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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.

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NSW stamp duty reforms – Boom and gloom

Peter Faludi — Tue, 20 Apr 2021 03:21:46 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

April 2021

NSW stamp duty reforms – Boom and gloom

As you are aware, in November 2020 the NSW Government issued a Consultation Paper, and subsequently received submissions, on a new way of taxing property in NSW.

While conceptually the ability to avoid large lump sums of transfer duty each time a person buys a property is attractive, the proposed reforms raise more questions than answers.

The examples given by the Government as to how the new regime would work are simplistic and do not address a number of significant issues buyers and owners of property will face due to the reforms.

In this Alert, we discuss the following issues which in our view should be addressed before the reform can have any widespread positive outcome for property buyers:

The complexity of a multi-tier tax regime,
The lack of flexibility in deciding which tax mechanism (upfront or ongoing) a buyer can use,
The uncertainty as to whether any limits will apply to future increases in the property tax rate and the thresholds which will apply to such rates, and
The lack of other options.

The bottom line:

Developers of lower-priced housing, as well as their buyers, will be the primary beneficiaries of the proposed new tax system. Buyers of higher-end residential property and commercial property are likely to miss out on the benefits of the new system.

There appears to be no proposed timeframe by which these reforms are to be introduced. As a result, property buyers and investors will have to live with the current laws or defer their decisions to buy until the reforms are clarified and the timetable for introduction is known.

Having taken the initiative to propose reforms to a universally disliked tax, the NSW Government should consider all issues raised and put forward the proposed timetable for the introduction of the new laws as soon as possible.

The complexity of a multi-tiered tax regime

Matters to be considered by buyers

As currently proposed, if the reforms are adopted, NSW will have a multi-tiered property tax system. Property buyers and owners would have to consider:

If the property they are intending to buy can benefit from the new regime (as their will initially be price thresholds above which the new regime will not apply),
Whether:
paying the current upfront transfer duty based on the improved value of the property together with an annual land tax (if applicable) based on unimproved land value, or
opting into an annual property tax based on the unimproved land value of the property, which would be in substitution for both transfer duty and land tax,

is better for them financially,

How the new regime applies to the structure of their proposed acquisition, e.g if a buyer is buying the entity which owns the land rather than the land itself, and
Whether any existing exemptions relating to transfer duty or land tax will apply.

Thresholds

It appears that the reform will not apply across all property types. To protect government revenue, the Government’s Consultation Paper indicates that thresholds are likely to apply resulting in properties with a higher unimproved value not being able to opt-in to the new regime.

Differing tax rates

The rates of the annual property tax differ between property types. For example, the rate will be higher for investment and commercial property than for owner-occupied residential property.

Due to the proposed perpetual consequence of their decision as to the matters in point 2 above, buyers should consider the impact of their choice on future buyers. The choice of property tax to apply to a property may impact a buyer’s ability to raise finance and their current and future cash flow.

In our view, simplification of the property tax regime is an important consideration for the proposed reforms and other alternatives should be considered when finalising them.

The lack of flexibility in deciding which tax mechanism (upfront or ongoing) a buyer can use

The reforms currently only allow the first buyer of a property, after the reforms become law, to choose whether to pay the lump sum transfer duty or to opt into the proposed new annual property tax regime. If a decision is made to opt into the annual tax regime, each subsequent buyer of the property will be bound by that decision. They will have no option to pay lump-sum transfer duty on the acquisition of the property.

While the Government acknowledges that buyers have different objectives and goals in relation to their property acquisitions, it has only provided flexibility to the first buyers of the property after the law changes. Subsequent buyers will have no such flexibility where the vendor has previously opted into the annual tax regime.

This may not suit all buyers (especially those who intend to hold property for the long term). The level of buyer interest in properties subject to the annual tax may be less than would be the case if subsequent buyers had a similar choice.

For example, the Government’s Consultation Paper proposes an annual property tax for commercial property to be 2.6% of the unimproved value of the property. If a vendor (who did not intend to hold the property for an extended period), chose to opt-in to the annual property tax, a buyer with a long-term objective would be paying 2.6% of the unimproved value throughout the duration of its ownership. Although this may be tax-deductible, it may still not be acceptable.

If this type of scenario results in fewer people switching to the new regime, the reform may not achieve its objective of relieving the current stamp duty burden of buyers.

Tax reform should ideally be neutral or favourable to the market. Allowing all buyers to have the same choice between a once only lump-sum transfer duty or an annual property tax would achieve this.

The uncertainty as to whether any limits will apply to future changes in the annual property tax rate and the thresholds which will apply to such rates.

As Government finances and agenda’s change, there is always a risk that taxes or tax rates may also change.

With lump-sum transfer duty, once paid it is no longer a tax which the buyer has to consider. The proposed property tax, being annual and perpetual (if an earlier buyer opts-in to that system), leaves itself open to increases if the Government needs to bolster its finances in the future.

Further uncertainty will arise from potential changes to the monetary threshold above which the annual property tax will not apply as well as changes to the valuation methods to be used in determining the unimproved land value on which the annual tax is calculated.

The lack of other options.

The Consultation Paper does not put forward other options to ease the burden of the current stamp duty regime.

Commentators have touched on other possible alternatives, including retaining the current regime but allowing the duty to be paid by installments over a period of years.

Hopefully, such options (and others) will be considered before any final proposals are submitted for approval by NSW Parliament.

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters affect you, including your current and future financial arrangements.

Peter

Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528

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.

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How to improve your property funding outcomes in 2021

Peter Faludi — Thu, 18 Feb 2021 01:11:44 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

February 2021

How to improve your property funding outcomes in 2021

If 2020 has taught us anything, it is that you need to expect the unexpected. You need to adapt/change your way of doing things to minimise adverse outcomes arising from unforeseen events.

In the context of property transactions in 2021, this includes:

considering a broader range of funding options, and
rethinking the type and location of your projects and the people you wish to involve in them.

In this Alert, we discuss some of the changes investors, developers, and borrowers may need to consider in their approach to funding their 2021 projects. In particular, we discuss:

The property funding spectrum. Broaden your horizons but beware of the risks,
Why negotiating funding documents will improve your funding outcomes, and
Some practical lessons learned from the:
- Mandatory Leasing Code, and
- the NSW development and construction industry reforms.

The bottom line:

Given our comments below, for property investors and developers to improve their funding outcomes in 2021 they should:

broaden their funding sources while at the same time being more aware of the terms of such funding and the benefit of doing due diligence on the proposed funder,
be more conscious of the need to negotiate documents before signing them to ensure their interests are protected in difficult times,
consider if their strategy for 2021 is appropriate in view of the market and regulatory changes,
assess their internal processes and procedures to ensure compliance with new laws and,
review their consultants and contractors to make sure they will meet the standard required by the new laws and their financiers.

The property funding spectrum. Broaden your horizons but beware of the risks

As mentioned in previous Alerts, the sources of funds available for property investment and development have exploded in the last 3 years.

Whereas traditionally such funds were provided by the major Australian banks, now such funds are available from a variety of sources. These include foreign banks, a variety of non-bank/private lenders (including private equity and high net-worth individuals/family offices) and funds established to lend money for property transactions.

Funds can be provided by way of senior or subsequent ranking debt or equity (including through joint ventures) and can be secured or unsecured (although this would be unusual, especially in the case of debt).

To improve the likelihood of getting funding, investors and developers need to consider a broader range of funders than those they are used to. We have recently been involved in a number of matters where borrowers severely limited their potential source of funds. This resulted in loans being accepted at a higher cost and on more onerous terms than was otherwise available in the market.

The broad spectrum of funding brings with it a number of additional risks for borrowers. These include:

potential issues as to the availability of funds on settlement or to meet progress claims in development projects, and
the inclusion of different or previously unused terms and conditions in loan documents which may have adverse financial consequences to borrowers.

The above risks can have significant adverse financial consequences to borrowers. These include:

settlements falling over or being delayed, and
progress claims not being met resulting in project delays, purchasers walking away from their contracts and the borrower going into default under other loans or becoming insolvent.

While the above risks and consequences are less likely when borrowing funds from a major Australian Bank, in the case of some of the alternative funding sources now available, to minimise such risks borrowers may need to do due diligence on their funder.

Borrowers need to get comfortable that funds will be available when needed and that the funder will be reasonable in dealing with problems associated with the project.

Why negotiating funding documents will improve your funding outcomes

Some alternative funders include different or more onerous terms in their loan documents than those traditionally found in Australian bank documents.

These terms can lead to significant additional costs or adverse outcomes to the borrower. An example is the minimum return requirement (and other fees charged) and when they are payable.

Borrowers need to pay more attention to these and other terms found in loan or funding documents. The days of assuming the documents will be “standard” are gone. Even standard documents need to be understood before they are signed as they inevitably contain terms that will surprise a borrower.

One of the benefits put forward by non-bank lenders is their ability to be more commercial and reasonable than the major banks when considering transactions. An investor or developer should put this to the test. Don’t accept terms without knowing what they mean and always seek to negotiate them.

The old saying “if you don’t ask you don’t get” definitely applies in the new world of property finance.

Some practical lessons learned

The Mandatory Leasing Code

The Mandatory Leasing Code adopted throughout the country during 2020 had a number of consequences for property investors. In the context of their funding, the main consequences were:

rental income was reduced adversely affecting payment of interest on their loans,
interest cover ratios were breached, and
the value of the property declined causing breaches of loan to value (LVR) ratios.

This resulted in loans going into default and/or terms of loans being reviewed.

In addition, the impact on valuations made it difficult for valuers to provide valuations as high as was the case prior to the pandemic. This reduced LVR’s for new loans and required more capital to be invested in a project by the borrower.

Knowing this, borrowers now need to consider the level of capital they have available for projects. They should also consider what changes should be made in loan documents to minimise the above consequences if similar circumstances arose in the future.

We suggest you seek greater flexibility in relation to the operation of various loan covenants in circumstances such as those we experienced in 2020.

Development and construction industry reforms

As you are aware, substantial reforms to the development and construction industry were introduced in NSW in 2020 – see our February 2020, June 2020 and August 2020 Alerts for more details. Currently, these reforms are limited to the development of residential property (other than freestanding detached houses). They also extend to mixed-use developments incorporating residential property.

Failure to comply with these reforms can lead to hefty fines, disciplinary action and project delays. It can also result in potential liability for breach of the laws for up to 10 years after construction work is completed and personal liability for company directors and others for contraventions.

The above risks and consequences are likely to be considered by financiers when assessing applications for development funding. The additional risks may impact on the pricing of loans as well as the financial and non-financial covenants and undertakings contained in the loan documents.

To minimise the above consequences, developers and building and design practitioners may prefer to become involved in more non-residential projects going forward.

Those that continue to be involved in residential development will need to consider their internal processes and procedures to ensure compliance with the new regime. They will also need to consider the quality and track record of all consultants and builders involved in a project. While the quality and track record of such parties has always been a significant factor to be considered by financiers, the overlay of the reforms will make this even a higher priority for financiers.

We trust you find the above useful as a first step in improving your property funding outcomes in 2021.

Please feel free to contact me to have a complimentary 20-minute discussion to see how you these matters affect you, including your current and future finance arrangements.

Peter

Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528

Peter Faludi Consulting

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Helping Property Investors improve their position in Australian Property

Peter Faludi — Wed, 07 Oct 2020 09:14:24 +0000

In the competitive world of investing in Australian commercial property, property investors are constantly considering what can they do to be the preferred party to deal with in relation to a particular project.

What is important in winning a transaction for property investors – price is not enough!

In the case of a purchaser, the previous view was that by the offering a higher price this would guarantee its success in a transaction. Additional factors are now becoming increasingly important to the other parties to the transaction in deciding who to deal with.

This is due to the increasing complexity associated with real estate transactions (particularly ones involving foreign property investors) and the importance of being able to act quickly to take advantage of opportunities.

Non - price factors: How they can work against a property investor

As a result of the above, price of itself will not necessarily be enough to guarantee success. Other factors, that may be equally or more important to the other parties, include:

ease of dealing with a party;
a party's level of familiarity with the type of transaction to be entered into
availability of funding (including debt finance) for the party; and
whether FIRB approval is required for the party to complete the transaction.

These factors can each have a major impact on transaction costs and meeting deadlines.

In the case of foreign investors or local property investors involved in more complex transactions than those to which they are used to, these non-price factors are particularly relevant. They can work against the property investor in a tender, expression of interest or private treaty sale. In relation to ongoing arrangements such as joint venture, co-ownership or development transactions, these factors take on even greater significance. This is due to the extended period of time during which parties need to work together.

How can the property investor avoid the negative consequences

To overcome the above disadvantages, property investors should ensure that they understand the main issues relevant to the transaction as soon as possible.

Once the need to have such knowledge is accepted, the question is what do potential investors need to know and when and how should they get that knowledge.

What Makes Us Different?

The main focus of our consulting services is to:

minimise the cost and time associated with implementing a transaction; and
maximise the ability of investors to protect their interests when negotiating the initial documentation with the other parties to the transaction.

Real Life Examples

The difference between getting the right advice as soon as possible and not doing so is demonstrated in the following real life examples:

Prior to seeking our advice, a borrower executed a term sheet which contained a prohibition on it acquiring any other property or borrowing further funds. This was the basis in which the lender agreed to provide funding. Once we highlighted this to the borrower, it did not wish to proceed without the lender removing this restriction. The lender could not accommodate this request resulting in the loan (approximately $50m) not being provided.
A developer provided a short form of development management agreement to the investor which was to fund the development. Upon seeking our advice, we negotiated substantial changes to that document. This resulted in a saving of $5m for the investor on completion of the project.

By leveraging off the 30+ years of legal and transactional experience of our Founder, Peter Faludi, at cost-effective rates, we assist property investors understand the legal, documentation and structuring issues associated with property investment, development and finance in Australia.

This type of advice is generally not provided by other advisers at the very early stages of the transaction.

By addressing these issues at the very beginning of a transaction, the amount of renegotiation by advisers involved in implementing the transaction (due to the investor requesting changes) will be minimised. This results in the saving of costs and time.

What Difference Does It Make To Property Investors?

By utilising our services, investors gain control of matters and are better able to protect their interests at the vital early stage of discussions with other parties.

In addition to the cost and time savings mentioned above, the investor should be seen as a more savvy investor by Australian parties and therefore be more likely to be invited to participate in future transactions.

To assist investors’ gain the knowledge they need to have before embarking on a transaction, we have prepared a list of the TOP 10 ISSUES FOR PROPERTY INVESTORS IN AUSTRALIAN PROPERTY TO BE AWARE OF BEFORE ENTERING INTO DOCUMENTATION.

If you would like a copy of such list, please click on our Website at https://www.peterfaludiconsulting.com.au.

I welcome your feedback at peter@peterfaludiconsulting.com.au

Regards

Peter Faludi

Director

The post Helping Property Investors improve their position in Australian Property appeared first on Peter Faludi Consulting.

The new world is not all about COVID 19 Property investors and developers beware

Peter Faludi — Wed, 05 Aug 2020 21:38:37 +0000

REAL ESTATE FINANCE and INVESTMENT ALERT

August 2020

Commentary on the economic impact of COVID 19, including its impact on the property market, has been widespread. The pace of legislative reform associated with COVID 19 has been unprecedented.

Our experience with legislative reform is that other than for the more established and well-funded participants in an industry impacted by the reform, most participants are not fully aware of the impact on their business until it is too late or increasingly costly to adjust their affairs to minimise the consequences of the reform.

In this Alert, we discuss some aspects of recent non-COVID 19 reforms (some of which we have previously reported on (see most recently our June 2020 Alert) which are likely to catch property investors and developers unaware. These are:

The unknown scope of the NSW Building Industry Reforms;
The personal liability of directors and managers of companies in the building industry for breaches of the NSW Building Reforms; and
Some significant potential financial costs for investors in property in NSW.

THE UNKNOWN SCOPE OF THE NSW BUILDING INDUSTRY REFORMS

As reported in our June 2020 Alert, in early June the NSW Government passed the Design and Building Practitioners Act 2020 (NSW) (DBPA) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW)(RABA).

Start dates

The new additional statutory duty of care contained in the DBPA became effective on assent to the legislation while the other provisions of the DBPA start on 1 July 2021.

The RABA commences on 1 September 2020.

Unfortunately, as you will see below, in the absence of regulations there can be no certainty in relation to the scope and application of a number of key aspects of each Act. At the time of writing this Alert, no regulations have been released for either Act.

Who is subject to the DBPA?

The DBPA imposes obligations on:

Design Practitioners
Principal Design Practitioners
Building Practitioners
Professional Engineers, and
Specialise Practitioners,

each as defined or referred to in the DBPA.

Regulations can prescribe additional parties to be Building Practitioners and can also exclude parties from being regarded as Building Practitioners.

All parties involved in a project should determine if they fall within any of the above categories to ascertain whether the DBPA applies to them. Given the nature of the definitions and the ability of regulations to add persons to, or exclude persons from, the definition of Building Practitioners, parties involved in building work should not assume that they are excluded from the scope of the Act.

What sort of work is subject to the DBPA?

The main activity to which obligations relate under the DBPA is “building work”. Building work means:

“work involved in, or involved in coordinating or supervising work involved in, one or more of the following:

the construction of a building of a class or type prescribed by regulations;
the making of alterations or additions to a building of that class or type,
the repair, renovation or protective treatment of a building of that class or type”.

The regulations can prescribe additional work as being building work for the purposes of the Act and can exclude work from being building work.

The new statutory duty of care contained in the DBPA (see our June 2020 Alert) is already in effect and applies to construction work, which includes building work and also extends to:

“the preparation of regulated designs and other designs for building work;
the manufacture or supply of building product used for building work; and
supervising, coordinating, project managing or otherwise having substantive control over any of” the above type of work.

The breadth of the meaning of building work, and the potential for other work to be included by regulation or for exclusions to apply, creates uncertainty as to the scope of the DBPA. Parties who are to be involved in a project will need to do their homework to determine whether or not the project is subject to the Act.

In the case of the new duty of care, parties will need to do their homework in relation to current and past projects as soon as possible due to the retrospective operation of the duty.

Who is subject to the RABA?

The RABA imposes obligations on Developers.

Developers are defined in the Act to mean:

“the person who contracted or arranged for, or facilitated or otherwise caused (whether directly or indirectly) the building work to be carried out,
if the building work is the erection or construction of a building or part of a building – the owner of the land on which the building work is carried out at the time the building work is carried out,
the principal contractor for the building work within the meaning of the Environmental Planning and Assessment Act 1979,
in relation to building work for a strata scheme – the developer of the strata scheme within the meaning of the Strata Schemes Management Act 2015,
any other person prescribed by the regulations”.

All parties involved in a project will need to determine if they fall within the meaning of “developer” to ascertain whether the RABA applies to them. Given the broad (and uncertain) scope of the definitions, and the ability of regulations to add persons to the definition of developer, parties involved in residential building work should not assume that they are not developers for the purposes of the Act.

What sort of work is subject to the RABA?

The RABA makes it clear that it only applies to building work in relation to residential apartment buildings. This is defined as being “a class 2 building within the meaning of the Building Code of Australia and includes any building containing a part that is classified as a class 2 component but does not include any building or part of a building” excluded by regulations under the RABA.

Regulations can also extend the provisions of the RABA to other classes of buildings.

Although a Class 2 building is referred to in the Building Code as being “apartment buildings…typically multi-unit residential buildings”, it also includes a building containing 2 or more sole occupancy units each being a separate dwelling. As a result, it can extend to smaller developments than the name of the Act and the term “residential apartment building” implies.

It is unclear whether a mixed-use development, which includes a residential component, would be treated as being a residential apartment building for the purposes of the RABA. This may not be the case where the construction of the non-residential stratum is separate from the residential stratum.

The powers of the Secretary of the Department of Customer Services under the Act (which may be delegated to the new Building Commissioner) can be exercised in relation to residential apartment buildings completed within the period of 10 years before the exercise of the power. Subject to the operation of the transitional provisions, it appears that powers (such as carrying out investigations and issuing rectifications orders) will be available to the Secretary or Building Commissioner for previously completed residential apartment buildings up to 10 years old.

PERSONAL LIABILITY OF DIRECTORS OF COMPANIES IN THE BUILDING INDUSTRY FOR BREACHES OF THE NSW BUILDING REFORMS

It is common for construction projects to be undertaken by special purpose vehicles (SPV’s) established by the sponsors of the project. Generally being companies or unit trusts, they provide a number of benefits including a layer of protection to the ultimate owners of the project in respect of various claims and liabilities associated with the project.

Under each of the DBPA and RABA, liability for a contravention of the Act or regulations by a corporate entity is imposed on both the company, its directors and other persons who are concerned in the management of the entity if the director or other person “knowingly authorised or permitted the contravention”,

This raises risks to directors and managers of companies associated with residential construction projects and reduces the benefits associated with the use of SPV’s.

SOME SIGNIFICANT POTENTIAL FINANCIAL COSTS FOR INVESTORS IN PROPERTY IN NSW

On 24 June 2020, the NSW Parliament passed a number of changes to stamp duty and land tax laws in NSW which will have a major impact on property investors. Some of the more significant ones are discussed below.

Discretionary Trusts

Discretionary trusts, and in some cases unit trusts in which a discretionary trust is a unit holder or companies which have a discretionary trust as a shareholder, which own or acquire an interest in residential related property may be subject to significant increases in transfer duty and land taxes if the terms of the relevant discretionary trust deeds are not amended by 31 December 2020.

The effect of the changes is that unless the trust deed of a discretionary trust specifically provides that:

no foreign person can be a “potential beneficiary”, and
the terms of the trust cannot be amended to allow a foreign person to become a potential beneficiary in the future,

the trustee will be regarded as being a foreign trustee. It will, therefore, be liable for surcharge purchaser duty (as payable by foreign purchasers) on acquisitions of interests in residential related property in NSW and be subject to the land tax surcharge payable by foreign purchasers in relation to such property owned by the trust. The surcharge purchaser duty is 8% in addition to the normal transfer duty payable. The land tax surcharge is an additional 2% on top of the normal land tax rate.

The term residential related property is not limited to existing dwellings and includes:

a parcel of land where there are one or more dwellings on the land or a parcel of land on which there is a building under construction that, when completed, will constitute one or more dwellings, and
a parcel of vacant land zoned or otherwise designated for use for residential or principally for residential purposes.

In order to avoid the above consequences, the Office of State Revenue has given parties affected by the changes until 31 December 2020 to amend their trust deeds so as to exclude foreign persons from being beneficiaries.

Investors or developers which have an investment in residential property or are considering acquiring an interest in such property (see above comments on the meaning of residential related property) using a discretionary trust or a unit trust in which a discretionary trust is a unitholder or a company which has a discretionary trust as a shareholder, may be affected by these changes. For those investments, consideration should be given to amending the discretionary trust deeds as mentioned above no later than 31 December 2020.

If an existing discretionary trust already has any foreign beneficiaries, the relevant parties should get advice as to what can be done to remove such beneficiaries or transfer their interest to non-foreign persons in order to minimise the above consequences.

Note: On 29 July 2020 the NSW Government introduced draft legislation intended to facilitate built-to-rent (BTR) projects. Part of the proposed reforms is to reduce the land tax applicable to such projects and to remove the application of surcharge purchaser duty and the land tax surcharge payable by foreign purchasers in respect of such projects.

We assume this would also apply if a discretionary trust was involved in such project however as the legislation has not been passed this is yet to be confirmed.

Calculation of landholder duty

The threshold, above which landholder transfer duty was payable when a purchaser acquired a 50% or greater interest in a private company or a private unit trust which owned land in NSW worth more than $2m, was previously calculated on the unimproved value of the land. If the property had an unimproved value below this amount, no duty would be payable on the acquisition of shares/units in the land-owning company or trust.

From 24 June 2020, the threshold is calculated on the unencumbered value of land owned in New South Wales, which includes the improvements constructed on the land. This greatly increases the number of transactions to which landholder duty will apply thereby adding to the transaction costs to be incurred by the purchaser.

Rescission of put and call options followed by a new contract with a new purchaser now subject to duty

Investors/developers often enter into put and call options with landowners to secure land prior to entering into a contract to purchase. This can be done for various purposes, including obtaining FIRB approval for the purchase (in the case of foreign purchasers) or development approval for the proposed project (in the case of developers).

One effect of doing so is to delay the time from which transfer duty is payable on the purchase until the option is exercised and a contract for sale entered into.

In circumstances where the purchaser cannot obtain the approvals it seeks, it may wish to rescind/terminate the option. If such termination occurred and the vendor then entered into a contract to sell to a third party, no duty was previously payable by the original proposed purchaser.

The Duties Act 1997 has now been changed so that if there is an arrangement under which the vendor agrees to sell the property to a third party and the initial proposed purchaser is released from the option, the arrangement will be treated as if the initial purchaser assigned the call option to the third party. This will result in the initial purchaser being liable for transfer duty on the value of the property, in the same manner as if the call option had been assigned to the actual purchaser.

As a result, investors/developers need to carefully consider how they can secure a property, while seeking any approvals they need to proceed, without triggering these new provisions. Getting this wrong will prove to be very costly.

The property industry has been significantly affected by COVID 19. The Stage 4 Victorian lockdown has highlighted this even more. Given this, the timing of the introduction of the above legislation (which is not related to COVID 19), other than the proposed concessions for BTR projects, is unfortunate as they each place additional costs and stress on an industry which is already considering how to move forward in the new world we live in (and will continue to live in for many years to come).

These legislative changes will also impact on the ability of developers and investors to obtain finance and the terms of such finance.

A new world indeed.

Please feel free to contact us to discuss any of the above or any loan facilities, current or future, in respect of which we may assist you in negotiating changes to fairly account for your financial circumstances and navigating the increasingly complex provisions found in such documents to so we can achieve better commercial outcomes in your finance arrangements.

Peter Faludi Consulting

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Has NSW clarified the Mandatory Leasing Code?

Peter Faludi — Sun, 26 Apr 2020 23:00:46 +0000

REAL ESTATE INVESTMENT ALERT

Special Edition

April 2020

Has NSW clarified the Mandatory Leasing Code?

As mentioned in our last Alert, on 7 April 2020 the Federal Government released its mandatory code of conduct setting out the “good faith leasing principles” to apply during the COVID-19 period to negotiations between landlords and tenants in respect of leases of commercial property, which includes retail, office and industrial premises (Code).

Based on information from a number of sources, some tenants are not complying with their good faith obligations under the Code, thereby causing significant problems for landlords (including in relation to their financing arrangements).

The Code was to be legislated by each state and territory. Although this has occurred in some jurisdictions, not all have completed this task.

On Friday 24 April 2020, the New South Wales Government released the regulations under which the Code is to apply in NSW. A set of regulations apply to retail premises and a slightly different set of regulations apply to other commercial premises.

In this special edition of our Alert, we highlight some of the more significant matters arising from the NSW Regulations – see Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW). In particular, we consider:

Duration of the Code arrangements
Limits on tenants which can rely on the Code
Exclusion of new leases
An unintended consequence of the proportionality principle
The complexity of rights of enforcement for breaches
Uncertainty regarding Lessor actions for non-COVID-19 related reasons
The need to include references to the Overarching Principles to protect both parties

If you would like to read more please click HERE or see below.

Duration of the Code arrangements

Unlike the Code itself (which referred to “the COVID-19 pandemic period (or a reasonable subsequent recovery period)”), the period for which the NSW Regulations apply is specified as the 6 months period commencing from 24 April 2020, being the date on which the Regulations commenced.

The Regulations provide that they are automatically repealed at the end of that period. Although this provides some degree of certainty to landlords and tenants as to how long these regulations will apply, there is no express mention as to whether this period can be shortened if we are successful in dealing with COVID-19 and going back to business prior to the expiry of the period.

It is also unclear whether any of the Leasing Principles of the Code which can operate beyond 6 months, such as the repayment period applicable to deferred rent, will continue to apply beyond the date of repeal of the Regulations.

Limits on tenants which can rely on the Code

To be able to rely on the Code, the Code requires tenants to qualify for JobKeeper and have an annual turnover of no more than $50m. The NSW Regulations make it clear that the turnover threshold is to be determined by reference to turnover in the 2018-19 financial year and is to include “turnover derived from internet sales of good and services”.

As a result, if a tenant had a good 2018-19 financial year (by having a turnover, including online sales, of more than $50m), it appears it will not have the benefit of the Code in NSW even if its turnover has dropped below this threshold since 1 July 2019 (assuming it’s financial year ends on 30 June).

We note some landlords have raised concerns as to the use of the turnover threshold without also considering other aspects of a tenant’s finances and ownership structure. No changes have been made to broaden the criteria to be used in assessing the entitlement of tenants to benefit from the Code.

Exclusion of new leases

The Regulations (and therefore the Code in NSW) do not extend to any commercial leases entered into after 24 April 2020.

To the extent a landlord has any vacant premises and can find new tenants, this should provide the landlord with assurance that the Code will not impact it its rights should there be any issues with such tenants.

Unintended consequence of proportionality principle

Where a tenant is obliged to contribute a fixed amount towards land tax, any other statutory charge or insurance premiums payable by the landlord, and the landlord obtains a reduction of such tax, charge or premium, the Regulations provide the tenants is to be exempted from its obligation to pay its contribution “to the extent of the reduction”.

It is not clear whether the term “extent of the reduction” is a reference to the proportion of the previous amount payable by the landlord as is represented by the reduction or a reference to the dollar amount of the reduction. It would not be equitable if it related to the dollar amount as this could result in each tenant, which is obliged to pay a fixed contribution amount, receiving an exemption for the full amount of their contribution, even though the reduction received by the landlord was less than 100% of the original tax, charge or premium.

This needs to be clarified by the Government.

Complexity of rights of enforcement for breaches

It appears that unlike the Code, which only allowed a landlord to take action against a tenant during the COVID-19 period for “material failure to abide by substantive terms of their lease” other than payment of rent, the Regulations allow action to be taken by the landlord (as allowed by the lease) in the case of any breach during the COVID-10 period other than:

failure to pay rent
failure to pay outgoings, and
the tenant’s business not being opened for business during the hours specified in the lease,

which occurs during the 6 months period of the Regulations.

In addition, no action can be taken if the breach of the lease is due to an act or omission required under a law of the Commonwealth or the State.

If a breach of a lease (including failure to pay rent or outgoings) occurred prior to 24 April 2020, the Regulations do not appear to prevent enforcement by the landlord.

To the extent a tenant fails to pay rent during the 6 months period of the Regulations, the parties must negotiate in good faith to agree the new rent payable, having regard to the Leasing Principles in the Code.

Commercial premises other than retail

Despite the above rights given to the landlord, in the case of commercial leases (other than retail leases), a landlord cannot:

seek to recover possession of premises or land
terminate the lease, or
exercise or enforce any other right under the lease

without first seeking mediation by the Small Business Commissioner. This seems to apply irrespective of the timing or nature of the breach on which the landlord wishes to rely (although see below under the heading Lessor actions for non-COVID-19 related reasons.

It is only if the Commissioner certifies that the dispute has not been resolved that the landlord may take court action to exercise any of the above rights.

When considering its decision, a court is required to have regard to the Leasing Principles in the Code.

It is not clear why the above procedure applies to actions by landlords in respect of breaches other than:

failure to pay rent
failure to pay outgoings, and
the tenant’s business not being opened for business during the hours specified in the lease,

which occur during the 6 months period of the Regulations.

This needs to be clarified by the Government so that both tenants and landlords clearly understand the procedures applicable to breaches under their leases.

Retail premises

In relation to retail leases, the existing dispute resolution procedures contained in Part 8 of the Retail Leases Act 1974 (NSW) will apply, as modified by the Regulations. Those provisions are different to those mentioned above.

Uncertainty regarding Lessor actions for non-COVID-19 related reasons

To the extent that a landlord wishes to take action under a commercial lease “on grounds non-related to the economic impacts of the CONVID-19 pandemic nothing in the Regulations will prevent the landlord from doing so.

The meaning of this exception is unclear. How is a landlord to determine whether a breach was “not related to the economic impacts of the COVID-19 pandemic”?

If a breach occurred prior to the onset of COVID-19, the exception should logically apply but the meaning of this exception should be clarified.

Need to include references to Overarching Principles to protect both parties

A number of provisions in the Regulations refer to the Leasing Principles set out in the Code.

The Leasing Principles are largely for the benefit of tenants and do not take account of the interests of the landlord. The provisions of the Code which have regard to the interests of both parties are contained in the Overarching Principles of the Code.

Landlords are concerned that the Code is very one sided and that tenants are not complying with the Overarching Principles when dealing with their landlord in the course of rent reduction negotiations. For example, requests by landlords for financial information to demonstrate the impact of COVID-19 on turnover and eligibility for JobKeeper (both of which are reasonable requests) are being ignored. Tenants are refusing to respond to suggested rent reduction proposals from landlords and have merely stopped paying rent. This is in breach of the Overarching Principles yet there does not seem to be any regulatory consequence to either a tenant or landlord arising from a breach of the Overarching Principles.

It is disappointing that the Regulations do not refer to both the Leasing Principles and the Overarching Principles. As it is clear that the Code and related State and Territory regulations are intended to lead to “mutually satisfactory outcomes”, the Regulations should also refer to the Overarching Principles. Failure to comply with such principles should, at least, be taken into account in any mediation, tribunal or court proceeding.

We understand further clarifications are being sought from the NSW Government in relation to a number of matters.

We trust you enjoyed this Alert.

Please feel free to contact us about any of the above matters.

Please also contact us if you would like to discuss our fixed fee loan document health check which will assist you in understanding your financier’s rights under current loan arrangements in the current challenging climate and help you in determining the strategy to adopt in your discussions with your financier.

Peter Faludi Consulting

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http://www.peterfaludiconsulting.com.au

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The post Has NSW clarified the Mandatory Leasing Code? appeared first on Peter Faludi Consulting.

Borrowers beware – financier’s rights may not be affected by COVID-19 policies

Peter Faludi — Wed, 08 Apr 2020 23:11:57 +0000

REAL ESTATE INVESTMENT ALERT

April 2020

Borrowers beware – financier’s rights may not be affected by COVID-19 policies

Since our last Alert, the regulatory environment in Australia has been turned on its head by a wave of changes, the likes and speed of which has not been seen before.

In circumstances like this, it is very difficult to formulate a strategy as to how best deal with the consequences of COVID 19 on business without first obtaining expert advice.

In this edition of our Real Estate Investment Alert, we outline a number of changes that have been introduced which are relevant to borrowers who are property investors and developers (as well as other business borrowers) and consider whether they will make any difference to borrowers in respect of their financing arrangements.

In particular, we discuss:

Changes to statutory demands and insolvent trading
Principles relating to commercial lease negotiations
Loan relief available from banks for small business
Dealings with non-bank lenders
Impact of FIRB changes on some COVID-19 strategies

Changes to statutory demands and insolvent trading

Statutory demands

As you are aware, where a company owes a debt in excess of $2,000 to another person, the creditor may serve a statutory demand on the debtor under Section 459E of the Corporations Act, requiring the debt to be paid within 21 days.

Unless there is a legitimate dispute as to the debt owing, failure by the debtor to pay the full amount of the debt within that timeframe will result in the debtor being regarded as insolvent. This is a common way of starting winding-up proceedings.

Failure to satisfy a demand is also generally treated as an insolvency event for the purposes of loan documents as well as leases, sale contracts and other commercial contracts.

Changes to the Corporations Act, enacted as part of the Federal Government’s COVID-19 reforms, have made it more difficult for creditors to rely on insolvency events of default and other clauses triggered by the occurrence of an insolvency event.

Under the changes, the minimum debt that can be the subject of a statutory demand has increased from $2000 to $20,000. In addition, the period by which payment must be made has been increased to 6 months. Accordingly, the ability of a financier to rely on an event of default triggered by the borrower failing to satisfy a statutory demand will now be deferred.

The above reforms are only to operate for six months from 25 March 2020 (unless extended by regulation or Ministerial order).

Similar changes have been made to the Bankruptcy Act for individuals.

From a borrower’s perspective, the reforms are beneficial but they do not prevent its creditors from taking action if a different event of default occurs under loan documents or other contracts, including events of default which may be triggered as a result of COVID-19 consequences. They also may not prevent financiers from taking advantage of any review rights they might have.

Insolvent trading

A major risk for directors of companies is that reduced cash flow caused by the impact of COVID-19 on their business or that of their tenants may increase the likelihood of the directors incurring debts on behalf of the company at a time when the company is insolvent, i.e it cannot pay its debts as and when they fall due.

As the Government wishes to keep businesses operating, it has made changes to the Corporations Act which significantly reduce the risk for directors of insolvent trading.

Under the new rules, directors will not be held responsible for insolvent trading if the debt is incurred:

in the ordinary course of business during the 6 months period commencing from 25 March 2020 (or such longer period as prescribed by regulation or Ministerial order), and
prior to any administrator or liquidator being appointed and during that period.

Although this is a good result for the borrower, it does not override restrictions on incurring financial indebtedness usually contained in finance documents, breach of which will trigger an event of default.

Principles relating to commercial lease renegotiations

On 7 April 2020, the Federal Government released its mandatory code of conduct which sets out the “good faith leasing principles” to apply to negotiations between landlords and tenants in respect of commercial tenancies, which include retail, office and industrial premises (Code).

The Code is to be legislated by each state and territory.

The Code applies where the tenant has suffered or is suffering financial stress or hardship due to COVID-19, has a turnover of no more than $50m and is eligible to participate in the JobKeeper Program.

The Code sets out 11 overarching principles and 14 leasing principles which are to be taken into account by both landlord and tenant when negotiating potential changes to leases currently in place.

Although we do not intend to summarise these principles in any detail, it is useful to mention a number of them relevant to the theme of this Alert.

Overarching Principles

The overarching principles include an obligation on both parties to negotiate in good faith, in an open, honest and transparent manner. The landlord must take account of the impact of COVID-19 on the revenue, expenses and profitability of the tenant and the changes made to the lease should be proportionate and appropriate having regard to the impact.

Leasing Principles

Some of the main specific leasing principles are:

If the tenant suffers distress, its landlord is not entitled to evict the tenant for non-payment of rent during the pandemic and a reasonable subsequent recovery period. As there is no specific timeframe mentioned, the term for which this restriction applies is unclear.
Material failure by a tenant to comply with “substantive terms of their lease” expressly forfeits the protections provided under the Code.
Rental waivers and deferrals must be offered to tenants in proportion to their reduction in turnover, with no less than 50% to be by way of waiver (meaning the reduction in rent is permanent) rather than deferral.
Deferred rent is to be amortised for no less than 24 months, irrespective of the term of the lease. No mention is made how the landlord can be secured for such payments after the lease expires. In addition, no fees, interest or other charges can be imposed on the waived or deferred rent.
The tenant should be provided with an opportunity to extend the lease on the same terms for any period of waiver or deferral of rent. This seems to go beyond the purpose of the Code as it may result in the landlord not being able to relet the premises immediately on expiry of the original lease for a higher rent once the pandemic is over.
The landlord cannot increase rent (other than turnover rent in retail leases) during the pandemic and a reasonable subsequent recovery period. Once again, as there is no specific timeframe mentioned, the term for which this restriction applies is unclear.

The above reforms are intended to override existing legislation and leases.

Possible impact on financiers

In terms of financiers, the Overarching Principles provide that both parties are to assist each other in their dealings with banks and other financial institutions to achieve outcomes consistent with the objectives of the Code. When releasing the Code, the Government stated that “it expects Australian and foreign banks, along with other financial institutions operating in Australia, to support landlords and tenants with appropriate flexibility as they work to implement the Code.”

It would appear that the Government will not tolerate actions by financiers which prevent a successful renegotiation of a lease consistent with the principles set out in the Code.

Although not specifically addressed by the Code, the abovementioned statement of the Government, as well as the Overarching Principles, may restrict a landlord’s financier from:

withholding its consent to proposed amendments to leases negotiated in accordance with the Code, or
calling an event of default if the terms of the loan are not met due to the revised leasing arrangements e.g due to a breach of financial ratios.

Indeed, financiers may need to amend their loan documents to expressly acknowledge these exclusions during the relevant period as part of the renegotiations of the lease between the landlord and tenant.

Although not clear, presumably a mortgagee in possession or a receiver appointed over the landlord could not override the restriction on eviction or any change made to the lease.

The above matters will need to be considered further if/when information regarding these reforms is released by the ABA.

Loan relief available from banks for small business

The ABA has advised that businesses, with total business loan facilities of upto $10m, which have been affected by COVID-19 will be able to “opt-in” and be relieved from strict compliance with certain provisions of loan documents for 6 months.

Subject to certain conditions, banks will not enforce their security in respect of non-financial default “(including changes in valuation)”. It is interesting that the ABA regards a change in valuation as being a “non-financial default”. In addition, interest will be able to be capitalised during the deferral period.

The ABA has also stated that other forms of assistance may be available to small business including deferral of scheduled loan repayments, waiver of fees and charges and interest-free periods.

Interestingly, the above change in approach to default does not extend to financial default even though it is the type of default which is most likely to occur. Presumably, the capitalisation of interest and the potential to waive fees and charges and provide interest-free periods will overcome this risk.

The above measures also do not address banks’ rights of review or their ability to change the terms of the loan, often found in standard bank terms and conditions.

For small developers and commercial property investors, these measures may be useful (although not providing complete protection) but for borrowers with loans in excess of $10m the relief measures do not apply.

Dealings with non-bank lenders (NBL’s)

The above measures also do not apply where the lender is an NBL.

NBL’s have traditionally relied on building strong relationships with their clients in order to maintain and grow their business. It will be interesting to see if these relationships will pass the stress test of COVID-19.

It makes sense for all borrowers and their financiers to be discussing the consequences of COVID-19 to assist each other make it to the other side of the pandemic in reasonable shape. Strict enforcement of loan documents in this environment is not likely to benefit either party. The GFC is testament to that.

It is important that borrowers start considering their loan arrangements and speaking to their advisers and financiers (whether banks or NBL’s) as soon as possible.

Impact of FIRB changes on some COVID-19 strategies

There are many strategies that can be followed by borrowers who are adversely affected by COVID-19.

These include asset sales, the raising of capital and refinancing.

The Treasurer’s announced changes to Australia’s foreign investment review rules, which took effect from 29 March 2020, are likely to further inhibit the property market for an indefinite time. The measures are to remain in place “for the duration of the coronavirus crises”.

To the extent a borrower wishes to sell assets to, or raise significant capital from, foreign persons (irrespective of value) after 29 March 2020, they will need to get Treasurer approval, which may now take upto 6 months. Financiers may not be willing to wait such length of time for sale or recapitalisation proposals to be implemented. They may not approve proposals involving foreign persons for this reason.

Refinancing by a foreign financier may also require Treasurer approval unless the relevant exemption applies.

As most financiers are not willing to leave approvals in place for extended periods of time or require drawdowns under facilities to occur within a particular period, the above changes may be an impediment to property investors refinancing where approval from the Treasurer is required. This may limit the strategies available to borrowers in relation to their current financing arrangements.

Conclusion

It is clear that there is a disconnect between a number of the new policies being put in place to keep business operating and people working and the rights of financiers in relation to business borrowers.

Although the small business’ which can take advantage of the announced ABA measures may be insulated from the exercise of enforcement rights of banks, those measures are not a complete safeguard against banks exercising their other rights and powers.

They also do not apply to a large number of property transactions and are not relevant when the financier is an NBL.

The other reforms mentioned above, although beneficial, do not expressly qualify financiers rights when borrowers are adversely impacted by COVID-19.

It will be interesting to see how financiers approach the issues arising for their borrowers given the objectives of the various reforms being put in place to deal with COVID-19.

We trust you enjoyed this Alert.

Please feel free to contact us about our fixed fee loan document health check which will assist you in understanding your financier’s rights under current loan arrangements and help you in determining the strategy to adopt in your discussions with your financier.

WISHING YOU A HEALTHY AND PEACEFUL EASTER

Peter Faludi Consulting

Connect with me on LinkedIn

http://www.peterfaludiconsulting.com.au

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Can COVID-19 infect your finance arrangements?

Peter Faludi — Sun, 15 Mar 2020 03:32:06 +0000

REAL ESTATE INVESTMENT ALERT
March 2020

Can COVID-19 infect your finance arrangements?

The impact of the outbreak of COVID-19 is getting larger and larger by the day.

Each day new consequences are being identified affecting a broader range of people, livelihoods, companies, industries and markets.

In this edition of our Real Estate Investment Alert we discuss:

The concept of “force majeure” and whether such a concept can be used to protect borrowers in circumstances where their property investment or development is adversely impacted by COVID-19,
Clauses found in finance documents which can work against borrowers in the above circumstances, and
How to deal with the impact of COVID-19 in relation to your finance arrangements.

If you would like to read more please click HERE or see below.

Force Majeure – can it be used by a borrower in respect of its obligations under loan documents?

There has been recent commentary on the use of “force majeure” clauses (found in certain contracts) in the context of the COVID-19 pandemic.

Force majeure clauses deal with circumstances which are beyond the control of a party to the contract. They generally provide that the non-performance by a party to the contract that has been affected by such circumstance will be excused and not regarded as a default under the contract. This enables the contract to be kept alive and adjusted to account for delays arising from the “force majeure” event.

Although used in many commercial, building and project contracts, such clauses do not apply to borrowers under loan documents. As result, to the extent the value, income or progress of a property or development project is adversely affected by COVID-19, a borrower will not be able to benefit from an equivalent clause in respect of its obligations under loan documents (even though a party to an underlying transaction document relating to the property or project may be able to rely on such clause in respect of its obligations to the borrower).

Unlike the position of a borrower, there are a number of clauses in loan documents which lenders may rely on to protect their interests in these circumstances.

Clauses found in finance documents which can work against borrowers in the above circumstances

COVID-19 is having and will continue to have, a number of consequences for property investors and developers. Examples include:

Delays in the supply of building materials and shortages of staff at building sites causing delays in completion and cost overruns,
Cashflow issues for operators, tenants and owners of income-producing property, thereby affecting the ability of such parties to pay their debts,
Increasing anxiety amongst consumers affecting confidence and their willingness to buy assets, including property,
Changes in work habits leading to more work from home and reducing the need for office space,
Increasing popularity of online purchases rather than in-store, and
Deferring travel plans and changing travel habits.

These circumstances may lead to:

Failure by borrowers to pay interest under loan documents,
Higher costs of, or delays in, completing projects,
Increased probability of purchasers of off-the-plan properties rescinding sale contracts or being unable to complete their purchases,
Insolvency of builders,
Failure by tenants to pay their rent,
Insolvency of tenants,
Higher vacancy rates in commercial, retail or other types of property

Although these circumstances are outside the control of the borrower, a number of standard clauses in loan documents provide the lender with rights in these circumstances which work against the interests of the borrower.

Many of such clauses are not identified or highlighted to a borrower in the initial term sheet or letter of offer provided by a lender and so borrowers are often unpleasantly surprised when the lender seeks to exercise such rights. This is particularly so where the circumstances leading to the exercise of these rights are beyond the control of the borrower.

Such clauses include:

Negative undertakings

Loan documents will contain a number of negative undertakings on the part of the borrower. These will include restrictions on:

Entering into or varying leases, sale contracts or project documents,
Waiving rights under such documents,
Terminating/rescinding such documents or agreeing to do so, and
Agreeing to extensions of time under building contracts or variations to a project.

Positive undertakings

In addition to restrictions, loan documents will impose obligations on borrowers to:

Pay interest and fees as required,
Satisfy certain financial undertakings,
Enforce their rights under the above types of documents as directed by the lender,
Fund all cost overruns in relation to construction projects, and
Comply with the terms of project or transaction documents.

Failure to comply with these undertakings (irrespective of whether or not such failure is outside the control of the borrower) will generally amount to an event of default.

Events of Default

The list of events of default in loan documents is generally quite long and broad in its scope. As mentioned, many can be triggered by events unrelated to the borrower, e.g the insolvency of the builder in a construction project or the occurrence of a material adverse effect on the borrower (which may arise from circumstances outside its control).

Unless events of default are negotiated (ideally prior to accepting a letter of offer or term sheet), the occurrence of the relevant event will trigger a default. This will not only allow the lender to enforce its security but will also allow the lender to charge default interest (usually 2-3% higher than normal interest but can be much more with certain lenders).

Default interest can be charged in different ways which can make a significant difference to the total amount of interest charged. The default rate as well as how it is calculated should be known prior to accepting a letter of offer or term sheet.

Review rights

Lenders generally reserve their rights to review the terms and conditions of a loan during the course of the loan.

The frequency of such reviews and the circumstances which can trigger such reviews need to be understood prior to accepting a letter of offer or term sheet in order to be able to have the best chance of negotiating such lenders' rights. As is the case with certain events of default, review events can arise in circumstances outside the control of the borrower.

How to deal with the Impact of COVID-19 in relation to finance arrangements

It is clear that the consequences of COVID-19 mentioned above can lead to breaches of undertakings, the occurrence of events of default and the exercise of a lender’s review rights.

None of these are in the interests of borrowers. Those clauses are for the benefit of the lender.

Although the impact of COVID-19 on the property market is still evolving, borrowers should understand how it may affect their finance arrangements. They can then start considering their response to the concerns likely to be raised by their financier’s if/once the relevant consequences arise. By doing so, borrowers will be better placed to:

demonstrate why the circumstances should not be of concern; or
negotiate any changes that may be required to the finance arrangements.

Borrowers’ should also get advice on clauses such as those referred to above when reviewing any letter of offer or term sheet for any proposed new loan facilities they are considering entering into. Dealing with these matters before accepting any such letter of offer or term sheet will maximise their chances of avoiding unpleasant outcomes or, at the very least, make them aware of these clauses so they accept the terms with their eyes open.

We trust you enjoyed this Alert.

Please feel free to contact us about our fixed fee initial term sheet review (FFITR) service which will assist you in minimising the risks associated with signing initial or indicative finance term sheets without fully understanding what is in, or is missing from, them.

Peter Faludi Consulting

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Improve your property finance outcomes – learn what the experts know, avoid unpleasant surprises and save money and time

Peter Faludi — Sat, 11 Jan 2020 23:21:26 +0000

Introducing our Fixed Fee Initial Termsheet Review (FFITR) service.

It's time to improve your property finance outcomes - learn what the experts know, avoid unpleasant surprises and save money and time!

What is FFITR?

FFITR is the cost-effective must-have service borrowers have always needed to improve their development and commercial property financing outcomes but either thought they couldn’t afford or didn’t understand the importance of.

Why you need to get FFITR

Avoid the unpleasant surprises found in finance documents which are often not identified by you or your advisers before it is too late. Remember, finance documents are generally drafted by the financier so they will not necessarily provide you with the outcomes you need or want.

Never assume that finance documents will give you the flexibility you want in dealing with issues associated with your project. Understand that your pre-sales may not count towards satisfying your financier’s requirements. Don’t structure your investment in a way which will prevent you from proceeding with your proposed financing.

What are the benefits of getting FFITR?

We leverage off our 35+ years of legal experience in property financing transactions (acting for borrowers and lenders) to assist borrowers who are seeking development or commercial property finance improve their position under the finance documents to be entered into.

The purpose of our review is to assist borrowers to understand the major non-financial terms associated with their proposed financing (which are either referred to in the term sheet or not expressly referred to but are likely to be included in the formal documentation). We focus on those terms which can have potentially adverse financial or commercial consequences.

Provided at a cost-effective fixed fee, this service will:

improve a borrower’s understanding of the financial and commercial consequences of often difficult to understand legal terms found in finance documents,
assist borrower’s negotiate changes to such terms to minimise their negative consequences,
reduce the total legal costs for borrowers by minimising the time taken by their transactional lawyers in trying to renegotiate such terms when it may be too late to do so, and
make the whole financing process run more efficiently thereby reducing delays in reaching completion.

If you would like to get FFITR this year then please contact me to discuss how we can apply our longstanding experience and expertise in a very cost-effective way to improve your financial outcomes.

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