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Property Newsletter – August 2015

Published on August 1, 2015 by Matthew Rafferty and Paul CarrollMatthew Rafferty and Paul Carroll

Off the Plan Purchases

Recent media concerning a Council’s Deputy Mayor’s Development Company demonstrates the dangers of buying “Off the Plan” apartments.

Almost every Off the Plan contract provides the Vendor with flexibility to vary the plans for the units, including the areas of units.  Almost invariably, the contract then gives the Purchaser the right to rescind if such variation is more than, say, 5% of the agreed area.

Here is what can happen:

1. Investors search tirelessly for a good Off the Plan investment unit and invest time and money on legal costs etc to secure a particular unit in a proposed development.
2. The buyer raises the 10% deposit, often incurring significant fees, using bank guarantees or deposit bonds or worse still, their own cash.
3. The Buyer then exchanges contracts, sits back and relaxes, believing they have made a good investment.
4. Over the next 12 or 18 months, God willing, the market value of the apartment under construction significantly increases, delivering an immediate windfall to the canny Purchaser who is often eager for completion of the unit, as either their investment or indeed their home to be.
5. The Developer either notices a sharp increase in market value or works out they can cram more units into the proposed development and proceeds to lodge amended plans with Council (or the State Authority if the development is worth more than $20 million).  The Developer works out that they could actually sell the units at a higher price per square metre than what they originally contracted for with the Purchaser.
6. The Developer obtains approval to the amended plans yielding a much greater number of units but reducing the area of each unit significantly.  In the current case, according to media, the areas of units decreased by as much as 36%.
7. The Developer notified the Purchaser that the area of the unit has significantly reduced but offers no proportionate reduction in the purchase price, thus rendering the Purchaser’s investment worthless and untenable, leaving the Purchaser with no option than to rescind the contract (because the area varied by more than 5%) and have their deposit returned.
8. The Developer goes on to construct smaller units and sells them at the increased market value, leaving the existing Purchasers high and dry, with no compensation whatsoever, nor reimbursement of any banking fees or legal costs.
9. The Purchaser has wasted 12 or 18 months and is thrown back into the market to start all over again with no redress against the Developer.

A good example of how Purchasers are at the mercy of the Developers’ focused financial gain.

Possible solution?

Insist on a special condition which provides that if the area decreases by more than 5% the purchaser can elect to either rescind or demand a pro-rata reduction in the purchase price.
Or, simply ensure you buy from a long standing reputable developer.

Author: Paul Carroll

Compulsory Acquisition

We have all seen the movie “The Castle”, poking hilarious fun at the Government’s powers of compulsory acquisition over your home.

But what if your own neighbour could also compulsory acquire your home?

The New South Wales Government has released an exposure draft of Strata termination legislation which empowers private citizens to forcibly acquire other peoples homes.

So long as 75% of owners in the strata plan agree, (some of whom may be investors or developers), the entire site can be collectively sold or re-developed.

Sydney needs more housing and the Governments justification for this proposal is urban renewal and consolidation.

If an apartment building is nearing the end of its life then it might make “some sense” to force one or more reluctant owners to give in and sell their unit so as to enable re-development of the entire building.  However, this is not a criteria in the draft legislation.  There is no requirement that the building be run down.  Indeed the building may be in first class condition however, because it is located in a great area, with potential for higher density redevelopment, then under the proposal a majority of 75% of owners could force the reluctant owners to sell. There is no proposed criteria which looks after the elderly or infirm owners who simply have no desire to sell their property, nor move to another home.

Nor is there any criteria that the proposed sale must yield a higher density development.  In other words, an existing 8 apartment building could be sold by 6 out of 8 owners (forcing 2 reluctant owners to sell) with a resulting new development downsized to 4 apartments as an end product, thus defeating the supposed aim of increasing Sydney’s housing availability.

Whilst the Government currently can only compulsory acquire properties for public purposes (eg. infrastructure, roads, train lines, etc) it is now being proposed that private citizens can compulsory acquire their neighbours for the single purpose of deriving profit, making no contribution to the public purse or needs of the community.

If you thought the script for The Castle was entertaining, wait for the next movie based on this proposed legislation.

Author: Paul Carroll

Exchange of emails can lead to a binding Agreement for Lease

In the recent case of Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASC 21, the Court of Appeal of Western Australia held that an email exchange between a tenant and a landlord’s agent amounted to an immediately binding agreement for lease and a licence, despite the fact that:

1. After the relevant exchange of emails, the parties continued negotiations as to the terms of the lease; and
2. No formal lease or licence documents were ultimately agreed upon or signed by the parties.

The facts
The tenant’s lease of office premises and licence of six car bays was due to expire on 30 June 2009.

In May 2009, the landlord and tenant entered into negotiations in relation to a new lease of the premises and licence of the car bays.

On 4 June 2009, a revised proposal was sent from the landlord’s agent to the tenant detailing a number of the terms of the lease, including the duration, rental, rent reviews, outgoings, make-good provisions, bank guarantee, GST and the terms of the car bay licence. The email asked the tenant to “confirm in writing…that these terms are acceptable”. The revised proposal stated that “the Lessor’s standard Lease and Licence shall be utilised to document and [sic] agreement between the parties, and shall be prepared by the Lessor’s solicitors incorporating the relevant terms contained within this proposal”.

On 10 June 2009 the tenant sent an email to the landlord’s agent stating that it was happy with the terms of the revised proposal, but was waiting on acceptance from its sub-tenant of the terms of the revised proposal. Later that day, the tenant sent an email to the landlord’s agent that stated:

“We have received our sub-tenants [sic] approval of the terms as well. Please proceed with wrapping this up.”

A draft lease agreement and licence agreement were subsequently prepared by the landlord’s solicitors and sent to the tenant on 2 July 2009. The tenant delayed in reviewing, signing or returning those documents.

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