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.