SUBDIVISIONS WITH A STING
By
SIMON LIBBIS
SUBDIVISION LAWYERS
www.subdivisionlawyers.com
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
http://www.hybridpublishers.com.au/legal.html
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
existing title will show a depth limitation. These used to be shown as 50 feet, which is 15.24 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
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
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.
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.
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
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
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 2005. 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
land. These obligations commenced on 1 July 2010.
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
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
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
2003.
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
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 54-609
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.
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
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 2011. However, the Consumer Acts
Amendment Bill 2011 will, when passed by Parliament, extend the start date to 1 July 2012. 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.