SUBDIVISIONS WITH A STING By SIMON LIBBIS SUBDIVISION LAWYERS

Transcription

1 SUBDIVISIONS WITH A STING By SIMON LIBBIS SUBDIVISION LAWYERS It is essential that conveyancing practitioners have a good understanding of the various aspects of subdivisions. They do contain a number of traps for the unwary. The purpose of this article is to highlight some of the more significant issues, mention some cases that have dealt with them and alert you to some proposed legislative changes. A more detailed analysis along with precedent documents is contained in my book, Subdivisions with the Lot. For more information about my publications visit Understanding Plans of Subdivision Conveyancing deals with land. Plans of subdivision create the very subject matter of the transaction. You do, therefore, have to know what the plan does. Following is an overview of some of the more important features. Stages Section 37 of the Subdivision Act allows a subdivision to be done in a number of stages. Ascertaining whether or not a plan is staged can have significant consequences. Staged subdivisions have particular significance in relation to making changes to owners corporations. A plan for a second or subsequent stage on a staged subdivision can create an owners corporation, common property, lot liability and entitlement for that stage. It can also change the earlier stages by adding to the membership of an existing owners corporation, adding to existing common property and changing lot entitlements and liability for existing lots. No other change affecting the common property can be made. The unanimous resolution of the existing owners corporation to the making of these changes is not required. The subdivider is entitled to make the changes without any reference to the owners corporation. The buyer of a lot in a staged subdivision needs to be aware of the changes that can be made without reference to the lot owner. Staged subdivisions impose additional disclosure obligations on vendors. They are set out in Section 32(3)(ba) of the Sale of Land Act. If the land being sold is in a second or subsequent stage then a copy of the plan for the first stage must be given. Details of any unsatisfied requirements in a statement of compliance for the stage that includes the land being sold must be provided. Any information that the seller has about subsequent stages must be disclosed and the buyer must be informed of the contents of the planning permit that authorised the staged subdivision. This latter requirement would usually be satisfied by attaching a copy of the planning permit. The obligation to provide these details is not limited to the subdivider. A person who purchased a lot in a staged subdivision and subsequently sold that lot would also need to provide the necessary information. Depth Limitation Unless a title or plan specifies otherwise, there are no upper or lower limits on the title. This means that the owner of the land owns all the air space above it and all the ground below. Sometimes an

2 existing title will show a depth limitation. These used to be shown as 50 feet, which is metres. If there is an existing depth limitation then this will be shown on the plan. There could be some titles where it applies to only part of the land. It is important to ascertain whether there is a depth limitation if significant excavation is required for foundations or where lots were going to be below the ground, such as basement car parks. If these foundations or lots are located below the depth limitation then they could not form part of the land as they are not owned by the property owner. Easements Section 24(2)(d) of the Subdivision Act provides that on registration of a plan of subdivision any easement is created, varied or removed as specified in the plan. Where land being subdivided is subject to an existing easement it will be shown on the plan even though it was created before the land was subdivided. Details of where the easement was created will be set out on the plan. This could be in a deed of creation of easement, a transfer of land or an earlier plan of subdivision. Providing these details on the plan enables a person dealing with the land to obtain the document that created the easement and ascertain details of it. Where the easement has been created by the plan of subdivision the origin of the easement is shown as being this plan. If an easement is created then some other land has the right to use that easement. That is called the land benefited. In other cases, the easement will be to enable a servicing authority to have access over the property. The easement is then said to be in favour of that authority. There is a panel on the plan that is headed land benefited/in favour of. That panel is completed by setting out details of theland which benefits from the easement or the authority in whose favour it is granted. As well as express easement a plan can also have implied easements under Section 12 of the Subdivision Act. These easements will exist in all subdivisions that create an owners corporation or subdivide a building. They will also apply if the plan specifies that they apply. A plan can specify that implied easements do not affect land on a plan in which an owners corporation is created. However, it is not possible to exclude Section 12 easements in the case of the subdivision of a building. Restrictions Covenants are called restrictions in the Subdivision Act. A plan of subdivision can have the effect of creating, removing or varying a restriction. All lots are affected by the covenant as soon as the plan is registered. The fact that the restriction is created will be set out under the Notations panel on the plan and a separate sheet which contains the restriction forms part of the plan of subdivision. A plan of subdivision can also remove or vary a covenant provided that a planning permit is obtained for this purpose. If the plan has this effect then it will be accompanied by a statement. When the plan is registered the restriction will be removed or varied as specified in the statement. Another form of restriction that will often affect lots on a plan are agreements under Section 173 of the Planning and Environment Act. These are not created by the plan but may be lodged with it. A planning authority will require one of these where there will not be compliance with all the conditions of a planning permit prior to the plan of subdivision being registered or where the authority wishes to

3 impose some restriction on the use of the land. The agreement will bind not only the original subdivider but also anyone who subsequently purchases the land. To ensure that future owners of the land are aware of their obligations under the agreement it is a requirement that the agreement be noted on the title to the land. Boundaries Lots created on a plan can consist of land, air space, buildings or any combination of these. They are defined by their boundaries. Failure to correctly identify the boundary of a lot can result in a property transaction dealing with something other than what was intended. Accordingly it is important to correctly locate the boundaries of lots on a plan of subdivision. Apart from strata titles, land does not usually have an upper limit. Accordingly the owner also owns the air space above it. This space can be subdivided in much the same way as land. Most subdivisions of air space are ancillary to the subdivision of a multi-storey development. Strictly speaking, however, this does not have to be so. A diagram showing these lots will form part of the plan of subdivision. Where the plan is a subdivision of a building some of the boundaries are structures like walls, floors or ceilings. A particular point in those structures must be located as the actual boundary. It is, therefore, necessary to specify whether the boundary is the interior face, the external wall or some other location in the structure. Some plans adopt the medium of a structure as the boundary. So if the boundary were a dividing wall it would be located at the middle of the wall Details of the location of the boundaries come under the heading of Notations on the plan If a lot on a plan has the letters PT before the number it will be part of the lot. This is used to tie a main unit to an ancillary area such as a car park. So part of the lot is the building or apartment and the other part is the car park space. This means that the car park cannot be dealt with separately from the living area. Common Property and Owners Corporations If a plan of subdivision creates an owners corporation then there will be an additional sheet on the plan which is called the Owners Corporation Schedule. Conveyancing practitioners need to be particularly mindful of a number of things when dealing with a lots affected by an owners corporation. Identifying Common Property It is important to ensure that the boundaries of common property on the plan are clearly and correctly identified. Failure to do this could have unintended consequences. A plan will often define the common property as the area not included in the lots. What constitutes a lot then becomes of paramount importance. Here are a couple of examples of boundary issues that arose in multi-storey buildings - 1. The lots were defined by reference to the building line on the ground. The upper levels, however, had balconies that were outside the vertical line extending up from the building line. The common property was defined as being everything outside the lots, so the balconies were technically common property and not owned by the owners of the particular units to which they are attached. Clearly, this was not intended. 2. The top storey used the roof area above it. The upper boundary of the lot was defined as the

4 ceiling. This meant that the roof above the top storey was common property and not part of the penthouse as thought. These examples highlight why it is important, where the boundary between lots and common property is a structure such as a wall, to identify what part of that structure is the boundary. A plan must indicate this. You can find on the same plan that some boundaries are the median of structures whereas others are the exterior or interior faces of those structures. When those structures require repairs or maintenance the cost will need to be borne by either the owners corporation or the lot owner depending on whether all or part of those structures are lots or common property. In order to ascertain this, the location of the boundary needs to be identified. Also watch out where the boundaries of lots have upper and lower limits. What is above and below the lot will be common property. Plans created under the Strata Titles Act are not always easy to read and it is often better to consult a surveyor when in doubt. Traditionally, a thick continuous line with no measurement represents a vertical or near vertical boundary along or inside a wall or fence. A thick broken line with measurements represents a vertical or near vertical boundary which does not lie along or inside a wall or fence. Where there is a common boundary (such as a wall, fence, ceiling or floor) between two lots or a lot and common property and the plan does not provide otherwise, the boundary between them is the middle of that wall, fence, ceiling or floor. Membership of an Owners Corporation An owners corporation can be created on any plan of subdivision but must be created where the plan creates common property. You don't need to have one in a building subdivision provided that no common property is created. There are, however, some subdivisions with no common property where an owners corporation is created. This is usually where there is a subdivision of a building that does not have separate services. The authority providing those services may only agree to the subdivision if an owners corporation is created. Section 27 of the Subdivision Act provides that a plan may create one or more owners corporations. Any owners corporation created will be incorporated on registration of the plan of subdivision and any common property shown on the plan will be owned by the members of the owners corporation in the shares shown as lot entitlement on the plan. Not all lot owners have to be members of the owners corporation. The owners corporation has a separate legal identity and owns the common property as nominee for the lot owners. The number which is allocated to the owners corporation is the registration number of the plan of subdivision. As a separate legal entity, the owners corporation can sue and be sued. Although the owners corporation resembles a company, it is not covered by the legislation that regulates corporations. If a plan of subdivision creates an owners corporation then it will have as a separate sheet on the plan, an owners corporation schedule. Most of the information in relation to the owners corporation is contained in the owners corporation schedule attached to the plan.

5 Limited Owners Corporations It is possible to create an owners corporation with a limited function. There is a panel in the owners corporation schedule headed limitations on owners corporation. If the words limited to common property appear in this panel then the owners corporation is a limited owners corporation. Otherwise it will be unlimited. Strangely enough, there can be a limited owners corporation in a plan with no common property, but the same statement must appear to create it. A limited owners corporation will normally serve some purpose which is ancillary to a main owners corporation. It is, however, possible to have a limited owners corporation without there being an unlimited owners corporation. As a limited owners corporation is intended to be an ancillary owners corporation, it does not have the same powers and responsibilities in respect of lots on the subdivision. The significance of limited owners corporation in relation to multiple owners corporation is dealt with below. An example of an owners corporation with a limited function could be where there is a large subdivision with a number of facilities, such as swimming pools and tennis courts. Different lots are entitled to use different facilities. There could be one main owners corporation which has responsibility for the whole of the subdivision. There could then be a number of limited owners corporations in respect of each facility. The only function of those limited owners corporations would be to look after their particular common property and those lot owners entitled to use it. Multiple Owners Corporations A plan of subdivision can create more than one owners corporation. Often in the larger developments there are different lots that use separate parts of common property. This could be because they are located on different levels of the building or in certain parts of a land subdivision. In these circumstances, it is appropriate to create a number of owners corporations, each having its own members, common property and responsibilities. Section 27(1) of the Subdivision Act provides that a plan can create one or more owners corporation. A lot cannot be affected by two unlimited owners corporations. Nor can it be affected by more than one limited owners corporation unless there is also an unlimited owners corporation affecting it. This does not mean that there cannot be more than two unlimited owners corporations on a plan of subdivision. Not all lots on a plan need be affected by a particular owners corporation created on that plan. When lots are affected by more than one owners corporation, special provisions apply in relation to the distribution of owners corporation assets on the winding up of the owners corporation. It is another significant aspect of limited owners corporations as, clearly, it is not possible for common property to be owned by two owners corporations at the same time. Lot Entitlement and Liability A plan of subdivision creating an owners corporation will set out the lot liability and entitlement of each lot. It will also show the total lot liability and entitlement for all lots on the plan. Lot liability is the proportion of the owners corporation expenses that are to be borne by a particular lot. It is effectively the limit of a lot owner s liability for the liabilities of the owners corporation.

6 Lot entitlement reflects the lot owner s share of ownership in the owners corporation assets which primarily comprises the common property. It will dictate entitlement on a winding up of the owners corporation and also voting rights at meetings of the owners corporation. Normally, lot entitlement and liability for a particular lot will be the same. This does not, however, need to be the case. Lot entitlement should reflect the value of the lot as a proportion of the total value of all lots affected by the owners corporation, whereas lot liability should be based on an equitable sharing of expenses of the owners corporation. Rules The Owners Corporations Act provides that an owners corporation: may make rules with respect to the matters listed in Schedule 1 of the Act be subject to prescribed model rules if no rules are made by an owners corporation be subject to a model rule if the owners corporation has not made a rule relating to a matter. The model rules will apply to existing plans that are subject to the old standard rules. The model rules apply to the owners corporation unless it makes and registers additional rules. The model rules are set out in Schedule 2 of the Owners Corporations Regulations and deal with the following matters: health, safety and security management and administration use of common property use of lots behaviour of owners, occupiers and guests dispute resolution. If the model rules provide for a matter and the rules of the owners corporation do not provide for that matter, the model rules relating to that matter are deemed to be included in the rules relating to that matter are deemed to be included in the owners corporation rules. An additional rule may be made by special resolution in relation to control, management, administration or use and enjoyment of common property or a lot. If an owners corporation makes, amends or revokes its rules, it must notify the Registrar of Titles. A rule takes effect on the day that the rule is recorded by the Register or a later date specified by the rules. An amendment to rules is effective from the day that the consolidated rules (incorporating the amendment) is recorded by the Registrar in the Register or on a later date specified in the consolidated rules. Insurance An owners corporation must have public liability insurance for the common property and reinstatement and replacement insurance for all buildings on it. In the case of a multi-level building it must have these insurances for all lots and the common property. It can, however, by unanimous resolution leave it to the lot owners to arrange their own insurance if there is no common property on

7 the plan. There are insurance exemptions for two lot subdivisions. The significance of this requirement in conveyancing transactions is covered below. Conveyancing Aspects The law about subdivisions has a flow on effect to conveyancing. It is of particular significance when the land is sold before the plan has been registered. Contractual Issues The reason that a subdivider enters into a contract for the sale of a lot on the plan of subdivision is to ensure that the buyer is bound to comply with his or her obligation to pay for the land by the agreed date. It is important when preparing contracts to ensure, firstly, that they accurately reflect the agreement between the seller and the buyer and, secondly, that they do not provide the buyer with an opportunity of avoiding his or her obligations. There are numerous obligations imposed on a seller by the Sale of Land Act and failure to comply with many of these will give the buyer the right to withdraw from the contract. Sections 9AA, 9AAA, 9AB, 9AC, 9AD, 9AE, 9AF, 9AH, and 10 deal with the sale of lots on unregistered plans of subdivision. Where a lot on an unregistered plan of subdivision is sold the buyer may withdraw from the contract if the plan has not been registered within eighteen months. Section 9AE(2) of the Sale of Land Act makes this provision but does allow for the contract to specify another period. It should be noted that the right to withdraw lies with the buyer only. The seller has no right to terminate the contract if the plan is not registered within the stipulated period. Sellers will often wish to specify a period other than eighteen months. They may also wish to give themselves the right to terminate the contract if the plan is not registered within the specified time. In order to achieve this a special condition needs to be included in the contract for the sale of the lot. Care does need to be taken in the drafting of these special conditions as is demonstrated in one of the cases mentioned below The special condition in relation to registration of the plan will often impose on a seller an obligation to use the seller s best endeavours to have the plan registered. What this means is also discussed in the cases. Contracts will often contain a special condition which entitles the vendor to make changes to the plan. Any rights the vendor has under such condition may be limited by the provisions of the legislation. Section 9AC provides that where the seller wishes to amend the plan or, if it needs to be amended in order that it can be registered, the seller must inform the buyer in writing of the proposed amendments. If these amendments will materially affect the land then the buyer may elect to withdraw from the contract within fourteen days of receiving the notice. The kind of situation to which this would apply would be where the size of the lot being purchased needs to be reduced to enable the subdivider to create more lots on the plan, or so that it will comply with survey requirements of Land Victoria. In such circumstances the buyer could refuse to proceed with the purchase of the lot. Prior to obtaining a statement of compliance the surveyor is required to give a notice in relation to the

8 marking out of boundaries. Section 9AH provides that if this notice discloses a significant discrepancy in relation to a lot which has been sold, the buyer may refuse to proceed with the purchase. So, if the plan of subdivision as registered does not comply with the land as it appears on the ground, the buyer may be able to get out of the contract. This right will be lost if the buyer has already sold the land to someone else or if the contract to buy it was entered into more than eighteen months beforehand. Section 10 also relates to amendments to plans between the date of the contract and registration of the plan. It provides that where any amendment that restricts or limits the use of the lot is made then the buyer may withdraw from the contract. An example of a situation where this would apply is where it is found necessary to create an easement over a lot after that lot has been sold. This may give the buyer the right to withdraw from the contract. If the amendment to the plan is the result of a requirement from a referral authority, the buyer does not have the right to withdraw from the contract. It is also possible to limit these rights by providing in the contract that the section will not apply in respect of the final location of an easement. Disclosure Obligations Section 32 (1A) of the Sale of Land Act requires details of all building approvals obtained in the last seven years to be provided in the vendors statement when there is a residence on the land being sold. It also requires details of builders guarantees and defects insurance to be given. Works are often carried out as part of the subdivision. If the works affect the natural surface level of the land being sold or of any adjoining land in the subdivision there is a disclosure obligation imposed on the seller. This is contained in s 9AB of the Sale of Land Act. Excavation for roads or services, landfill and contouring of the land are all types of works that would affect the natural surface level of the land. If these works have been carried out after certification of the plan, but before the contract is entered into, or if they are being carried out or are proposed to be carried out at the time the contract is entered into, the seller must provide details of them in the contract. Any engineering plans relating to the work lodged with the council or referral authority must be attached to the contract. Where these types of works are carried out, or are proposed to be carried out, after the contract is entered into and before registration of the plan, the seller must provide details of them and the engineering plans to the buyer as soon as the seller becomes aware of them. This must be done in writing. Failure by the seller to comply with the obligations imposed by s 9AB gives the buyer a right to withdraw from the contract at any time before the plan is registered. It can also make the seller liable to a heavy fine. It is, therefore, important to ensure that details of any works affecting the natural surface level of the land being sold or any adjoining land be provided where required, even where those works are considered to be of a minor nature. On 2 December 2008, the Government announced that a Growth Areas Infrastructure Contribution (GAIC) would apply to land brought into the Urban Growth Boundary after The Planning and Environment Amendment (Growth Areas Infrastructure Contribution) Act 2010 amended Section 32 of the Sale of Land Act to require vendors of land with a GAIC recording on title to notify purchasers that the GAIC might be payable, and provide a copy of any GAIC certificate issued regarding the

9 land. These obligations commenced on 1 July Conveyancing practitioners acting on matters in these growth areas should obtain a further title search to check for a recording and also apply for a GAIC certificate from the State Revenue Office. This information needs to be included in the vendors statement. Owners Corporation Certificate Section 32(3A) of the Sale of Land Act provides that if the land is affected by an owners corporation, the seller must attach to the vendors statement, a copy of the current owners corporation certificate issued in respect of the land under the Owners Corporation Act and a copy of the documents required to accompany the owners corporation certificate. Under section 151(4) of the Owners Corporation Act, an owners corporation certificate must contain the prescribed information relating to the owners corporation and a lot which must include the prescribed information relating to (i) fees payable in respect of the lot; (ii) fees and charges that are imposed or proposed to be imposed on the lot; (iii) fees and other money owing in respect of the lot; (iv) insurance; (v) repairs and maintenance; (vi) the funds held by the owners corporation; (vii) liabilities and contingent liabilities of the owners corporation including any liabilities or contingent liabilities arising from legal proceedings; (viii) contracts, leases, licences and agreements affecting the common property; (ix) services provided to lot owners and occupiers and the public; (x) notices and orders served on the owners corporation; (xi) legal proceedings to which the owners corporation is a party; (xii) the manager. The owners corporation certificate must be accompanied by (i) a copy of the rules or, if the rules have been amended, the consolidated rules of the owners corporation as recorded on the Register; and (ii) a statement in the prescribed form providing advice and information to prospective purchasers and lot owners; and (iii) a copy of all resolutions made at the last annual general meeting of the owners corporation; and (iv) any other documents of a prescribed kind; and (v) a statement advising that further information on prescribed matters can be obtained by inspection of the owners corporation register. Some owners corporations, especially the smaller ones, are inoperative. They will not, therefore, be able to provide a certificate. The consequences of this and some suggestions are discussed in the cases below Insurance The obligation of an owners corporation to insure is discussed above. Section 11 of the Sale of Land Act provides that where land that does not have the requisite owners corporation insurance is sold, the

10 buyer may withdraw from the contract at any time up to the settlement date. It is, therefore, important to ascertain whether owners corporation insurance is or will be compulsory. If it is compulsory then the seller must make sure that the appropriate insurance is in place, failing which the contract may not be enforceable against the buyer. In the case of an unregistered plan, the seller must take out the insurance that will be required to be taken out by the owners corporation when the plan is registered. Section 9AAA provides that the vendor must take out the insurance as if the vendor were the owners corporation and maintain that insurance for six months after the plan is registered or until the owners corporation holds its first meeting, whichever is the earlier. There is no penalty for a vendor who fails to comply with this requirement and it is unlikely that s 11 would enable a purchaser to avoid the contract. Section 11 refers to the sale of a lot affected by an owners corporation. A lot on an unregistered plan of subdivision is not yet affected by the owners corporation as the owners corporation does not come into existence until the plan of subdivision is registered. It is for this reason that many vendors do not comply with s 9AAA. The requirement of section 11(1) of the Sale of Land Act must be read in conjunction with section 9AAA of the Subdivision Act. A problem can easily arise long after section 9AAA has ceased to apply. There could be no public liability cover or the individual lot owner may have arranged his or her own cover. This latter insurance cover does not accord with the cover required by the Owners Corporation Act. Generally the owner-vendor in such a case would be only insured in respect of his or her own liability in relation to the common property and such cover would not extend to the liability of the owners corporation. To comply with the Sale of Land Act and the Owners Corporation Act, the statutory public liability cover must be taken out in the name of the owners corporation as the insured. To comply with section 11 the statutory cover must be in effect on the day of sale. Taking the cover out after the day of sale still leaves the seller exposed to the transaction being avoided at any time before settlement. Deposits Most contracts for the sale of land require the buyer to pay a deposit, which is usually 10 per cent of the purchase price, on signing the contract. Section 24 of the Sale of Land Act makes provision for deposits to be held by stakeholders. The stakeholder provisions do not apply to the sale of lots on unregistered plans of subdivision. These are covered by special provisions which are set out in s 9AA. The deposit must not exceed 10 per cent of the purchase price. It must be paid into the trust account of a solicitor, conveyancer or estate agent acting on behalf of the vendor or into a special purpose bank account in the joint names of the vendor and purchaser. The deposit cannot be released to the vendor until the plan of subdivision has been registered. Presumably, at that stage, it would be held in the same account but under the stakeholder provisions. The contract must stipulate how the deposit is to be dealt with, and if this does not comply with the provisions of the Act, or if the deposit is not dealt with in accordance with the Act, the buyer may withdraw from the contract at any time before registration of the plan of subdivision. As there is sometimes a lengthy period between payment of the deposit and final settlement, the parties to the contract often agree for the deposit to be invested. It is important that any clause along these lines does not offend the provisions of Section 9AA and also that it is specified to whom the

11 interest will be payable in the event of the contract being settled, rescinded or avoided. The use of deposit bonds or bank guarantees in lieu of payment of a cash deposit is becoming more common in off the plan sales. The legislation does not recognise their use and, accordingly, great care needs to be taken when drafting special conditions in contracts where a bank guarantee or deposit bond is to be obtained instead of a cash deposit. This is highlighted in one of the cases mentioned below Some contracts merely provide that the bond or guarantee is to be taken to be payment of the deposit. In such circumstances, the deposit is deemed to have been paid and accordingly Section 9AA applies. The problem that flows from this is that a bank guarantee or deposit bond cannot be held in trust as envisaged by the Act. Accordingly, there is a real risk that a condition along these lines will constitute a breach of section 9AA and make the contract voidable by the purchaser. The only way that Section 9AA would not apply would be if no deposit were payable. The condition in the contract should, therefore, provide that if the vendor does agree to accept a bank guarantee or deposit bond, then the contract is to be varied to provide that no deposit is payable under the contract. The condition should then provide for the grounds on which the vendor could claim against the guarantee or deposit. Goods and Services Tax All sellers must be conscious of the liability to pay GST. This is particularly so with new buildings and land as the developers of these will be liable to GST. Generally, GST is not payable in respect of premises that are used for residential purposes. This exemption does not apply to new residential premises. The sale of these will attract GST if the vendor is registered for GST. These include premises that: have not previously been sold before; have been created through substantial renovations; or have been built to replace demolished premises on the same land. These do not apply for premises that were used for residential accommodation before 2 December Most sales of new houses or apartments will, therefore, attract GST as will the sale of vacant land. The tax office has ruled that vacant land cannot qualify for the exemption available for residential premises. Basically, a GST of 10% is payable on the purchase price. This means that the seller is required to remit one-eleventh of the purchase price to the Australian Taxation Office. It will need to be remitted whether or not it has been recovered from the purchaser. It is, therefore, vital that any liability on the purchaser to pay the GST is included in the contract. It is also possible that the purchase price can include the GST, which means that there is no need for the contract to provide for GST to be paid in addition to the purchase price. In fact, the Australian Competition and Consumer Commission has ruled that contracts for the sale of residential property must show the price as GST inclusive. Under normal GST rules, the amount of GST that is payable on taxable sales of real property is equal to one-eleventh of the sale price. If the margin scheme is applied, GST payable is one-eleventh of the

12 margin. Under the margin scheme, it will generally result in a lower amount of GST, but care needs to be taken that it is used in the appropriate circumstances. In most cases, the margin is the difference between: the sale price and the price paid when the real property was purchased, or if the property was purchased before 1 July 2000, the sale price and the value of the real property as at the relevant valuation date (usually 1 July 2000, and so it is important for vendors who already own property and wish to sell using the margin scheme to have the property valued as at 1 July 2000). For the margin scheme to apply the seller and buyer of land must agree in writing to use the margin scheme by the time the property is supplied (usually at settlement). Sellers need to make a choice to use the margin scheme before the property is supplied and have records depicting the date the choice was made. If you are acting on a purchase where GST is payable using the margin scheme it is important to ensure that the contract provides for this. Recent Cases There have been a number of court cases that have dealt with some of the issues covered in this article. They highlight the traps awaiting conveyancing practitioners in this area. Etna v. Arif (1999) V Conv R A contract for the sale of land provided that it was conditional on the plan being registered, but then went on to say that the seller would at the seller s own costs, use the seller s best endeavours to procure certification and registration of the plan of subdivision by the plan registration date. The plan was not registered by the due date and this was extended to a later date. This seller was informed by the council that the statement of compliance was now available subject to payment of the open space contribution. The open space contribution was not paid and the seller then rescinded the contract based on the failure to have the plan registered by the due date. The seller argued that the obligation to use best endeavours only applied up to the plan registration date in the contract, but there was no obligation after that date. The purchaser argued that there was an implied term in the contract that the seller would continue to use its best endeavours to have the plan registered after the registration date if neither party had chosen to rescind the contract. The Court decided in favour of the purchaser. The judgment states, The contract, then, is expressed to be conditional upon certification and registration by the plan registration date. The vendor is to use his best endeavours to procure certification and registration by that date. It does not follow that the vendor may then stop using best endeavours. On the contrary, it goes without saying that the vendor is to continue to use best endeavours after the plan registration date. It is simply that, after that date, either party may rescind, though not if the vendor s continued best endeavours have, before rescission, resulted in certification and registration. The expression but before the plan is registered in the special condition is the reason why it goes without saying that the vendor continues to be under an obligation to use best endeavours after the plan registration date. Everest Project Developments Pty Ltd v. Mendoza [2008] VSC 366 This is another case where the Supreme Court interpreted Sections 9AA 9AH of the Sale of Land Act so as to protect the purchaser of a lot on an unregistered plan of subdivision.

13 The contract provided for a deposit bond rather than payment of the deposit to the vendor s solicitor, conveyancer or agent to be held on trust but did not clearly state that if the vendor called on the deposit bond, the proceeds could only be paid to the vendor s solicitor, conveyancer or agent. On one view of the relevant provisions, the bond proceeds could be paid directly to the vendor. Even though this did not in fact happen in relation to the contract under consideration, the Court nevertheless found that the contract was voidable at the option of the purchaser. It is, therefore, important to make sure that off the plan contracts that provide for deposit bonds or guarantees make clear that any proceeds must be paid to the vendor s solicitor, conveyancer or agent to be held on trust and cannot in any circumstances be received by the vendor. Clifford v. Solid Investments Australia Pty Ltd [2009] VSC 223 The contract of sale stipulated that the sunset date for registration of the plan of subdivision was 30 months after the date of the contract of sale. This date could be extended by the vendor giving notice to the purchasers in certain circumstances set out in the contract. The vendor served notices extending the date for registration on three occasions. Before the last notice was served, the purchasers served a rescission notice. The purchasers challenged the right of the vendor to extend the plan registration date beyond the original 30 months. The Court held that the contractual provisions that permitted the vendor to extend the date for registration of the plan of subdivision contravened section 9AE of the Sale of Land Act and were, therefore, of no effect. This meant that the purchasers were entitled to rescind and to recover the deposit. The option under Section 9AE to specify a time for registration of the plan of subdivision other than the period of 18 months referred to in the section requires the vendor to nominate a time in explicit terms or conveying it with unambiguous clarity. What this means is that a definite period of time must be fixed so that a purchaser knows the date after which the contract can be rescinded. The time, once specified, cannot be subsequently extended by the vendor. Joseph Street Pty Ltd v. Tan [2010] VSC 586 This was also a case about the obligation of a seller to use best endeavours to have the plan registered within the time specified in the contract. The seller purported to rescind the contract on the basis that the plan had not been registered but the buyer wanted to complete the purchase. The main reason for the delay was that the builder engaged by the seller had gone broke. The Court held that the best endeavours test is an objective test. Factors to be considered in determining whether the actions of a vendor are reasonable include the experience of the developer, the size of the development, the ability to obtain independent advice and the extent of the resources available. Whilst the vendor is not responsible for the faults or defaults of an independent contractor, such as the builder s delay and eventual administration in this case, a vendor still has an obligation to take all reasonable steps to secure registration of the plan. Any acts or omissions that are identified as being unreasonable must have a material contribution to the delay in registering the plan. The buyer in this

14 case had not established a breach of contract as the plan of subdivision could not have been registered earlier by the seller acting reasonably. Nicolacapoulos v. Khoury [2010] VCC 1576This case dealt with the sale of a lot affected by an inoperative owners corporation. The certificate required under Section 32(3A) of the Sale of Land Act was not attached to the vendors statement and the buyer exercised the right under Section 32(5) to rescind the contract. The seller sought to obtain the protection available under Section 32(7) claiming that the actions were reasonable as the owners corporation was inactive and the purchaser was no worse off. The court did not agree. The failure to comply with Section 32(3A) allowed the buyer to rescind the contract even though strict compliance would have been virtually impossible. The reasoning behind this decision indicates that it was more about the buyer not being aware that an owners corporation existed rather than not receiving the information required to be given. In any event the certificate should always be provided where available. If it cannot be obtained from the owners corporation, sellers should provide some disclosure about its existence even if it is a blank certificate. This will not be strict compliance but would significantly increase the prospect of protection under Section 32(7). Proposed Legislative Changes There will soon be changes to Sale of Land Act that will impact on practitioners in this area. Keep an eye out for them so that you can ensure compliance by the time they come into operation. The Consumer Affairs Legislation Amendment (Reform) Act 2010 makes some changes for off the plan contracts. It requires a notice to buyers and removes the ability to hold deposits in special purpose bank accounts. It also makes some changes to the cooling off provisions. These changes were to come into effect by 1 September However, the Consumer Acts Amendment Bill 2011 will, when passed by Parliament, extend the start date to 1 July It is likely that there will be some amendments before then, so don t change your standard forms yet. The Planning and Environment Amendment (Growth Areas Infrastructure Contributions) Bill 2011 will add some disclosure requirements to Section 32. The CAIC disclosure obligations were mentioned above. This Bill establishes work in kind agreements that run with the land. They will now need to be disclosed under Section 32. A Final Word We are not likely to see a slowdown in the growth of high density developments in the foreseeable future. This means that more issues will arise resulting in litigation and legislation. If you practise in this area it is vital to keep up to date so that your forms and procedures comply with current requirements. Failure to do this is not only detrimental to your clients interests but could also result in significant claims being made against you.