Instalment Contracts

Can you avoid getting caught in an instalment contract?

 

 

An instalment contract (called a terms contract in Victoria and Western Australia) is an agreement to purchase a property by paying in increments without obtaining title to the property until the last instalment is paid.

 

There is a significant risk to the buyer by not having legal title in the event that the seller becomes bankrupt or there was a mortgage from a lender and the lender sold the property.  South Australia and New South Wales have passed legislation to ban and severely restrict their use.

 

In Victoria and the Northern Territory there is legislation that prevents the seller from mortgaging or selling the property once it is under an instalment contract of sale. In the NT, a mortgage given in contravention, the mortgage is voidable by the purchaser any time before completion.

 

In Queensland and Western Australia, the permission of the buyer (or by leave of the court in WA) is required to add a mortgage.  Also in Queensland, a variation of the mortgage that was in existence when the instalment contract was signed must not increase in the principal sum; however additional advances made under an existing contract are acceptable.

 

Queensland and the Northern Territory provide some additional protection for the buyer, as, other than for the initial installment which is treated as a deposit with time being of the essence, the seller must provide 30 days notice for the buyer to rectify the contract by paying any overdue installment. 

 

Queensland legislation allows for the buyer to lodge a non-lapsing caveat on the property to prevent the registration of any other instrument until the contract is completed.  Queensland also gives the buyer a right to have the title transferred once they have paid one-third of the purchase price with the balance taken as a registered mortgage to the seller back over the property.  The payments continue on the terms of the instalment contract. This can, however present a problem if there is an existing mortgage on the property.  There is a reciprocal right for the seller to demand the same transfer of title and mortgage, but the seller might be obliged to advance the buyer an amount equal to the transfer duty and legal costs payable by the buyer to be added to the principal sum and would be included in the mortgage.

 

In general, the payment of an amount more than 10% of the purchase price, without conveyance of the title, can make a contract deemed to be an instalment contract even if that was unintended.  If a buyer has to pay other amounts in addition the standard deposit prior to settlement the agreement would become an installment contract.  Alternatively, if the buyer is given a rebate before settlement, that would cause the deposit to exceed 10% of the purchase price.

 

Other considerations including the buyer’s right to conduct searches, timing of the payment of transfer duty, repercussions of a buyer’s requirement to pay interest charges if the purchase price remains outstanding and any equitable charge the buyer may have over the property should be carefully considered after receiving sound legal advice for the particular circumstances of your transaction.

Off the Plan Contracts

Off the Plan Contracts

Our top tips for negotiating and entering off the plan contracts

Estate Planning

What is a EPOA and BDBM?

Extensions

What happens in a conveyance when one party needs an extension?

Tenants with Pets; Discrimination, Extra Bond and Extra Rental

Liability of Company Directors

Director Guarantees and Company Administration

When clients come to us and ask us to set up their new business, the first step is to advise on which type of business structure best suits their needs. One option we advise is incorporating a company to run their business. The benefit of running a business through a company is that companies have separate legal identity, much like individuals. The result of having separate legal identity is that the company and it’s obligations, liabilities, and debts are separate from the people who own and/or run the company (shareholders and directors). This forms a layer of protection for the directors, who run the company, from having to meet the company’s debts out of their own pocket.

Banks and other lenders will rarely lend money to a new company without some sort of guarantee that they’ll be paid in the event of default. The way the banks minimise their risk of not being repaid by the company is to require the directors of the company to personally guarantee the company’s debts. This is very common for new companies which don’t have enough credit history or income to acquire loans and overdrafts.

In the event a company is struggling or verging on insolvency, the directors may place the company into external administration. This involves a third party Administrator taking control of the company. While under external administration, directors are protected from having a lender (or anyone else) call in their guarantees.[1]

The amnesty only applies if the creditor (the bank, company or person who gets the benefit of the guarantee) hasn’t taken action to enforce the guarantee before the director places the company into external administration.[2]

Guarantees are an example of how the Corporations Law can leave directors personally vulnerable, despite the directors usually incorporating a company for their own protection. If you are unsure of your rights or obligations as a director or shareholder, or you need assistance protecting yourself from claims against you personally, make an appointment with one of our experts.

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[1] Section 440J Corporations Act 2001 (Cth)

[2] Mizuho Bank Ltd v Mark Anthony Ackroyd [2016] NSWSC 1148.

When Builders Go Bust

The flow-on effect of building companies declaring insolvency

Insolvency can be thought of as bankruptcy for companies (though there are obviously differences).  The legal definition is an inability to pay the company’s debts as and when they fall due (insolvency).

In recent years there has been a string of insolvent building companies. Collier Homes late last year is a recent example. When building companies go under, they take the expectations of home buyers, finance companies, subcontractors, professionals (such as real estate agents and solicitors), insurance companies and the community at large down with them. The flow-on effect can be enormous.

Following a builder’s insolvency, the company is usually placed into external administration (administration, receivership, or liquidation; same people different titles, rules and outcomes), where a third party Administrator, Receiver or Liquidator takes control of the company.

Often the company will continue trading under this new control format, and may finish building the homes to try to minimise the loss to the company’s creditors. While this might sound like good news for the home buyer, in reality they can be left to claim hundreds of thousands of dollars from insurers when the homes aren’t built to specification. Further, home buyers are often forced to deal with colossal delays in receiving the home they bargained for while the Administrator, Receiver or Liquidator takes stock and works out how best to proceed.

Subcontractors are worse off than home buyers, often being left significantly out of pocket as well as out of work.

The effect on the home building industry includes unprecedented rises in home indemnity premiums as insurers try to make up their losses.

The economic cost of delayed building projects along with the social cost of incomplete buildings littering suburbs makes for more bad news.

If you know a home buyer or subcontractor that would rather be protected against builder insolvency, make an appointment to speak to one of our experts about how to amend your contracts to address the issue.

Developer barred from terminating under Sunset Clause

The New South Wales law provides that a developer cannot terminate under a sunset clause in an off-the-plan contract unless the Court grants them permission to do so.

Property values have soared over the last few years. Developers who entered off-the-plan contracts to sell a property for, say,  $400,000.00 in 2014, which by 2016 is worth $550,000.00, may feel unhappy at having to sell the property for less than its’ current market value. Some unscrupulous developers began using the sunset clause in the contract to terminate it by intentionally delaying the completion of projects until the sunset date arrived. At that point they were terminating the off-the-plan contracts, quickly completing the projects and then selling the properties.

In response the New South Wales law now protects buyers from developers looking to take advantage of the sunset clause in off-the-plan contracts by forcing developers to get Court approval before terminating the contract.

That legislation was tested recently in a case involving a developer and a purchaser.

The Court will consider the developer’s reasons for the delay in creating the Lot, whether the reasons for the delay are reasonable, whether the developer has acted in bad faith, what effect the termination will have on the purchaser and whether it is fair and equitable that the developer be allowed to terminate.

In the recent case of Jobema Developments Pty Limited v Zhu & Ors the developer selectively extended the sunset dates on some contracts in the development and not others, and offered no explanation as to why some contracts were extended where others weren’t.  It will come as no surprise that the Court refused the developer’s application.

It will be interesting to see how this protection is extended or redacted as more cases under these laws are brought before the Courts.

Underbelly: housing schemes- Vendor finance and rent-to-buy housing schemes called a ‘black market’

Underbelly: housing schemes

 

Vendor finance and rent-to-buy housing schemes called a ‘black market’

 

 

The seemingly unstoppable rise in housing prices over the last decade has caused many Australians to feel ‘locked out’ of the dream of owning their own home.

 

Perhaps in response to this, a string of new businesses (called ‘equity providers’) have opened shop and now offer purchasers the ability to take a loan to pay the deposit on their home. The purchaser then makes their usual mortgage repayments to a bank in addition to paying back the equity provider for the deposit, usually over a period of 5 to 10 years. Assuming the purchaser has met their instalment payments, each year the equity provider transfers a small portion of ownership to the purchaser.

 

While this might appear to be great news for young people entering the property market, a recent investigation has revealed that people who enter into these arrangements are sometimes left worse off or even financially ruined.

 

The way the equity provider often charges what they call ‘option fees’. These fees are paid in exchange for the right to purchase the property from the equity provider at an agreed value when the instalments for the deposit are paid. The option fees don’t go towards paying off the debt.

 

The reason these arrangements can be risky is because the value of the property, and therefore the price the purchaser pays the equity provider at the end of the agreement, is agreed at the beginning of the agreement and not updated at any time before the purchaser purchases the property from the equity provider. Just some of the issues this creates for the purchaser include;

 

·        Some equity providers have over-inflated the worth of the property and set very high final purchase prices;

·        The purchaser ends up paying exorbitant option fees as well as funding two mortgages, and is  far worse off than before the agreement; and

·        Even if the purchaser is able to meet the repayments, there is then an over-inflated price for the property to be paid at the end of the agreement.

 

Some consumer advocates have called for these schemes to be banned, or at the very least provide protection under the National Credit Code.

Parental Communication Paramount Words by head of Family Law- Warren Tegg

Most separating parents want an ongoing and meaningful relationship with their children. They will, after all, be parents for life. But what is the key to parenting effectively, while living in separate houses? Parents will often each have different ideas regarding parenting, but that does not mean that one or the other parent is wrong, they are just different. And the differences are to be celebrated – those differences provide the children with two separate, and not necessarily opposing, viewpoints. In order for a shared parenting agreement to work, these two people have to find a way to work with their differences. Firstly, children are very intelligent, they know when a weakness or difference of opinion appears in the approach being taken by their parents. Anyone with children will know they will play these two parents against each other to gain an outcome they see as beneficial to themselves. This play off isn’t overtly selfish. Very young children will, early in the break-up, state to both parents that they don’t want to go to the other. This has nothing to do with choosing one parent over the other. This break-up is very unsettling for the child, so the child may seek the exact same loving and caring response from both their parents to make themselves feel safe. It is important for parents to recognise this and be able to maintain a basic and civil level of communication, just to protect themselves from being exploited. It is helpful for the children for them to focus, not on the differences, but basics that perhaps they substantially agree upon. This way they can support one another in parenting decisions – provided same are basic to the child’s welfare and do not create any risk to the children. The Court considers the parent’s ability to talk to one another about their children to be of paramount importance when looking at a co-parenting regime. It is deemed by the law to be in the children’s best interests that parents share the responsibility for the children’s care, but this becomes impossible if the two parents cannot cooperate together on some level. Being able to speak to one another civilly and make decisions about your children, even when you do not entirely agree with the other party, is of fundamental importance if it is your goal to be a share parent. Celebrate your different views, they introduce the children to diversity of thought! Agreeing on a set of basics you can live with, will lead to happier and more effective parenting.

Is an employee entitled to compensation for injuries sustained while working flexibly from home?

Employers in recent years are more inclined to grant employees flexible work arrangements including working from home. The result is that many employees are not restricted to traditional physical locations such as an office. Recent cases have shined a light on the laws surrounding these arrangements and the conflict with worker’s compensation for injuries.

For employers, the flexibility granted to employees comes with some degree of risk. The careful controls and Workplace Health and Safety procedures employers invest significant resources to implement around the office may not be suited to a home environment where the risks of injury are outside their control.

The important question is whether the injury arises out of or in connection with the course of employment. This includes injuries which are sustained;

1. While physically in the place of employment, or
2. While temporarily absent from the place of employment for an ordinary recess, for example a regular or scheduled break.

If an employee takes a “frolic”, for example by going for a run in the middle of the day, this is not an ordinary recess. Other examples of frolics include;

• Where an employee courier driver deviates from the route the employer planned for them,
• Where an employee goes somewhere the employer told them not to go, and
• Where an employee takes more breaks than the employer prescribes.

The take-home message (sorry, couldn’t resist!) is that simply because employees are granted flexible working arrangements, they are not necessary entitled to compensation for injuries that arise while working flexibly from home.

A lesson for employers is to ensure adequate controls are established for the employee’s home environment. We advise clients that this is best accomplished by giving the employee 

Seeking healthy relationships with family , friends , neighbours and work colleagues?

Written by Family Law Head of Department, Warren Tegg.

I’m constantly negotiating. I represent people in dispute. They may fall foul of the law or be in dispute with a competitor, customer or supplier in business. My task is to negotiate an outcome. My work in Matrimonial or Commercial negotiation is assisted by an  understanding  the personalities I deal with. First I must understand my own. I learned that I am a strong personality,  a “powerful choleric” inBriggs Myers experts terms an “A” type. I say  “We work as a team and do it my way “ ! “Powerful choleric comes from  American psychologist (Florence Littauer). She simplifies a  personality test into two pages of strengths and weaknesses you identify. The result is a guide to  your own  blend of personality traits. Her work in  “Personality Plus” is both instructive and entertaining. You will be elated  to discover that you possess your own distinctive personality type and that, for instance , it is OK not to be like your partner. Step 1 shows how you view the world. Time to learn  how others view it. The brevity of this column prevents  a detailed explanation but people  are a combination of four personality types: Strong leader; Organised and meticulous Sanguine party animal; Easygoing Peacemaker Strong  leaders are great in a crisis. They know what to do next and will  make the decision. They do need organized help to actually carry out the decision. Some 37 % of people would rather do the job than make the decision. The world needs party people for  fun and gentle peacemakers to offset the decision makers. Opposites attract so Leaders seek organized peacemakers and vice versa. Party animals are great fun but they’ll forget to bring everything they need and don’t plan at all. Organized people may have trouble with spontaneity. And those seeking harmony may have trouble with  practicality. One part of a healthy relationship is understanding that our partner, co-worker or neighbor  views the world differently. Consideration of their personality in getting our message across makes communication effective. Understanding these differences will lead to healthier relationships.

Danger Ahead: Instalment Contracts- Common issues with these types of contracts

Danger Ahead: Instalment Contracts

Common issues with these types of contracts

What’s an instalment contract?

An instalment contract is where the purchaser pays via increments and does not usually obtain title until the final payment is made. The Property Law Act 1974 (Qld) makes special provision for instalments contracts and in many respects treats them differently to standard residential conveyances.

Identifying an instalment contract

If the purchaser is obligated to pay greater than 10% (or 20% for a proposed lot off the plan)[1] of the purchase price without receiving transfer of title then the contract is an instalment contract.

Important features include;

ü  The vendor cannot mortgage or sell the land,[2]

ü  The purchaser can lodge a caveat to protect their interest in the land,[3]

ü  The vendor cannot rescind the contract for the purchaser’s default in a payment unless a 30-day notice has been issued to the purchaser,[4]

ü  After one-third of the purchase price has been paid, either party can demand a conveyance of title from the other (subject to the purchaser granting a mortgage in favour of the vendor).[5][6] The party seeking the conveyance can’t be in default.

Common issues

Default

As stated above, where the purchaser fails to meet a payment the vendor can issue a notice giving the purchaser 30 days to rectify the breach. Two common mistakes arise following this. First, vendors often give the purchaser notice requiring payment within 7 or 14 days rather than the statutory requirement of 30 days. Second, vendors often misunderstand their rights and will purport to terminate immediately after the purchaser fails to make the payment. This actually results in a breach by the vendor.

Vendor’s reluctance to hand over title

Vendors are often reluctant to hand over title to the purchaser. Indeed they may not be able to do so if there is a mortgage that hasn’t or can’t be paid out.  A purchaser faced with a particularly difficult vendor can make an application to the Court to force the vendor to transfer title to the purchaser. This is very costly and the vendor can be fined upwards of $900.00. We always recommend purchasers lodge a caveat to stop the vendor dealing with the property at all until the Court application has settled.

Lodge a caveat

Although a vendor cannot grant a mortgage to a third party, they can grant other kinds of charges (we stress the importance of proper contract drafting here). Purchasers would lodge a caveat communicate to the outside world that they have a legal interest in the property. This defeats most claims from third parties that the vendor granted them some other form of interest.

Stamp duty

Although final payment of the purchase moneys may be years away, stamp duty is due 30 days from the contract date.  Significant penalty interest will accrue from this date until payment.

Existing mortgage over the lot

The purchaser should specify in the contract that instalment payments be made to the mortgagee (bank). The consequence of not doing so is that upon final payment being made the vendor’s mortgage may not be paid out and the funds dissipated preventing settlement.

Interest charges

A term in a contract providing that interest is payable where the purchaser fails to meet an instalment payment can be held invalid if not properly drafted. If the right to charge interest arises because the purchaser has granted a mortgage to the vendor, consumer credit legislation can step in to negate that right. Proper contractual drafting is absolutely paramount to ensure these rights are maintained.

Bankruptcy

If the vendor becomes bankrupt or enters external administration (for companies) the purchaser can enforce the contract against the vendor’s trustee, administrator or liquidator. However, the trustee can void the transaction where the purchase price was well below market value.

Taking possession and due diligence

Purchasers typically lose their right to conduct searches and seek compensation or terminate upon taking possession. The contract should take this into account by delaying possession for a few weeks so the purchaser can do their due diligence.

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[1]Property Law Act 1973 (Qld), S71.

[2]Ibid, at s73.

[3]Ibid, at S74.

[4]Ibid, at S72.

[5]Ibid, at S75.

[6]Ibid.

New stamp duty surcharge-Applicable to foreign acquirers for property in QLD, NSW and VIC

From 1 October 2016, Queensland will apply a stamp duty surcharge of 3 per cent on direct and indirect acquisitions of residential land by foreign purchasers.

Similar surcharges are in place already in New South Wales and Victoria, having taken affect from 21 June 2016 and 1 July 2016 respectively.

Note however that the surcharge only applies to residential land.

Residential land is land upon which a building is (or will be) situated and approved by the local government for human habitation by a single family unit. It is extended to include land which is (or will be) subdivided into lots for the same purpose. The definition extends to vacant land where a person undertakes or will undertake development of a building or buildings which will fit the description above.

The Commissioner is serious about reaping the surcharge. The foreign purchaser, the vendor and any co-purchaser will all be jointly and severally liable for any unpaid Additional Foreign Acquirer Duty (“AFAD”), even if the vendor is not foreign. If any AFAD is unpaid the Commissioner of State Revenue will have a first-ranking statutory charge over the land and can even obtain a court order to sell the land. However there is some comfort in that subsequent purchasers of lots will not be jointly or severally liable for unpaid AFAD where the Commissioner has yet to register a charge.

Importantly, if the purchaser becomes foreign within 3 years of acquiring the land they will need to notify the Commissioner within 28 days. It is an offence to fail to notify the Commissioner within 28 days. This imposes quite an onerous obligation on trustees and corporate directors to monitor share and unit holdings.

New stamp duty surcharge-Applicable to foreign acquirers for property in QLD, NSW and VIC

From 1 October 2016, Queensland will apply a stamp duty surcharge of 3 per cent on direct and indirect acquisitions of residential land by foreign purchasers.

Similar surcharges are in place already in New South Wales and Victoria, having taken affect from 21 June 2016 and 1 July 2016 respectively.

Note however that the surcharge only applies to residential land.

Residential land is land upon which a building is (or will be) situated and approved by the local government for human habitation by a single family unit. It is extended to include land which is (or will be) subdivided into lots for the same purpose. The definition extends to vacant land where a person undertakes or will undertake development of a building or buildings which will fit the description above.

The Commissioner is serious about reaping the surcharge. The foreign purchaser, the vendor and any co-purchaser will all be jointly and severally liable for any unpaid Additional Foreign Acquirer Duty (“AFAD”), even if the vendor is not foreign. If any AFAD is unpaid the Commissioner of State Revenue will have a first-ranking statutory charge over the land and can even obtain a court order to sell the land. However there is some comfort in that subsequent purchasers of lots will not be jointly or severally liable for unpaid AFAD where the Commissioner has yet to register a charge.

Importantly, if the purchaser becomes foreign within 3 years of acquiring the land they will need to notify the Commissioner within 28 days. It is an offence to fail to notify the Commissioner within 28 days. This imposes quite an onerous obligation on trustees and corporate directors to monitor share and unit holdings.

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NEW foreign resident capital gains withholding payments

NEW foreign resident capital gains withholding payments

Be prepared: The following applies to all contracts entered into which will settle from 1 July 2016

The Government’s new “non-final withholding tax” will mean that where a foreign resident disposes of Australian property the Buyer will need to withhold and  remit 10% of the market value of the property to the ATO.

What does it apply to?

The new withholding tax will apply to all transactions for Australian property where the vendor is a foreign person, including options and rights to acquire, except assignments of leases where no premium is paid for entry into the lease.

What is ‘market value’?

Where parties contract at arm’s length, the purchase price is taken as the market value.

Importantly, there is an exception where the market value is below $2million, leaving the vast majority of residential property sales unaffected. REIQ and QLS are likely to release a new edition of the standard contract shortly.

It is the purchaser’s responsibility to remit payment to the ATO from the purchase price. Foreign sellers unaware of this might expect to receive more funds from their sale than they will. Issues could arise where the funds from a sale are intended to be used towards a subsequent purchase, and the funds are short as a result of the withholding. 

What is a clearance certificate?

For sales over $2million, a clearance certificate can be obtained by the seller which provides the certainty for both parties that the purchase price does not include the withholding tax. Using the certificate means no nasty surprises for the seller in that no funds are withheld from the sale proceeds. These certificates can be obtained before listing the property for sale.

The clearance certificate application will be an online process. The ATO will be making it available before 30 June. After the application is lodged, the tax office are predicting it will take days for the certificate to be issued, unless there are irregularities within the system whereby certificates could take up to 4 weeks.

What is the effect of GST?

If the transaction is subject to GST, the withholding will be 10% of the GST-inclusive purchase price less the input credit deduction. This only applies where the purchaser is registered for GST or entitled to an input tax credit.

The tax office has published a range of FAQ’s on the new laws which can be accessed here.