Buyers are increasingly considering whether they should defer the purchase of their home and accept that they will be renting for longer.

Rental returns are improving for property owners due to the shortage of housing and an increasing population, driven predominantly by higher migration and returning students.

Given the above, many developers may be considering a move from the build-to-sell (BTS) model to the build-to-rent (BTR) model.  The question is whether this is a realistic strategy.

While the concept sounds simple, the reality is very different.

FUNDING ISSUES TO CONSIDER

One of the major impediments for developers, (other than tier-one companies such as Mirvac and Lendlease), to shift into BTR is that its funding has some fundamentally different characteristics relative to traditional BTS construction funding.

The developer will need to have access to significant equity to service debt throughout the project and repay the debt on completion. This is not required in BTS projects where interest is capitalised and repayment is funded from sales.

OTHER ISSUES

The number of counterparties involved in a successful BTR project is greater than in a BTS project. An experienced operator of BTR projects will need to be involved and will likely have significant input in the project design.

If equity investors are bought into the transaction to assist in the funding, the developer’s control of the project is likely to be further diluted.

For these reasons, developers will need to think carefully about whether BTR is really for them.

Feel free to contact me by email if you would like to discuss.

Peter Faludi
Director
Peter Faludi Consulting
Email peter@peterfaludiconsulting.com.au
Connect with me on LinkedIn at Peter Faludi

The post How Easy Is It for Property Developers To Shift into Build-To-Rent Projects? appeared first on Peter Faludi Consulting.

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:

1. 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),
2. Whether:
3. 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
4. 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,

3. 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
4. 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

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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.

Copyright © Peter Faludi Consulting. All rights reserved.

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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:

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

Peter Faludi Consulting

Connect with me on LinkedIn

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Email  peter@peterfaludiconsulting.com.au

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.

Copyright © Peter Faludi Consulting. All rights reserved.

The post How to improve your property funding outcomes in 2021 appeared first on Peter Faludi Consulting.

December 2020

The Property Boom – Things to watch in 2021

As the year most of us would like to forget draws to a close, is the stage set for a great 2021?

While many of the regulatory changes made during the year were temporary, some will continue to impact the property market in 2021. In addition, the ongoing reform agenda will raise further questions for property investors as to how to carry on their business.

In this Alert, we discuss some of the 2020 legal changes (actual and proposed) which will impact property investors and developers in 2021 and beyond:

• The Mandatory Leasing Code Hangover – what it means to investors
• Development and construction industry reforms to increase costs and change the industry
• Proposed NSW stamp duty law reforms may not be as good as they seem

Peter Faludi Consulting

Connect with me on LinkedIn

https://www.linkedin.com/in/peter-faludi/   

Subscribe to our Website

https://www.peterfaludiconsulting.com.au

Call    0401 500 528

Email  peter@peterfaludiconsulting.com.au

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.

Copyright © Peter Faludi Consulting. All rights reserved.

The post The Property Boom – Things to watch in 2021 appeared first on Peter Faludi Consulting.

November 2020

New COVID-19 leasing changes – are you better off?

Unresolved questions for property investors and tenants

On 23 October 2020, the NSW Government released the Retail and Other Commercial Leases (COVID-19) Regulation (No. 2) 2020 NSW, (Regulation No.2). This regulation extends (until 31 December 2020) and modifies the previous regulations introduced to implement the Commonwealth Mandatory Leasing Code. Regulation No. 2 became effective from 24 October 2020

The original Regulation (Regulation No.1) expired on 24 October 2020. It raised a number of questions for landlords and tenants (and their financiers). These included:

• What happens to negotiated arrangements on expiry of Regulation No.1?
• How can property investors protect their interests where tenants fail to provide information required to determine acceptable rent relief?
• Can parties seek to negotiate further rent relief or other changes if their circumstances change during the “prescriber period”?
• What happens if negotiations are not completed by the date of termination of the Regulation?

In this Alert, we consider

• Has Regulation No.2 dealt with the above questions? and
• Do the changes improve the position of property investors and their financiers’?

Connect with me on LinkedIn

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Subscribe to our Website

http://www.peterfaludiconsulting.com.au

Call    0401 500 528

Email  peter@peterfaludiconsulting.com.au

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.

Copyright © Peter Faludi Consulting. All rights reserved.

The post Are you better off under new leasing changes? appeared first on Peter Faludi Consulting.

June 2020

NSW Building Reforms – Developers access to finance to be affected

On the 3^rd and 4^th of June, the NSW Parliament passed two pieces of legislation as part of the reforms initiated in 2019 to deal with issues relating to the quality of construction and other problems evident in the building industry, especially in respect of residential apartments.

The legislation passed was the Design and Building Practitioners Act 2019 (NSW) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW).

Some of these reforms take effect immediately while others will become effective on 1 September 2020 and 1 July 2021.

In addition to the passing of the above legislation, the NSW Building Commissioner has put out to tender the online registration and information systems to be put in place to enable:

• All information relating to developers, builders and others involved in the construction industry (including information regarding previous projects in which they have been involved) to be stored on one database; and
• A rating system to be developed in respect of participants in the construction industry.

As mentioned in a number of our previous Alerts, (see most recently our February 2020 and November 2019 editions), the proposed reforms will have a major effect on the property development industry. Not all of these will be positive.

In this Alert we discuss:

• The new statutory duty of care which is now in force; and
• Consequences to developers in respect of their current and future financing arrangements.

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

NEW STATUTORY DUTY OF CARE

As recently reported in the Australian Financial Review, the Design and Building Practitioners Act 2019 (NSW) (DBPA) contains a new statutory duty of care in favour of “owners”. This duty of care is now in force.

What is the new duty of care?

Under the DBPA:

“A person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects:

1.  in or related to a building for which the work is done, and
2. arising from the construction work.

The duty of care is owed to each owner of the land in relation to which the construction work is carried out and to each subsequent owner of the land.”

This duty of care entitles the persons to whom the duty is owed to damages for breach of the duty.

The duty of care is owed to an owner “whether or not the construction work was carried out:

1. under a contract or other arrangement entered into with the owner or another person, or
2. otherwise than under a contract or arrangement.”

Importantly, the duty:

1. applies irrespective of when the relevant contract or arrangement was entered into,
2. cannot be contracted out of,
3. applies not only to construction work undertaken after the commencement of the DBPA but can apply to buildings up to 10 years old as at the commencement of the DBPA (in other words it has retrospective operation), and
4. is in addition to any other duties or remedies in favour of or available to owners.

What buildings does the new duty of care apply to?

Although the DBPA expressly includes residential building work (as defined in the Home Building Act 1989 (NSW)) as being the subject of the duty, the types of buildings to which the duty applies can be extended by regulations, which have not yet been issued. This creates uncertainty as to the types of projects to which the duty relates.

Who is the duty owed to?

As mentioned above, the duty is owed to “owners” and subsequent owners. The term “owner” is defined to include:

• every person who is jointly or severally or at law or in equity entitled to the freehold estate in the land,
• “every person who jointly or severally or at law or in equity is entitled to receive, or receives, or if the land were let to a tenant would receive, the rents and profits of the land, whether as beneficial owner, trustee, mortgagee in possession or otherwise”, and
• “other persons prescribed by the regulations for the purposes of this definition”.

This could extend the parties able to take action for breach of the duty to unitholders in a unit trust which owns the building, joint venture parties and lenders (even though they may not have enforced their security).

The extremely wide definition of owner substantially increases:

• the range of persons to whom damages could be payable beyond the immediate contractual party for whom the building work is done, and
• the possible amount of damages payable due to the different economic consequences which could arise in respect of each “owner”.

By whom is the duty owed?

The duty is owed by each person who “carries out construction work” in relation to a building.

The term “construction work” means:

• building work, which extends to construction of a building, making alterations or additions to a building and repair, renovation or protective treatment of a building,preparation of designs for the building work,“manufacture or supply of building products for the building work”, and
• “supervising, co-ordinating, project managing or otherwise having substantive control over the carrying out of any of the other elements of construction work”.

As a result, nearly all contractors, sub-contractors, consultants and suppliers involved in a development are now subject to the new statutory duty.

This additional risk for such parties is likely to increase insurance costs and project costs for new projects.

CONSEQUENCES TO DEVELOPERS IN RESPECT OF THEIR CURRENT AND FUTURE FINANCING ARRANGEMENTS

Regulations

As mentioned in our earlier Alerts, a large number of significant matters which developers, designers, builders and others involved in property development will need to know in order to understand the scope of the new laws and comply with their requirements will be set out in regulations. The regulations will cover such fundamental matters as the types of buildings to which the new regime applies.

Until drafts of such regulations are issued, it will be difficult for participants in the development industry to fully understand how the new regime will impact their business and how to prepare for it.

Rating System and Database: Increased scrutiny

The NSW Building Commissioner has put out to tender the online registration and information systems to be put in place to enable all information relating to developers, builders and others involved in the construction industry (including information regarding previous projects in which they have been involved) to be stored on one database.

Details of the database are not yet fully known.

The availability of such a database will enable both purchasers and financiers to undertake more detailed due diligence on developers and others involved in a project prior to committing to be involved in the project.

We assume this information will form the basis on which ratings will be awarded to participants in the industry.

Adverse impact on sales

To the extent developers, designers and building practitioners do not meet the new standards to be imposed by the new regime, or will not receive the required quality rating, their business is likely to suffer. They will experience increased difficulty in winning projects and, in the case of developers, in achieving pre-sales.

Adverse impact on financing

• In the case of future projects or current projects which have lots which remain unsold, the above possible adverse impact on sales may negatively affect the value of projects and decrease their future marketability.  This may lead to greater losses for the developer and financier involved.
• Developers (with which financiers have existing facilities) may be subject to damages claims under the new statutory duty of care in respect of previous projects (potentially up to 10 years old). This may trigger:
  • events of default under loan documents for current facilities resulting in default interest costs and potential enforcement by the financier,
  • or review rights of financiers under such facilities.
• Due to the expanded information which will be available on the above-mentioned database, financiers may not wish to deal with developers that do not achieve the required quality rating or where the information on the database relating to the developer or any of the key contractors and consultants involved in a project discloses potential problems.
• Loan documents may be amended to include additional conditions precedent, information and other undertakings, events of default and/or review rights, making them more onerous for developers.
• Loan to value ratios and loan to development cost ratios may be reduced, resulting in developers having to find more equity for projects.
• A greater number of financiers (both bank and non-bank lenders) are likely to limit the developers and design and building practitioners they wish to deal with to those with a good track records, who are fully compliant with the new regime and are attributed a good quality rating under the new regime.

Although the reforms are important, the financial costs associated with compliance and the potential liability to which developers, builders and others involved will be exposed in respect of projects (up to 10 years old) may, given their already fragile financial position, result in some parties leaving the industry.

Please feel free to contact us about any loan facilities, current or future, in respect of which we may assist you in navigating the increasingly complex provisions found in such documents and help you in negotiating better commercial outcomes in your finance arrangements.

Peter Faludi Consulting

Connect with me on LinkedIn

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Call    0401 500 528

Email  peter@peterfaludiconsulting.com.au

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.

Related Links:

• Can COVID-19 infect your finance arrangements? 
• The Downside of Proposed NSW Building Reforms
• Improve your property finance outcomes – learn what the experts know, avoid unpleasant surprises and save money and time

Copyright © Peter Faludi Consulting. All rights reserved.

The post NSW Building Reforms – Finance will be harder to find appeared first on Peter Faludi Consulting.

May 2020

The domino effect of the Covid-19 Leasing Changes

Welcome to our newly named Real Estate Finance and Investment Alert. The addition of the reference to “Finance” is to better reflect the nature of our business, which is to assist commercial property investors and developers improve their finance and investment outcomes.

We do this by:

1. guiding them through the complexities and often misunderstood legal terms of their funding documents to ensure they:

1. are aware of the commercial consequences of such terms, including the impact on their proposed investment structure, and
2. have the best opportunity to negotiate such terms before being bound by them, and

2. assisting them in negotiating changes to term sheets and formal documentation to achieve their desired commercial outcomes.

We also offer clients the opportunity to meet with potential funders.

Following on from our Special Edition in April dealing with the NSW Regulations implementing the Federal Government’s Mandatory Code of Conduct relating to Commercial Leasing (Code) – see HERE, it has become clear that the objectives of the Code and Regulations are not necessarily being realised.

The problems

The main problems relating to the Code are:

• some tenants are not complying with their good faith obligations under the Code,
• tenants who are not entitled to benefit from the Code are nonetheless using it as justification for reductions or withdrawals of rent and are ignoring the terms of their leases,
• the Code does not sufficiently account for the circumstances of landlords, and
• the lack of uniformity between the State and Territory Regulations passed to date to implement the Code is creating difficulties for both landlords and tenants which operate in more than one jurisdiction to agree on one set of changes.

The above matters, combined with the general economic uncertainty flowing from COVID-19, are causing significant short and long-term problems for landlords (including in respect of their financing arrangements).

In this edition of our Alert, we consider:

• practical difficulties faced by commercial property investors arising from Covid-19 and the Code, and
• some current trends in the property finance market.

PRACTICAL DIFFICULTIES FACED BY COMMERCIAL PROPERTY INVESTORS ARISING FROM COVID 19 AND THE CODE

Reduced income

The Code has emboldened tenants to disregard their legal obligations under existing leases.

The fundamental importance of the rule of law and compliance with binding contractual terms underpins the confidence of all parties which enter and operate in the Australian property market. It is one of a number of factors that makes Australia an attractive destination for offshore investors.

In the Covid-19 world, the Code and its associated State and Territory regulations have overridden the terms of existing leases. Although the reason for doing so is understood and justified, the practical consequences of this were perhaps not fully appreciated.

Although the Code’s overarching principle is for parties to act in good faith and in a transparent manner to achieve mutually acceptable outcomes, it is clear that the leasing principles benefit tenants and not landlords.

Although some States have expressly acknowledged that in determining the level of rent relief to be agreed the financial ability of the landlord to offer rent relief (including any relief provided to the landlord by its financiers) must be taken into account, such provision is the exception rather than the rule.

As increased unemployment, lack of consumer confidence and escalating vacancy rates continue, the increased difficulty for a landlord to find an alternative tenant (should an existing tenant leave or the landlord determine to evict the tenant where the Code does not apply) has worsened the position of landlords in their negotiations with tenants.

Increased costs

The avalanche of tenant requests or demands for rent relief has resulted in additional costs being incurred by landlords. These costs include:

• diversion of management time from running and growing their business to focussing on dealing with these requests/demands, and
• for larger landlords, the costs of establishing committees or similar groups to deal with rent relief requests/demands, including recruiting additional resources, establishing protocols and procedures and engaging external advisers where necessary.

The need to maintain social distancing and enhanced hygienic standards and implement government-backed protocols/rules in relation to such matters can also involve significant expenditure by landlords.

Adverse Valuations

Valuers, vendors and purchasers are finding it difficult to value commercial property due to the uncertainty associated with Covid-19 and the fall-out from the Code.

Without knowing the rent that can be achieved from a property or the period for which such rent will be paid, commercial property values have been, and will continue to be, adversely affected. In addition, valuations have or will become less useful to vendors, purchasers and lenders due to the valuation either referencing a broad range of possible values, containing expanded disclaimers, removing reliance wording and/or potentially giving the valuer the right to withdraw the valuation at any time.

The uncertainty as to when life will go back to “normal” (including what “normal” will look like) as well as the impact of the Code, both in the short term and the long term, will prolong adverse valuations and their flow-on effects.

The possible long-term shift in working habits

There has been a lot of commentary on the possibility that working from home will become more accepted even after the pandemic is over. Whether or not this will have a long-term effect on the nature and location of office buildings will not be known for some time.

Nonetheless, commercial property investors will need to consider this matter and determine how/if it may affect their current portfolio and future projects. This raises further market uncertainty.

Fundraising adversely affected

Given the above matters, it is not surprising that the ability of landlords to raise funds has been adversely affected.

Without clarity around income streams, valuations and the legal position of landlords in respect of tenants’ lease obligations and landlords’ rights, investors are likely to hold back on their property investment decisions.

Changes to FIRB rules requiring all investments in property to be subject to approval, which can take up to 6 months, is another possible obstacle for landlords seeking to raise capital or sell-down their interest in property in the current market.

Don’t forget your financiers

Although not unexpected, the focus on dealing with tenants seeking rent relief is, in many (if not most) cases, diverting the attention of landlords from another key stakeholder in their business, their financier.

In most finance arrangements relating to commercial property. variations of leases (or at least material leases) require financier approval. In addition, failure to pay interest or satisfy financial covenants (such as interest cover ratios) are events of default which can trigger enforcement by the financier and the application of default interest.

If new rent arrangements agreed with tenants have a material adverse effect on the landlord, this can also trigger an event of default or financiers' review rights.

As each of these will have a major adverse consequence to a landlord, it is recommended that landlords discuss their position with their financiers before agreeing to new arrangements with their tenants.

As the 4 major banks have an average exposure to commercial property of approximately 25% of their loan book, they will be keenly interested in understanding what rent relief arrangements are proposed. They are also likely to be receptive to considering amendments to loan facilities to minimise loans going into default.

SOME CURRENT TRENDS IN THE PROPERTY FINANCE MARKET

Based on our research, the following are some of the trends that have become apparent in the commercial property finance market as a result of Covid-19 and the Code:

• Financiers are willing to consider deferring compliance with financial covenants and obtaining fresh valuations and are open capitalising interest (although ultimately this will cost the borrower more than if it was able to keep paying interest as originally required),
• Banks and Non-bank lenders (NBL’s) are more conservative in their lending,
• Banks are rationing capital,
• As mentioned above, Valuations are difficult to obtain due to market/economic uncertainty and are not likely to be as useful, e.g broad price ranges and/or more extensive disclaimers by valuers and/or non-reliance clauses,
• Pricing by both banks and NBL’s have increased due to additional risk, including issues arising from the Code and Regulations,
• Pricing differentials between banks and NBL’s have increased,
• LVR’s are dropping,
• ICR’s are increasing, and
• Some NBL’s are not lending due to higher risk concerns and/or unavailability of funds.

Given the above, it is clearly important for a landlord to work with its current financier to ensure that any changes to leasing arrangements are acceptable to the financier. Refinancing of any existing loan (in the current market) is likely to be very difficult, if not impossible and if it was available it would no doubt be on more onerous terms.

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;

• understand your financier’s rights under your loan arrangements in the current challenging climate; and
• help you in determining the strategy to adopt in your discussions with your financier.

Best Regards, Peter

Peter Faludi Consulting

Connect with me on LinkedIn

https://www.linkedin.com/in/peter-faludi/   

Subscribe to our Website

http://www.peterfaludiconsulting.com.au

Call    0401 500 528

Email  peter@peterfaludiconsulting.com.au

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.

Related Links:

• Has NSW clarified the Mandatory Leasing Code?
• Borrowers beware – financier’s rights may not be affected by COVID-19 policies
•  Improve your property finance outcomes – learn what the experts know, avoid unpleasant surprises and save money and time

Copyright © Peter Faludi Consulting. All rights reserved.

The post The domino effect of the Covid-19 Leasing Changes appeared first on Peter Faludi Consulting.

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

Connect with me on LinkedIn
https://www.linkedin.com/in/peter-faludi/  
Subscribe to our Website
http://www.peterfaludiconsulting.com.au
Call    0401 500 528
Email  peter@peterfaludiconsulting.com.au

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.

You may also like:

• The Downside of Proposed NSW Building Reforms
• The Impact of Building Industry Reforms on Financing
• Getting Ready for the Next Wave of Development Projects

Copyright © Peter Faludi Consulting. All rights reserved.

The post Can COVID-19 infect your finance arrangements?  appeared first on Peter Faludi Consulting.

The downside of proposed NSW Building Reforms

The NSW Minister for Better Regulation and Innovation, Kevin Anderson, recently released further proposals (including a rating system for developers, builders and certifiers) to be considered as part of the new regulatory regime intended to improve building standards. The regime is to be adopted once the NSW Government is able to get agreement from opposition parties in the NSW upper house.

As mentioned in a number of our previous Newsletters, (see most recently our November 2019 edition), the proposed reforms will have a major effect on the property development industry. The proposal put forward by Mr Anderson has further highlighted this.

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

• The nature of the proposed new regime
• The consequences of the regime for:
  - Developers and builders
  - Purchasers
  - Financiers

NATURE OF PROPOSED NEW REGIME

Main new requirements

The proposed new regime is to apply to building and development in NSW and is currently set out the Design and Building Practitioners Bill 2019 (NSW)(Bill). Although the Bill was passed by the NSW Legislative Assembly on 13 November 2019, it was withdrawn from the Upper House late last year due to lack of agreement by opposition and minor parties in the NSW Upper House.

In addition to the Bill, regulations will deal with a large number of significant and operational matters which are only referred to in the Bill at a high level. No draft regulations are currently available.

Once finalised, it is likely that similar reforms will be rolled out in the other states and territories.

The Bill includes the following:

• registration requirements for design, principal design and building practitioners (each as defined in the Bill),
• a requirement for compliance declarations to be provided by such practitioners in relation to design and building works. The declarations will include verification by the relevant practitioner that the design and works are compliant with the Building Code of Australia and other applicable requirements as may be specified in the regulations,
• limits on who can issue compliance declarations – must be registered practitioners,
• a requirement that practitioners must provide verification that they are covered by adequate insurance,
• a potential prohibition on the issue of building certificates without relevant compliance declarations first having been provided to the issuing authority,
• a potential prohibition on the issue of Occupation Certificates in respect of a building to which the Bill applies until all required compliance declarations are provided to the relevant certifier,
• a prohibition on registered practitioners or other persons entering into understandings under which the practitioner is to act other than impartially in relation to the issue of a declaration,
• an extended statutory duty of care to exercise reasonable care to avoid to economic loss caused by defects. This duty extends to each owner of the land for which the works were carried out and each subsequent owner. In addition, the duty cannot be contracted out of or delegated to someone else. Importantly, this duty will have retrospective application and it appears that, in any action enforcing the duty, a reverse onus of proof may apply to the relevant practitioner(s),
• extensive investigation, information gathering and similar powers for “authorised officers” in respect of monitoring and enforcing compliance with the regime, and
• the imposition of penalties.

Impact of Regulations

As mentioned above, a large number of significant matters which developers, designers and builders will need to know in order to comply with the new law will be set out in regulations to the Bill. Until drafts of such regulations are issued, it will be difficult for participants in the development industry to fully understand how the new regime will impact their business and how to prepare for it.

The regulations will cover such fundamental matters as:

• the types of buildings to which the new regime applies,
• the form and content of the various compliance declarations,
• the documents required to accompany the compliance declarations,
• when and to whom the compliance declarations need to be provided,
• the insurance requirements to be met in order to comply with the Bill.

It is likely the rating system proposed by the Government will also be dealt with by the Regulations.

STOP ORDERS, PUBLISHED WARNING NOTICES AND OTHER MATTERS

Stop orders

The Bill gives powers to the Secretary of the NSW Department of Customer Service to issue Stop Orders to a building practitioner or the owner of land on which works are being carried out to stop the works if, in the opinion of the Secretary:

1. “the building work is, or is likely to be, carried out in contravention of the Act; or
2. the contravention could result in significant harm or loss to the public or occupiers, or potential occupiers, of the building to which the work relates or significant damage to property.”

It appears such Stop Orders could be effective for upto 12 months unless revoked earlier.

Published warning notices

In addition to Stop Orders, the Secretary will have the power to publish a notice, warning persons of particular risks involved in dealing with:

1. “a specified registered practitioner or former registered practitioner; or
2. any other person the Secretary reasonably believes may have breached the Act or regulations.”

Proposed Rating System

In Kevin Anderson’s release of 20 January 2020, he put forward additional factors which purchasers could consider when assessing their potential risks in dealing with particular developers or builders.

He suggested a quality rating system for builders, certifiers and developers which would allow NSW Building Commissioner the power to block the issue of the occupation certificate for a project if the project was deemed to be unsafe.

Failure of the developer to obtain an occupation certificate would, if it was not able to be obtained prior to the sunset date specified in the sales contracts for the project, require a refund of deposits to purchasers.

CONSEQUENCES OF PROPOSED REGIME

Developers and builders

Although the regulations to the Bill could extend its operation to any type of building, it is clear that the proposed regime is intended to substantially raise the standard and quality of building of high-rise residential projects.

Stringent approach

As you will have seen from the above high-level summary of the current Bill, the NSW Government has adopted a very stringent approach to regulation. It is essentially warning that unless the design and building practitioners involved in these types of developments meet the required standards and stand by their project for the benefit of current and future owners, they will eventually be unable to carry on their business.

Additional costs and uncertainty

The proposed changes will result in additional costs being incurred by developers, designer and building practitioners, particularly in respect of high-rise residential developments. The uncertainty as to the timing and nature of a number of these changes will place additional pressure on developers and such practitioners and potentially make it harder to undertake these types of developments.

Adverse impact on sales and finance

To the extent developers, designers and building practitioners do not meet the new standards to be imposed by the new regime, or will not receive the required quality rating, their business is likely to suffer. In addition to increased difficulty in winning projects, financiers may not wish to deal with those developers and practitioners thereby making it harder for them to continue their business.

Start getting ready for the new regulatory world

Developers, designers and building practitioners will need to ensure they get advice on the various regulatory changes that may impact their business as soon as possible to make sure that they:

• understand which, if any, changes will affect them or individual projects,
• structure or change the type of projects they are involved with to account for the reforms,
• factor the costs of the changes into their feasibilities for future projects,
• adjust their processes to be compliant with the new rules once they take effect, and
• demonstrate to their financiers that they are on top of these issues and can satisfy any requirements their financier may have in relation to the changes.

Consequences of the proposed rating system

As the proposed rating system will be based on historic information, it is likely to adversely impact on existing developers, designers and building practitioners who may not have an unblemished track record, even if the above preparations are undertaken.

In addition, for new participants in the industry, it will be difficult to get a rating until they successfully undertake a number of projects. This may act as a barrier to entry for new participants, which will have various commercial consequences to the industry.

Purchasers

Although, on the face of it, the new regime should be good news for purchasers, there are some significant possible adverse consequences as well. These are:

Delays in getting to settlement

• To the extent a Stop Order is issued or an occupation certificate is not issued in relation to a project, a purchaser will suffer potentially large delays in completing its purchase. Indeed, settlement may not occur at all if the relevant issues cannot be addressed. This is likely to have adverse flow-on effects in relation to the purchaser’s financing as well as the sale of its current residence.

Increased difficulty in getting finance

• The purchaser’s financiers may require a new valuation (which may prove to be less than the original valuation obtained thereby reducing the amount of the loan it will provide) or withdraw from the financing altogether due to the delay or its concerns in relation to the building.

Impact on sale of existing property

• To the extent a purchaser has entered into a contract to sell an existing property to fund the purchase of its new apartment, he/she will need to consider whether the delay in completing the purchase of the new apartment will allow the purchaser of the existing property to rescind their contract.

Refund of deposit may not cover all losses

• Although a purchaser may receive his/her deposit from the developer of a project which is no longer proceeding or is extensively delayed due to the issue of a Stop Order or failure to obtain an occupation certificate, this may not be sufficient to cover the loss the purchaser will incur see above.

 Financiers

Financiers will also be subject to various business challenges arising from the proposed new regime. These include:

Increased potential for losses

• To the extent they have financed a project which is not completed by the time the new regime comes into effect, they face the risk that the off the plan purchasers will be entitled to rescind their contracts due to the issue of a Stop Order or the failure of the developer to obtain an occupation certificate.
• The value of projects suffering the above consequences will decrease and their future marketability will be difficult.  This may lead to greater losses for the financier involved.

Increased competition for good borrowers

• A greater number of financiers (both bank and non-bank lenders) are likely to limit the developers and design and building practitioners they wish to deal with to those with a good track records, who are fully compliant with the new regime and are attributed a good quality rating under the new regime. This may lead to consolidation in the development sector as well as the non-bank lending sector and change the types of residential projects financiers are prepared to finance.

Need to reassess due diligence processes and documentation

• Financiers will need to review their credit criteria, the scope of their developer borrower due diligence and their standard documents to account for the new regime.

It is clear that the new regime for the building and development sectors in NSW, once adopted, will have a major impact on everyone involved in the development sector. Given the potential negative consequences of the regime, it will be interesting to see how the NSW government manages the reform process to minimise such consequences.

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 really knowing what is in, or is missing from, them.

Peter Faludi Consulting

Connect with me on LinkedIn

https://www.linkedin.com/in/peter-faludi/   

Subscribe to our Website

http://www.peterfaludiconsulting.com.au

Call    0401 500 528

Email  peter@peterfaludiconsulting.com.au

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.

You may also like: 

• Getting Ready for the Next Wave of Development Projects
• 2020 – Do you have perfect vision for the year ahead?
• Become a smarter borrower. Click here for the Top 10 tips to do so.

Copyright © Peter Faludi Consulting. All rights reserved.

The post The Downside of Proposed NSW Building Reforms appeared first on Peter Faludi Consulting.

Those reforms are not the only ones which will have a major impact on developers.

Reforms relating to illegal phoenixing activity as well as proposed changes to strata laws in many states will also need to be considered by developers and their financiers, not only at the beginning of their projects but also at the end.

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

• The importance of reputation
• The nature of proposed reforms to illegal phoenixing - SPV's Beware; and
• Upcoming changes to the New South Wales Strata laws.

THE IMPORTANCE OF REPUTATION

NSW Building Commissioner David Chandler has recently been quoted as saying that his preference is to achieve a cultural shift so that developers and builders take on more responsibility rather than to introduce substantial new regulation. He has also indicated that the nature of future reforms in NSW may be different for those developers and builders who take long term responsibility for their work relative to those that don’t.

I have always been of the view that the ultimate protection for a party to a transaction, whether that be a loan, the purchase of an apartment or even dealing with a retailer is the reputation of the person or organisation you are dealing with.

A clear demonstration of this was highlighted in the AFR on 5 September 2019 where it was reported that Mirvac had itself started the process of removing hazardous cladding from one of its office buildings. It did not wait for government help and clearly wanted to do the right thing by its tenants.

It obviously takes time to build up a good reputation but at the end of the day, it significantly pays-off in so many ways.

If David Chandler’s approach is finally adopted, for developers and builders with good reputations, the reforms will not have a significant impact on their business.

For others, the reforms may have a significant impact which may be hard to accept.

THE NATURE OF PROPOSED REFORMS TO ILLEGAL PHOENIXING - SPV's BEWARE

In our last Alert, we raised the possibility of a crackdown on the use by developers of special purpose vehicles (SPV’s). Moves in this direction have already started.

Draft legislation has been or will be introduced in the Australian Capital Territory aimed specifically at minimising the ability of building companies to walk away from their responsibilities when they go into administration or are wound up. Such legislation may also impose personal liability on directors of such companies where the company fails to carry out rectification work.

Federally, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 is currently before the Commonwealth Parliament for debate. The Bill introduces a concept of “a creditor-defeating disposition”.

Creditor defeating dispositions

A creditor defeating disposition is described as:

A disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.

Such a disposition is prohibited if:

it is made at a time when the company is insolvent, or, because of the disposition, the company

• immediately becomes insolvent;
• enters external administration within the following 12 months; or
• ceases to carry on the business altogether within the following 12 months.

Consequences of creditor defeating dispositions

Such transactions may be voidable and ASIC will have the ability to make orders to recover – for the benefit of a company’s creditors – the company property disposed of, or the benefits received under, a voidable creditor-defeating disposition.

This may have a negative impact on financiers where they are paid from the proceeds of such dispositions.

Criminal and civil penalties are proposed not only for directors and officers of the company but also persons who “procure, incite, induce or encourage a company to make a prohibited creditor-defeating disposition”.

There will be some safe harbour provisions in the legislation as well as some exceptions.

It is proposed that the concept of a creditor defeating disposition will be extended to the creation by the company of a right or other interest in property in favour of another person. In addition, in some circumstances, the concept will reflect the economic substance of a transaction.

For example, where a company disposes of property to one person and that person pays some or all of the consideration to a third party, the company will be taken to have made:

• a disposition of the property actually transferred; and
• a disposition of the consideration paid to the third party.

Given the consequences of these proposed laws, developers will need to carefully consider all dealings with a project, (including the lots created), throughout the course of the project and especially at the end where transfers may occur which could trigger the application of these provisions.

UPCOMING CHANGES TO THE NEW SOUTH WALES STRATA LAWS

The New South Wales Strata Laws will soon be amended, with the Conveyancing Legislation Amendment Act 2018 awaiting proclamation.

One of the main changes which will affect developers and be relevant to their financiers is the additional rights available to purchasers to rescind off-the-plan sale contracts.

Material particulars

These additional rights revolve around the concept of “material particular”. A material particular is defined as including, but is not limited to, the following:

(a)  a change to the draft plan of subdivision or draft strata plan, included in the disclosure
statement attached to the contract,

(b)  a provision of draft by-laws

(c)  an easement or covenant

(d)  changes to the schedule of finishes

that in each case will, or are likely to, adversely affect the use or enjoyment of the subject lot, and

(e)  any other matter prescribed by the regulations,

but does not include matter excluded by the regulations.

Additional vendor obligations and purchasers’ rescission rights

Vendors will be obliged to notify purchasers (using an approved form) at least 21 days before completion of a sale of a lot if the vendor becomes aware that the disclosure statement:

• was inaccurate in relation to a material particular at the time the contract was signed; or
• has become inaccurate in relation to a material particular after the contract was signed.

A purchaser may, after receiving the above notice, rescind the contract if the change(s) notified is/are such that the purchaser:

a)     would not have entered into the contract had the purchaser been aware of the change, and

b)     would be materially prejudiced by the change.

Vendors will also be required to serve a copy of the registered plan on the purchaser before completion together with any other document that was registered with the plan.

A purchaser may, after receiving such plan and other documents, rescind the contract if the disclosure statement includes any inaccuracy in relation to a material particular such that the purchaser:

a)     would not have entered into the contract had the purchaser been aware of the inaccuracy, and

b)     would be materially prejudiced by the inaccuracy.

It is not clear how these consequences need to be established for a purchaser to be able to exercise its rescission rights.

These additional rescission rights are likely to be of concern to a developer’s financiers and result in additional reporting and other requirements being imposed on developers by their financiers.

For tips on how to improve a borrower’s position under finance documents and enhance its reputation with lenders and other parties to a transaction please download my free Top 10 Tips to improve your Australian Property and Development Finance Outcomes – There is much more to it than just numbers available on our Website at www.peterfaludiconsulting.com.au

If you would like to discuss any of the above please feel free to contact us.

Peter Faludi Consulting

Connect with me on LinkedIn

https://www.linkedin.com/in/peter-faludi/  

Subscribe to our Website

http://www.peterfaludiconsulting.com.au

Call  0401 500 528

The post The importance of Reputation on Reforms Affecting Property Developers appeared first on Peter Faludi Consulting.