By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

Tip Box

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

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

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tip Box

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

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

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

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

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

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

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

Tip Box

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

Vendor

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

Purchaser

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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

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

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

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

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

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

Security Deposit

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

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

Tips

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The conveyancing process in Victoria has the advantage of a ‘standard’ contract of sale that is, more or less, universally adopted. This contract has the imprimatur of government by being adopted by regulation, although it is not obligatory. It contains 29 General Conditions that provide a workable template for a conveyancing transaction and, importantly, are designed to strike a fair balance between the interests of the vendor and the purchaser.

The contract recognises that a particular transaction may require one or more Special Conditions to address specific requirements of that transaction and provision is made for the General Conditions to be supplemented by Special Conditions. However it was not intended that those Special Conditions would fundamentally alter and undermine the balance of power between the parties established by the General Conditions.

A practice has arisen since the ‘new’ contract was introduced in 2008 of vendors adding extensive Special Conditions to the contract which, rather than seeking to address the particular needs of the transaction, actually result in the underlying General Conditions being substantially changed and effectively emasculated. Authors of such contracts need to bear in mind the possibility that such contracts may be found by a court to be misleading and consequently unenforceable, or at least partly so.

Changes that increase the penalty interest rate, shorten the period of time for notice, increase the number of bank cheques, remove rights given to the purchaser in GCs 8 and 24, tinker with obligations at settlement, alter the way that adjustments are calculated and change pre-settlement inspection rights are all designed to alter the relative balance of power between the parties to favour the vendor. There is no doubt that the parties are free to contract on the terms of their choosing but a dissatisfied purchaser may well argue that a contract that is presented in a standard form but includes many changes to that standard form that favour one party only is misleading.

Off the plan contracts

Such changes are particularly prevalent in off the plan contracts. Putting aside whether extensive Special Conditions that largely repeat relevant statutory provisions are even necessary, the adoption of the standard form contract and then alteration of over half of the General Conditions is ludicrous.

Such sales are inevitably in trade and commerce with purchasers regarded as consumers and courts are all too ready to grant protection in circumstances of unequal bargaining power, let alone circumstances where it is clear that the purchaser was lulled into believing that the transaction was governed by a ‘standard’ contract.

Speaking as one of the authors of the standard contract, and on behalf of the other two authors, I say to such draftspeople: by all means draft a contract that provides greater advantage to your vendor client but DO NOT seek to mask that unfair contract within the cloak of the standard contract. That particular Trojan Horse may fall foul of the Australian Consumer Law and Fair Trading Act 2012.

PRECEDE

Altering the General Conditions of sale may create a misleading contract.

Tip Box

• Special Conditions are meant to supplement the General Conditions
• Altering the balance of power between vendor and purchaser in the context of a standard contract might be misleading
• Whilst written for Victoria this article has interest and relevance for practitioners in all states

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Quality disputes in off the plan contracts often relate to the size of the finished product

A summary of the provisions of the Sale of Land Act 1962 that allow for avoidance of off the plan contracts was published in the May 2015 Law Institute Journal. Those provisions only relate to a purchaser’s complaints with the terms of the contract, changes to the plan of subdivision or failure to complete the project within the permissible time. Those provisions do not assist a purchaser who is concerned with the end product presented by the developer at the time of settlement.

These disputes relate to the quality of the final product and generally contrast the developer’s commercial aspirations with the purchaser’s aesthetic aspirations. The purchaser was provided with architectural drawings, artist impressions, glossy brochures and perhaps even video impressions upon which the purchaser constructed a home in the sky, but the developer had a black and white construction contract with the builder and a tightly controlled budget. Inevitably, expectation comes up against the rock hard face of reality and tears are often the result.

Developers may include a self-serving ‘entire contract’ Special Condition in the contract in an attempt to quarantine these marketing tools but that is not likely to be successful – Nifsan Developments P/L v Buskey [2011] QSC 314. Thus the dissatisfied purchaser waves the marketing publications and complains that the finished product that the developer wants to be paid for ‘next week’ is nothing like the apartment that the purchaser was expecting.

Apart from the lack of panoramic views which were promised by the development (as in Nifsan), the most common complaint is size. The purchaser is often appalled when the actual size of the built apartment is substantially less than their expectations and the existence of architectural drawings can lend some weight to those complaints. The problem is that there are at least three methods of measuring the area of a building and inevitably the developer will have adopted the ‘external walls’ method and the purchaser will wish to adopt the ‘internal walls’ method. Purchaser’s financiers seem to adopt the third method which might be described as the ‘minimalist’ method, which focuses on useable space.

A purchaser was successful in avoiding a contract in such circumstances in Birch v Robek Aust P/L [2014] VCC 68. Because the vendors in these transactions will generally be engaged in trade and commerce, the provisions of the Australian Consumer Law will apply. This provides the purchaser with a whole suite of rights and remedies beyond those available in relation to a quality dispute under the common law, limited as it is by the principle of caveat emptor.

The court considered the purchaser’s claim based on the ACL and held that the marketing information, specifically the architectural plans with dimensions of the apartment, gave the purchaser an entitlement to expect that the final product would be reasonably consistent with those plans. That the developer might have intended the dimensions shown on those plans to be the external dimension of the building and that the purchaser expected them to represent the internal dimensions was not relevant when the court was satisfied that the actual dimensions were substantially less than the plans represented.

On one method there was a deficiency of 16%, on another 12% and on the developer’s method, 2%. The court was satisfied that the discrepancy exceeded 5% and adopted the principle in Flight v Booth (1834) 131 ER 1160 that such a discrepancy justified avoidance. The court also found a breach of the ACL which would justify avoidance. Arguably, such a breach might also form the basis for a claim for compensation by a purchaser who resolved to settle notwithstanding some deficiency.

This decision may be compared with Sivakriskul v Vynotes P/L [1996] VicSC 497 (unreported) that was apparently not cited to the court. That decision denied a purchaser’s claim and adopted the ‘external walls’ method, although that decision was made prior to the introduction of the ACL.

Tip Box

• Quality disputes relating to off the plan purchases may attract the Australian Consumer Law
• Discrepancies in measurements may give purchasers rights to avoid or claim damages
• Whilst written for Victoria this article has interest and relevance for practitioners in all states