REAL ESTATE INVESTMENT ALERT NO. 9
In this Alert:
- New strata defects bond regime in New South Wales - impact on property development;
- The dangers of banks’ “standard terms and conditions”.
Read more if this is a concern.
NEW STRATA DEFECTS BOND REGIME IN NEW SOUTH WALES – Residential Property Developers' beware
When does it apply?
From 1 January 2018, developers of residential or partially residential real estate in New South Wales involving 3 or more floors will need to comply with the Strata Defects Regime established under existing Strata Schemes legislation.
The new regime applies to any work carried out under a construction contract entered into on or after 1 January 2018 (or commenced on or after that date where there is no construction contract in place).
What obligations are imposed?
The regime imposes potentially significant financial and administrative burdens on residential property developers which, in most cases, will need to be reflected in the arrangements between the developer and the builder. In the absence of the builder taking on these obligations, many developers may find it difficult to comply with the regime and/or will face additional time delays and cost burdens in settling with purchasers on completion of the works.
Lodgement of defects bond
Residential property developers will need to arrange for a bond or similar undertaking (covering an amount of 2% of the contract price) to be lodged with the Department of Finance, Services and Innovation (Secretary) prior to the issue of an occupation certificate in respect of the development.
The contract price on which the bond amount is calculated is potentially broader than the contract price under the construction contract and may result in the amount of the bond being higher than anticipated.
Lodgement of documents
The documents to be lodged with the bond are comprehensive and may be difficult to compile without the builder taking on, and complying with, the requirements of the regime. Delays in assembling all of the required documents will delay the issue of the occupation certificate.
Interim and final defects inspections
Residential property developers' must engage inspectors to carry out interim and final defects inspections. The inspector must be on a strata inspector panel, such as that established by the Master Builders’ Association. The interim inspection is to be done between 15 and 18 months after completion of the works, with the final inspection to be done between 21 and 24 months after completion.
A report is to be prepared by the inspector after each inspection and lodged with the Secretary.
Claims on bond – extended defects liability period
The owners’ corporation may claim amounts under the bond to cover defect rectification work up to the later of 2 years after the completion of the works and 60 days after the lodgement of the final report by the inspector. This essentially means that the developer is subject to a longer defects liability period than the usual 12 month period provided for in construction contracts.
What are the consequences to residential property developers?
In our view, the main consequences to developers are:
1. They should ensure their construction contract imposes the documentary obligations to be complied with under the regime on the builder;
2. The defects liability period under the construction contract should be the same as under the regime;
3. The security to be provided by the builder under the contract should be consistent with the requirements of the regime. The builder should be obliged to lodge the security necessary to satisfy the strata defect regime;
4. Building costs are likely to increase to account for the additional costs associated with the above;
5. Construction financiers may impose additional obligations on developers to comply with the new regime and require evidence of such compliance; and
6. Sale contracts in respect of the strata lots to be constructed may need to be amended to account for the new regime and possible delays arising from it.
THE DANGERS OF BANKS’ “STANDARD TERMS AND CONDITIONS” – Trap for the unwary
Borrowers are generally provided with a term sheet or letter of offer from their bank which sets out the major commercial terms of the proposed loan.
The fine print
In the case of smaller business or property loans (where the formal documentation is not intended to be negotiated) the document will also contain a small paragraph which provides that in addition to the specific terms referred to in the document, the “Bank’s standard terms and conditions” will apply. These are often contained in a printed booklet which is not always provided with the term sheet or letter of offer.
Many borrowers (and their advisers) will not review the standard terms and conditions, assuming that they are not negotiable and will be limited to administrative type issues. This is a big mistake.
What you need to know!
I have always reviewed the standard terms and conditions and have found that they, more often than not, contain some very one-sided clauses favouring the bank which, when mentioned to the client, are totally unacceptable.
One of the most common of such clauses is the bank’s right to review the terms of the facility at any time, often without any qualification at all. As most borrowers expect that the terms of their loan won’t change unless there is a default by the borrower, it comes as a nasty shock when they realise they have given the bank such a broad right to change the terms of the facility.
Tip for the unwary
Always review the standard terms and conditions as well as the specific terms in the term sheet or letter of offer and negotiate those which are not acceptable.
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The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.