve’ auction.

Tip Box

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

Breach of section 32

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By Russell Cocks, Solicitor

Published in 2011, First published in the Law Institute Journal

The Vendor’s Statement required by the seller of real estate pursuant to s 32 of the Sale of Land Act 1962 is a fundamental document in the conveyancing process. Designed as a consumer protection mechanism, the statement requires the vendor to disclose certain items of relevant information to a prospective purchaser.

Perhaps reflective of a ‘boom market’ in real estate in the new millennium, there have not been many recent cases that have considered this section. Purchasers in such a market are less likely to complain and more likely to take a long term view that capital growth may remedy minor blemishes. Add to this the uncertainty of legal proceedings and enormous cost consequences of failure and it is little wonder that contested cases are rare. Nicolacopoulos v Khoury [2010] VCC 1576 – the writer’s firm acted for the purchaser plaintiff – therefore comes as a rare treat for the property connoisseur.

The vendor instructed a conveyancer to prepare a Vendor’s Statement, which formed part of a contract of sale. The property was a lot on a plan of subdivision and it was, as a matter of law, affected by an owners corporation. This was an agreed fact at the hearing, but the conveyancer had incorrectly taken the view that the property was not affected by an owners corporation as there was no ‘common ground’. This was apparently a reference to the fact that the subdivision was a two-lot subdivision with both lots having separate road access, so there was no common property. Nevertheless, there was an owners corporation, even if in name alone – the euphemistic ‘inoperative owners corporation’.

In those circumstances s 32(3A) requires the vendor to include in the Vendor’s Statement an Owners Corporation Certificate, issued pursuant to s 151 Owners Corporation Act 2006, and accompanying documents. Failure to do so entitles the purchaser to rescind the contract pursuant to s 32(5), subject to the limitation created by s 32(7).

There was no contest that there was a breach of s 32(3A) and a consequent right to rescind pursuant to s 32(5), but the vendor argued that the vendor was saved by s 32(7). To come within the protection of subsection (7) the vendor had to prove:

  1. that the vendor had acted ‘reasonably’; and
  2. that the purchaser was ‘substantially in as good a position as if all relevant provisions had been complied with’.

The first question raised the issue of the vendor’s liability for the statements in the Vendor’s Statement. This issue had been the subject of conflicting authority, with Payne v Morrison [1991] V ConvR 54-428 holding a vendor vicariously responsible for the unreasonable (negligent) conduct of an adviser and Paterson v Batrouney & anor [2000] VSC313 suggesting that vicarious liability was not appropriate and that only personal liability was relevant. Fifty-Eighth Highwire v Cohen and Anor [1996] VicRp 57 had also considered the issue, without needing to reach a decision on the point.

Ultimately Ginnane J. adopted a similar course to Fifty-Eighth Highwire v Cohen and avoided deciding whether vicarious liability was sufficient as he was satisfied that the vendor had been personally negligent and therefore had not acted reasonably. Unlike Paterson v Batrouney, where there had been total reliance on the adviser, Ginnane J. held that the vendor should have been aware of the existence of the owners corporation and therefore bore personal responsibility for ensuring adequate disclosure.

The second issue concerned the consequences of the breach on the purchaser. The vendor made two arguments on this point:

(a) that the Vendor’s Statement had not misled the purchaser.

The purchaser’s evidence was that she was particularly interested in the property because the sales brochure began with the words, ‘Say good-bye to the body corporate’. She presently owned a property subject to a body corporate (owners corporation) and she was very concerned that a new property should not be affected by an owners corporation. The vendor argued that the purchaser purchased the property because of the brochure and that the absence of the Owners Corporation Certificate in the Vendor’s Statement had not influenced the purchaser’s decision.

Ginnane J. held that if the information required by subsection (3A) had have been included in the Vendor’s Statement, then it was likely that the purchaser would have been made aware that the property was subject to an owners corporation and would not have purchased the property.

(b) that the owners corporation was dormant.

The vendor gave evidence that the owners corporation had never met and that no levies had been struck. For all intents and purposes, the owners corporation did not exist.

This argument was not accepted. The mere existence of the owners corporation and the possibility that it could be enlivened was sufficient to establish a detriment.

Whilst the issue of detriment was to be determined objectively, the purchaser’s subjective characteristics were a relevant consideration. So too was the fact that parliament had decreed that certain information was required; and, it may be presumed, such consumer protection aspirations are not to be lightly ignored.

The matter came before the court as a vendor-purchaser summons based on s 49 Property Law Act. As such, the issue for determination was limited to the issue arising from s 32 Sale of Land Act, and the question of the negligence of the conveyancer or misrepresentations of the agent were not matters before the court. Nevertheless, the purchaser was able to establish that the agreed breach of subsection (3A) was not saved by subsection (7).

Tip Box

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

Subdivision – Off the plan sales – Best endeavours – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The sale of land ‘off the plan’ is a common occurrence in the property market. Its principal virtue is that it provides certainty to both vendor (as to the sale) and purchaser (as to the eventual purchase) of the subject property. Whilst there may be some delay in relation to the eventual settlement, which cannot occur until the proposed plan of subdivision is registered at the Land Titles Office, both parties can be confident that, upon registration, the contract will proceed to settlement on the agreed terms.

Off the plan sales are common in a variety of circumstances, but the two principal scenarios are:

  1. sales of vacant land; and
  2. sales of homes.

Land sales

These sales generally fall into one of two categories:

  1. small-scale subdivisions, perhaps only creating as few as two lots; or
  2. large-scale subdivisions, including ‘greenfield’ sites, creating multiple lots.

Whilst projects in these two categories can have enormous differences in scale – from 2 lots to 1000 or more lots – the same legislative framework guides the subdivisional process (Subdivision Act 1988 (Vic)) and the same legislative framework regulates the vendor’s obligations, and purchaser’s rights, on sale (Sale of Land Act 1962 (Vic)).

Pursuant to the Subdivision Act, the vendor is required to satisfy the local council, acting in a supervisory capacity, that the proposed plan satisfies all of the subdivisional requirements of council and service authorities; and, when satisfied, council will seal the plan and provide a statement of compliance. These documents are then lodged with the Land Titles Office and, in the normal course of events, the plan is registered and settlement may take place.

The Sale of Land Act prohibits completion of the sale until registration of the plan, imposes pre-contract requirements and creates during-contract rights, which are essentially designed to protect purchasers.

The 2008 contract of sale, widely used for sales generally, adopts these broad guidelines; and it is possible to create a contract for an off the plan sale relying on the particulars of sale and general conditions alone, without the need for any special conditions or annexures. This is particularly so for small-scale developments, although larger-scale subdivisions involving substantial earthworks may require the inclusion of a plan showing ‘works affecting the natural surface level’: s 9AB Sale of Land Act.

Home sales

Again, these sales generally fall into one of two categories:

  1. small-scale subdivisions, creating just a few lots for sale; or
  2. multi-unit subdivisions, including high-rise developments.

The same subdivisional and registration processes apply to these developments, with the added complication that councils generally will not issue a statement of compliance until construction of the development is complete.

Such contracts envisage the construction of improvements on the land during the contract, and a special condition will usually be added to the effect that the contract is not a major domestic building contract and that the vendor will enter into a major domestic building contract with a registered builder. The extent of detail provided to the purchaser in respect of the improvements to be erected is not regulated and may vary from reliance by the purchaser on a glossy brochure provided by the vendor (which is not included in the contract) to a full copy of the major domestic building contract (including specification) that the vendor has or will enter into. It is fair to say that purchasers ‘take on faith’ that the vendor will ultimately deliver to the purchaser at the expiration of the contract the product, in all its glory, that was touted as being sold when the purchaser entered into the contract.

Once the contract has been signed and the project is underway, the purchaser enters purgatory – a state of perpetual waiting. Even if the project is a mere land subdivision, ages can pass before the plan is registered. If a home is being constructed, long periods of inactivity cause concern. The default period between contract and settlement (14 days after notification of registration of the plan) is 18 months, but contracts can adopt another period and contracts spanning 60 months are common.

A recent case has considered the vendor’s obligations in terms of completion of the project within the required period: Joseph Street Pty Ltd & Ors v Tan & Anor [2010] VSC 586. The project was a relatively small development by the vendor of six units. The contract completion, or sunset, period was 15 months, and the vendor had entered into a contract with a registered builder for construction of the units. Regrettably, the builder ‘went broke’ and the project was substantially delayed while the vendor put other construction arrangements in place. The sunset period expired, the vendor rescinded the contract and the purchaser sought specific performance. No doubt, given the rising housing market, the property had appreciated and both parties sought to take advantage of that situation.

To succeed, the purchaser had to establish that the vendor was in breach and thus not entitled to rescind. The purchaser sought to do so on the basis of a breach by the vendor of an express contractual obligation to use ‘best endeavours’ to complete the contract within the sunset period. It was also agreed that such an obligation was an implied term of the contract. The court concluded that the true cause of the delay was the collapse of the builder, an occurrence that was beyond the control of the vendor. The vendor had therefore fulfilled its contractual obligations to use best endeavours and was entitled to rescind, thereby retaining the (more valuable) property.

Tip Box

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

Deposit release – Why take the risk?

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Land deposits must be held in trust pending settlement or prior release: s 24 Sale of Land Act. Vendors (and particularly their agents) often seek prior release pursuant to s 27 of the Act. A recent case has raised the possibility that release of the deposit may also have some unexpected consequences for the purchaser’s legal rights against the vendor.

Pamamull v Albrizzi (Sales) Pty Ltd (No 2) [2011] VSCA 260 concerned an attempt by a purchaser to avoid a contract of sale of land on the basis that an encroachment on one boundary constituted a defect in title. The purchaser had purported to rescind the contract shortly prior to settlement, but the vendor had rejected that purported rescission, had in turn rescinded the contract, resold the property at a loss and issued proceedings against the purchaser for forfeiture of the deposit and the loss on resale.

The trial came on for hearing in the Supreme Court but the purchaser was not in a position to proceed. His solicitor applied to withdraw and the purchaser sought an adjournment, which was opposed by the vendor. The purchaser’s defence had been based on the partial encroachment onto the land sold by an adjoining property constituting an easement over the property sold which should have been disclosed in the Vendor Statement. The failure to disclose was said to justify statutory avoidance by the purchaser. The judge granted the purchaser a short adjournment but then found in favour of the vendor, however the purchaser was given the right to return in two days to show why judgment should not proceed.

The purchaser returned in the company of the inimitable Wikramanayake SC, who informed the court that the Vendor Statement argument was ‘wrong’ and ‘of no merit’ but that the purchaser had a good defence based on an argument that the partial encroachment over adjoining land by the land sold constituted a defect in the vendor’s title entitling the purchaser to rescind the contract. That argument was not accepted, essentially as the judge was not satisfied that there was any evidence before him as to this encroachment, and judgment was confirmed.

The purchaser appealed to the Court of Appeal and, in relation to the argument concerning the failure of the judge to grant a longer adjournment, was successful. The Court of Appeal held that it would have been reasonable to grant an adjournment of two weeks to allow the purchaser to retain and instruct new solicitors. However the Court of Appeal decided nevertheless that, as the purchaser’s claim had such little chance of success, it would be futile to order a retrial and judgment was confirmed.

The Court of Appeal considered the defect in title argument and the analysis followed the traditional route of starting with Flight v Booth [1834] EngR 1087 to establish that a substantial error or misdescription in title boundaries may constitute a defect in title such as to justify avoidance. This however depends upon the subject matter of the transaction, requiring reference to the contract of sale, which in turn brings into play any contractual conditions that relate to misdescription. This contract contained what might be described as a traditional ‘identity’ condition which seeks to forgive any misdescription but which will always be subject to the Flight v Booth limitation in relation to a ‘substantial’ error. The Court of Appeal concluded that the contractual terms forgave a minor error and that the error in this case was ‘not of such substantiality as to found an entitlement to avoid’.

There is nothing unusual in this analysis except that the Court of Appeal also referred to the fact that the purchaser had agreed to release of the deposit and in doing so ‘was deemed to have accepted title’ and might thereby be regarded as having ‘waived those rights or elected to proceed under the contract.’ The proposition was not considered at length but must be taken as a warning to purchasers that consent to release of the deposit may constitute an acceptance of title and thereby prevent any subsequent argument based on a substantial defect in title.

A purchaser who signs a deposit release that includes reference to accepting title will thereby lose the ability to thereafter claim a title defect. Further, signing a deposit release that does not refer to acceptance of title might arguably be deemed to be implied acceptance. Section 27(2)(b) does not provide that a purchaser who releases the deposit thereby accepts title, but it does provide that the deposit release procedure is only available ‘where the purchaser has accepted title or may be deemed to have accepted title’. Thus a purchaser who signs a release may face an argument that the purchaser has impliedly accepted that the statutory precondition to release has been satisfied. Whether some all embracing statement to the effect that the purchaser does not accept title, will save the purchaser is uncertain.

Consenting to release immediately upon sale would be outright dangerous, but consenting at any time prior to settlement would appear to expose a purchaser to an unnecessary risk. Failing to fully inform the purchaser of this risk would constitute professional negligence.

Tip Box

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

Co-owners – Joint tenancy or tenancy in common

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The recent decision in Sacks v Klein [2011] VSC 451 considered the well known distinction between joint tenancy and tenancy in common and the impact of the death of a co-owner. It confirmed that whilst co-owners may be registered as joint tenants (legal joint tenants) equity may nevertheless impose an equitable tenancy in common by way of a trust.

Generally speaking, VCAT (Victorian Civil and Administrative Tribunal) has almost exclusive jurisdiction over applications relating to co-owned land under Part IV of the Property Law Act 1958. However, pursuant to s 234C(2) the courts retain jurisdiction in relation to co-ownership disputes in de facto property situations, testator’s family maintenance claims and partnership disputes. This dispute potentially came within one or both of the latter two categories, although the issue of jurisdiction was not discussed in the judgment. Indeed, no reference was made to the Property Law Act and the proceedings were conducted as an application for a declaration of trust.

The important distinction between joint tenancy and tenancy in common presents upon the death of one of the co-owners. In a joint tenancy, the deceased’s interest in the property passes to the surviving owner pursuant to the right of survivorship. In a tenancy in common, the deceased’s interest passes to the deceased’s estate.

In Sacks v Klein, two brothers (D aged 30 and M aged 29) purchased a property in 1994 as an investment and were registered as joint tenants. M died in 2005 and D lodged a survivorship application and became registered as sole proprietor by survivorship. M’s administrator issued an application on behalf of M’s estate for a declaration that D held the property on trust for himself and the plaintiff as tenants in common in equal shares.

Hargrave J. set out various principles discerned from previous cases:

  1. Where property is conveyed to two or more persons who are named as transferees without further specification as to whether they are to hold the title as joint tenants or tenants in common, they are deemed by operation of s 33(4) of the Transfer of Land Act 1958 (Vic) to hold the legal estate as joint tenants. However, s 33(4) of the Act does not preclude the operation of equity.
  2. Unless there is evidence to indicate the transferees held a different intention, equity will follow the law.
  3. Irrespective of the position on the certificate of title, equity may intervene to impose a tenancy in common.
  4. Equal provision of purchase money points to a joint tenancy.
  5. Where the co-owners are partners or participants in a joint undertaking, tenancy in common will prevail.
  6. A common intention by the co-owners to acquire the property as joint tenants is not conclusive.

Analysing the evidence, Hargrave J. concluded that the brothers had purchased the property as a joint undertaking. The mortgage loan was made to them jointly and severally. The fact that it was D’s idea to invest in the flat was not to the point. He chose to invite M to participate in a joint purchase of the flat with the express purpose of long-term profit being made by each of them. Likewise, the fact that D assumed responsibility for the investment and arranged for the property to be leased, maintained and renovated was not to the point. Notwithstanding that M had lived overseas the entire time the property was jointly owned, he was to be regarded as a ‘silent partner’ in a joint undertaking, a conclusion that would point to a tenancy in common, even if no formal partnership existed.

However, Hargrave J. accepted that there was evidence that at the time of purchase the difference between joint tenancy and tenancy in common was explained to D and that he in turn explained it to M, who agreed that the property should be purchased as joint tenants. On this basis His Honour concluded that at the time of purchase the co-owners intended to hold the property as joint tenants.

Thus His Honour was faced with a subjective joint tenancy, based on the stated preference of the co-owners as revealed by their registration on the title, as opposed to an objective tenancy in common, based on the nature of the relationship between the co-owners. In such a situation the stated intention (as revealed on title) of the parties will prevail unless ‘there is evidence, even slight evidence, to indicate an intention to divide the property between the joint tenants’. His Honour found that there was evidence of such an intention, being:

  1. the property was an investment;
  2. the income and expenses were divided equally; and
  3. M had acknowledged a ‘moral obligation’ to D’s family in the event of D’s death.

The plaintiff’s application for a declaration of trust was successful.

Tip Box

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

Land tax – Part 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Last month’s column considered the imposition of land tax and its adjustment at settlement of a conveyancing transaction.

Land tax is distinguished from other outgoings by four attributes:

  • thresholds, below which tax is not imposed;
  • aggregation of ownership;
  • an increasing rate of tax based on value; and
  • exemptions.

The combination of aggregation and the increasing rate of tax expose a purchaser to a liability to contribute to ‘excessive’ land tax in some circumstances, and last month’s column explained how the ‘single holding’ basis of adjusting protects purchasers in this regard.

Principal place of residence exemption

Land may be exempt from land tax on the basis of the principal place of residence (PPR) exemption. A property owned and occupied by a ‘natural person’ is exempt from land tax. This is irrespective of the land value of that property and means that land tax is rarely a factor in residential conveyancing. But ‘unusual’ transactions present from time to time, and it is probably the unfamiliarity with land tax in the residential environment that creates problems.

The key to understanding this exemption is that it is based on the current use of the property, not an intended use. If the current use is as the vendor’s PPR, then the property is exempt for the current year. The upside of this for a purchaser is that, if the vendor has established the PPR exemption, it will not be taken away in the current year and no adjustment is necessary, even if the purchaser does not intend to use the property as a PPR. The purchaser will be liable for land tax in the subsequent year, but not in the year of acquisition.

The downside is that, if the vendor has not established the PPR in the year of sale, the purchaser will still be obliged to adjust land tax (on a single holding basis) even if the purchaser intends to occupy the property as the purchaser’s PPR. The exemption will not be available until the subsequent year.

This scenario can also arise if the vendor has purchased before selling. The vendor settles their purchase and advises the State Revenue Office that their new property is their PPR. If they retain ownership of their ‘old’ property beyond 31 December in that year, the old property is likely to be assessed for land tax as it is no longer exempt as a PPR. Disputes may arise at settlement of that property in the new year as the vendor’s statement, prepared at the time of sale, will very likely not reveal a potential land tax liability as it was prepared in anticipation of the sale of the PPR in the previous taxing year.

Special land tax

Land tax at a premium rate is imposed on some properties owned by trustees, and the land tax threshold in respect of such properties is $25,000 rather than $250,000. This means that a purchaser of such a property would, perhaps unexpectedly, face an obligation to adjust land tax in the year of acquisition, notwithstanding that the purchaser is a natural person and would not ordinarily be liable for land tax. This situation is covered by GC 15.2(c) of the 2008 prescribed contract of sale, which provides that adjustments are to be effected on the basis that ‘the vendor is taken to own the land as a resident Australian beneficial owner’. On that basis the premium rate does not apply and the threshold is $250,000. Adjustments would therefore be effected on a single holding basis, with the normal threshold and standard rates. In this manner, the burden of special land tax falls on the vendor, not the purchaser.

Special conditions

The 2008 contract of sale is an industry standard, but its use is not compulsory. It is permissible for a vendor to change the method of adjustment of land tax by special condition, and purchasers must be careful to check whether this has been done in any particular contract. Property developers in particular may seek to transfer responsibility for land tax to a purchaser from the date of contract rather than from the conventional date of settlement. This can have the effect of requiring the purchaser to bear an unexpected land tax burden and, if coupled with removal of the ‘single holding’ basis of assessment, can have a significant downside for a purchaser, particularly in the case of a long settlement period that may extend beyond 31 December. This exposes the purchaser to a share of land tax in the year of contract and the whole of the land tax, at the vendor’s rate, in the year of settlement – often a nasty surprise.

Tip Box

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

Subdivision – Owners corporations

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The Owners Corporations Act 2006 took effect on 1 January 2008. In some respects it is a radical change; in others it is just like a holiday – more of the same in a different place.

Owners corporations (OCs) are creatures of subdivision. Land may be subdivided into separate parcels and share nothing with its neighbour other than a boundary. But some subdivisions adopt a more ‘community minded’ approach and add on to ownership of the land an interest in land owned ‘in common’ with adjoining neighbours. This is essential in multistorey developments, where all owners need to share common points of access, and is also common in lifestyle developments that include enhancements such as tennis courts and swimming pools. Ownership of these common areas is shared amongst the owners and the concept of a ‘body corporate’ was developed to provide a legal entity to act as owner. These developments are primarily governed by the Subdivision Act and the nuts and bolts of this governance were previously set out in the Subdivision (Body Corporate) Regulations.

The new Act retitles these entities as owners corporations but their role remains fundamentally the same – to act as a legal entity to own common areas in subdivisions. The most significant change is the move of the legislative basis for these entities from the low level of statutory rules into the higher plane of legislation. Most of the substance previously contained in the regulations now lies in the Act, and whilst there are still some regulations (Owners Corporations Regulations 2018) these are far less significant. In this regard however the changes are more as to form than substance and the essential governance provisions relating to owners corporations are fundamentally the same as those relating to bodies corporate, albeit in a slightly more salubrious garment.

Substantive changes introduced by the new Act are:

  • 2-lot plans are treated slightly differently to other plans (s 7)

2-lot plans are exempt from some requirements, notably the obligation for the owners corporation to provide public liability insurance in respect of common property. Most ‘strata’ insurance policies extend cover to the owner’s liability in respect of common property so this change will probably not be significant, but nevertheless it seems strange from a policy viewpoint.

  • large subdivisions will need to establish maintenance plans and funds (s 36)

Subdivisions of over 100 lots or that levy fees over $200,000 per annum are obliged to establish 10-year maintenance plans and dedicated maintenance levies to fund these plans. This will re-open the debate in relation to adjustment of levies on sale, which have traditionally not been adjustable.

Insurance obligations remain fundamentally the same. Owners corporations must insure any buildings on common property (s 59) and must have $10 million public liability insurance in respect of common property (s 60). Multistorey developments must also insure all buildings and have public liability insurance that covers the lots (s 61) as well as the s 60 public liability insurance in respect of common property. This is logical as damage to one lot in a multi-storey development is likely to impact on other lots (above or below) so a joint insurance policy makes sense.

Recognizing that owners corporations arising from intensive inner-city developments are likely to be big business, a registration regime has been introduced for managers. No particular qualifications are required.

A new set of model rules (set out in the regulations) have been prescribed. These apply in default of other rules and may be changed by adoption or resolution. Rules of a pre-existing body corporate continue, presumably even if they were simply the previous standard rules.

  • dispute resolution (s 152)

The ubiquitous VCAT (Victorian Civil and Administrative Tribunal) has been given jurisdiction to resolve disputes, at the end of a formal dispute resolution process.

Substantial amendments, but mainly as to form, have been made to Part 5 of this general supervising Act.

  • limitation of actions (s 222)

Owners are prohibited from claiming adverse possession of common property.

Amendment of s 32 Sale of Land Act is the most significant practical effect of the new Act. Vendors must now include an owners corporation certificate (OCC) in pre-contract disclosure. Owners corporations must provide an OCC within 10 days of application and may charge up to $150 (including GST). There is no prescribed form of OCC but there is prescribed information that must be included and prescribed documents that must be attached.

2-lot plans are not exempt from this requirement. The vendor of a 2-lot plan must provide an OCC.

Tip Box

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

Land tax – Part 1

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By Russell Cocks, Solicitor

Published in 2011, First published in the Law Institute Journal

Land tax is imposed by the state government as a source of revenue. In this respect it is similar to stamp duty or taxes on gambling, and it is undoubtedly an important revenue stream for government. Essentially it is a wealth tax designed to raise revenue from taxpayers who own valuable, commercial land. Thus land tax:

  • has a threshold, so that ‘cheap’ land is not taxable;
  • is calculated on the unimproved value, so that the value of improvements to the land, such as buildings, is not taxable;
  • is calculated on the aggregate of all land owned by the vendor;
  • is calculated on a sliding scale, so that more valuable land attracts tax at an increasing rate, known as an ad valorem rate; and
  • has a number of exemptions, so that the principal place of residence (PPR) and farming land, amongst others, are not taxable.

These aspects may be contrasted with other outgoings, such as municipal rates, that are generally based on the improved value, apply universally and are at a fixed rate. Thus land tax provides a special challenge in respect of adjustment of outgoings at settlement of a conveyancing transaction.

Adjustments

Adjustments are meant to result in the vendor and purchaser each paying a fair share of the outgoings relating to a property in the year of sale/purchase. Thus rates and charges need to be apportioned between the vendor and purchaser at settlement, so as to result in the vendor paying those outgoings up to and including the day of settlement and the purchaser being responsible for outgoings after settlement. The process is therefore governed by the agreement between the parties – generally general condition (GC) 15 of the 2008 contract – and the provisions of legislation establishing those outgoings, the Land Tax Act 2005.

Conceptually the adjustment process is simple and, in the case of most outgoings, remains so in practice. The current rate or charge is apportioned over the year between vendor and purchaser. If the charge is paid as at the date of settlement, the apportionment will result in an increase in the amount paid to the vendor at settlement. If the rate or charge is unpaid, the usual way to adjust is to treat the outgoing as paid, resulting in the same increase in the amount due at settlement to the vendor as if the rate or charge had have been paid, and then draw a cheque from the amount due to the vendor for the full amount of the outgoing and forward that cheque to the rating authority after settlement in payment of those rates, thus complying with s 175 Local Government Act 1989. In this way the parties have contributed to payment of the outgoings in proportion to their length of time of ownership in the year of acquisition.

Adjustment of land tax

The fact that land tax has a threshold – currently $250,000 – means that land tax will not be a factor in the sale of ‘cheap’ land. The fact that it is calculated on the unimproved value of the land, ignoring the value of improvements, effectively extends this threshold so that, whilst a property may have a capital improved value of $1 million because of the improvements erected on the land, it will not be subject to land tax if the land itself has a value below $250,000.

The distinguishing feature about land tax when compared with other outgoings is its ad valorem nature. Thus a vendor of land that exceeds the threshold will pay land tax at a higher rate as the value of the land increases (0.2% above $250,000, increasing to 2.25% over $3 million). Further, land tax is calculated on this increasing scale on the aggregated value of the vendor’s land and then apportioned across the vendor’s total land holdings. Thus a vendor whose total land holdings are valued at $3 million will pay much more tax on one lot valued at $250,000 than a person who only owns one lot worth $250,000.

A purchaser is therefore exposed to being obliged to adjust land tax at an ‘inflated’ rate simply because the vendor owns other land. GC 15.2(b) of the contract recognises this possibility and requires adjustment of land tax to be on the basis that ‘the land is treated as the only land of which the vendor is owner’ – the so-called ‘single holding’ basis. The property sold is isolated from the vendor’s other land holdings; and a calculation of whether, and how much, the purchaser must contribute to the vendor’s land tax is made on that basis. This additional information is included on the back of the Land Tax Certificate.

Next month’s column will consider the impact of the PPR exemption, the imposition of special land tax on trusts and the effect of special conditions in contracts.

Tip Box

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

Contract – New contract – Contract of sale tweaked

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The contract of sale of land in common use is not strictly a compulsory document. It is prescribed pursuant to the Estate Agents (Contracts) Regulations 2008, but those regulations only bind estate agents. This means that if an estate agent prepares a contract the prescribed form must be used, but if the contract is prepared by a solicitor (or conveyancer) another form of contract may be used.

However, apart from some off the plan sales situations where developers (or their advisers) seem reluctant to move from the old form, the 2008 form of contract appears to have been widely accepted. Its best attributes may be described as:

  1. Table A was abandoned and all contractual terms were gathered in the one place;
  2. the contract note was abandoned;
  3. the right to make requisitions was replaced with contractual warranties; and
  4. an attempt was made to have the general conditions operate as a standard template with any changes being made by special condition rather than (possibly imperceptible) changes within the general conditions.

For a more complete summary of the 2008 contract, see the article (2008) 82 (10) LIJ 40.

The impending application of the Personal Property Securities Act 2009 (Cth) prompted a review of the 2008 form of contract by the Justice Department, and the Law Institute has been involved in that working party. This opportunity has also been taken to ‘tweak’ the contract a little to build on the experience of three years use of the new contract.

On the front page, the principal amendment relates to the cooling off warning. This has been amended in accordance with the recent Sale of Land Act amendment to maintain the right to cool off even if the purchaser obtains independent legal advice. The proposed off the plan warning amendment has not been enacted at this stage.

The particulars of sale page has had some minor changes and the location of special conditions has been moved to be between the particulars of sale and the general conditions rather than after the latter, as had been the case.

The main changes to the general conditions are:

  1. General condition (GC) 1.3 is deleted as it appears to have very little application in standard transactions.
  2. GC 3.1 (the ‘identity’ condition) is slightly amended for clarity.
  3. GC 7 is amended to take account of the Personal Property Securities Act 2009 (Cth).
  4. GC 8 is amended to require the vendor only to provide details of building warranty insurance that are in the vendor’s possession.
  5. GC 11.2(c) is deleted. The Sale of Land Act no longer allows for a deposit to be held in a vendor/purchaser joint account.
  6. GC 11.6 is amended to remove the redundant reference to ‘bank’ cheques.
  7. GC 12 (deposit release condition) is amended to adopt the language of the Act by substituting ‘particulars’ for ‘proof’ in 12.1(a).
  8. GC 12.1(b) is amended to comply with the Act by allowing release provided that ‘28 days have elapsed since the particulars were given to the purchaser’.
  9. GC 13 has a minor GST amendment.
  10. GC 17.2 allows for a broader method of service.
  11. GC 23.1(a) (terms contract condition) updates the reference to s 29M Sale of Land Act.
  12. GC 27 is amended to specify that a default notice must be in writing and that notices are to be ‘given’ rather than ‘served’.

Various minor grammatical and style changes have also occurred.

The Law Institute of Victoria is also proposing to release a standard form of nomination to complement the contractual right to nominate established by GC 18 and to make available various standard special conditions to be used in common situations, such as the need for a building inspection or a pest inspection.

The vast majority of users of the contract have respected the intention that the general conditions remain sacrosanct and that any changes to those general conditions are to be made by separate special condition. If a vendor wishes to make a change to the general conditions, then that should be done by way of special condition that amends the relevant general condition, not by making a change to the general condition itself. The objective of this method is to improve transparency in relation to the contract, thereby assisting the purchaser to better understand the conditions and also assisting the vendor by reducing the possibility that the purchaser will cry foul in relation to such changes.

Tip Box

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

Contract – Changing the contract by special condition

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Regular readers of this column will note a recent contract-centric emphasis, and this column continues that focus by considering how the standard form contract can, or should, be changed.

At the risk of repeating well known law, the standard contract of sale of real estate is not a compulsory document and may therefore be changed by agreement between the parties. The authors of the contract surrendered copyright in the contract so that it could be adopted by the Estate Agents (Contracts) Regulations 2008 as a standard form available for use across the conveyancing industry. The contract includes 28 general conditions that form the basis of a contract that is capable of providing all the terms necessary to make a workable, binding contract between vendor and purchaser.

This means that special conditions ought not be necessary in a standard conveyancing transaction, although it remains permissible to supplement or change the general conditions by special condition. Unfortunately many lawyers find it very difficult to move on from time-honoured precedents and many contracts still included pages of special conditions that, if considered carefully, generally add nothing to the general conditions and indeed often contradict those general conditions. Generally this is simply a consequence of laziness, with the practitioner not bothering to determine how those ‘old’ special conditions interact with the new general conditions. The worst example of this is the special condition that refers to Table A, a provision that was repealed in 2009.

Special conditions

Some transactions do indeed require special conditions. In such cases the special conditions are added to the contract (in the newest version of the contract, before the general conditions) and those special conditions take precedence over the general conditions. It is possible for those special conditions to change the general conditions and some common examples of this are to remove general condition 24.4 or to amend the penalty interest rate.

One of the popular consequences of the new contract was to abandon the time wasting exercise of ‘requisitions’ and replace it with contractual warranties, set out in general condition 2, so that a purchaser can have certain basic expectations about the transaction confirmed. Whilst it is theoretically possible for the vendor to include a special condition amending these contractual warranties, to do so undermines the whole structure of the contract and is not recommended.

Altering general conditions

Unfortunately some practitioners have chosen to adopt a more surreptitious method of amending the contract. Rather than adding a special condition, these practitioners amend the wording of the general condition. The Legal Practitioners Liability Committee (LPLC) In Check Bulletin 53 of December 2011 alluded to this practice and warned purchaser’s practitioners of the danger of ‘missing’ such a surreptitious change. However there may well be danger for the vendor’s practitioner who adopts this practice.

George T Collings v. H F Stevenson (Aust) P/L is a 1990 unreported judgment of Nathan J. in the Supreme Court of Victoria. The case relates to the interpretation of an estate agent’s sole agency authority, specifically the period of time during which the vendor was bound to pay the agent commission in respect of a sale. The authority allowed for the inclusion of a specific period but also provided that the authority extended indefinitely, unless terminated by the vendor. The agent negotiated a sale outside the specified period and claimed commission on the basis that the vendor had not terminated the authority. Nathan J. found that the authority was unenforceable as ‘unconscionable’ on the basis that the indefinite extension of time was ‘submerged in the fine print of the contract’. He concluded that it is ‘unconscionable to imbed in a pro forma contract, a term inconsistent with its stated purpose’.

By analogy, a vendor who adopts the standard form contract of sale of land but surreptitiously amends that contract such that the amendment is ‘submerged in the fine print’ may well find that such an amendment is unenforceable as unconscionable. If that amendment were to be to the penalty interest rate, no interest would be payable. No better example of the saying ‘hoist by his own petard’ can be imagined.

Notwithstanding the High Court confirmation of the significance of contractual terms in Toll (FGCT) P/L v Alphapharm P/L [2004] HCA 52, it is submitted that, particularly in a residential sale environment, the powerful argument based on unconscionability will prevail to strike out any amendments to general conditions that are effected other than by way of a special condition. The negative consequences for a vendor in such circumstances might be the next matter of concern for the LPLC.

Tip Box

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

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