Uncategorized – Peter Faludi Consulting

Unfair Contract Laws to Impact Development and Property Financing

Peter Faludi — Mon, 08 Apr 2024 05:56:49 +0000

UNFAIR CONTRACT LAWS TO IMPACT DEVELOPMENT AND PROPERTY FINANCING

April 2024

Changes to Unfair Contract laws, which commenced in November 2023, are likely to impact the availability and terms of development and commercial property finance for small and not so small developers and commercial property buyers.

When does the amended law apply

The broadened scope of contracts (including finance documents) to which the laws apply is likely to result in one of two consequences for developers and commercial property buyers which have:

less than 100 employees; or
a turnover of less than $10m in the last financial year, and

who wish to borrow funds involving amounts of $5,000,000 or less.

The consequences of the above changes on financing will depend on how financiers wish to deal with the impact of the amended laws.

The penalties and other consequences for financiers who breach the amended laws are more onerous and substantial than was previously the case.

Can financiers avoid the new rules?

Financiers wishing to avoid the application of the amended laws may decide either to:

limit the type of borrowers they wish to fund to those which have more than 100 employees and a greater than $10m turnover in their last financial year,
not be involved in loans where the loan amount is less than $5m, or
not use standard contracts to document loans and allow borrowers to negotiate terms which have a potentially significant impact on the borrower (not just terms which deal with minor or insubstantial matters).

What do the amended laws mean for borrowers?

Outcomes 1 and 2 would make it harder for smaller developers and commercial property investors to find finance. However, in the competitive finance market, where deals are not as plentiful as in the past, financiers are likely to be under pressure to fund deals and so may not wish to reduce their potential universe of clients.

Consequently, the legal changes should open the door for smaller borrowers to be in a better position to negotiate the terms of their financing arrangements.

A mandate for review and negotiation and a win for borrowers

The Ethos of my business has always been that borrowers need to have all finance documents provided to them by a lender (including the initial indicative letter of offer or term sheet) reviewed by a finance law specialist with a view to understanding what terms mean and negotiating those terms prior to signing anything.

I am pleased that the Federal Government has bolstered the existing unfair contract laws so as to essentially mandate that review and negotiation be part of the process followed by both the borrower and financier when putting in place financing arrangements. Financiers are now more likely to want to avoid being caught by the amended laws.

In my view this is a big win for borrowers and I look forward to assisting them in reviewing and negotiating the terms of their future finance arrangements.

If you would like to learn more about the above, please feel free to make contact or connect with me.

Peter
Director/Lawyer
Peter Faludi Consulting

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

http://www.peterfaludiconsulting.com.au

Email peter@peterfaludiconsulting.com.au

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NEW BUILDING LAWS EXPAND THEIR REACH

Peter Faludi — Thu, 06 Jul 2023 01:21:48 +0000

The changes to the regulatory regime applicable to the construction industry in New South Wales, which started in 2020-21, are still not fully understood in the industry. This is particularly the case in relation to repairs and renovations of strata residential buildings.

The purpose of the new laws was to improve the standard of construction of residential apartment buildings by requiring such things as:

Building plans and designs to be registered,
Design and building practitioners to have minimum qualifications and be registered,
Adequate insurances to be in place for such practitioners.

DUTY OF CARE EXPANDED

The laws also introduced a new statutory duty of care applicable to persons who carry out construction work requiring them to “exercise reasonable care to avoid economic loss caused by defects”.

While initially focused was on Class 2 buildings (residential apartments), it was always known that the laws could be extended to other classes of building.

Recent case law has expanded the reach of the statutory duty of care so that it applies to any class of building. It is not limited to construction work in respect of Class 2 buildings. This will probably come as a surprise to many in the industry.

Case law has also highlighted that the type of parties who may be subject to the duty of care is very broad and can potentially extend to directors of a builder or developer, senior management involved in a project, and perhaps even financier representatives who sit on project control groups.

LAWS TO COVER MORE TYPES OF BUILDINGS

From 3 July 2023, the laws were extended to Class 3 buildings (being any residential building other than freestanding houses or townhouses) and residential/aged care buildings.

In times of an acute housing shortage, the increasing ambit of these laws may add to the problem. Of course, if the building/construction work is done properly and all the requirements of the law are satisfied, the ever-expanding reach of the laws should not be a problem.

Time will tell.

Contact me by email if you would like to discuss.

Peter Faludi
Director
Peter Faludi Consulting
peter@peterfaludiconsulting.com.au
https://lnkd.in/gwZ6Utu

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Are you better off under new leasing changes?

Peter Faludi — Sun, 01 Nov 2020 00:57:50 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

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’?

HAS REGULATION NO.2 DEALT WITH THE ABOVE QUESTIONS?

What happens to negotiated arrangements on expiry of Regulation No.1?

There is no clear answer to this.

Due to the change in the JobKeeper program from 28 September 2020, tenants now need to satisfy the eligibility tests contained in Regulation No.2 (which includes the satisfaction of the JobKeeper 1.0 and 2.0 requirements) to continue to be entitled to rent relief.

While tenants who continue to satisfy each of the tests will continue to be entitled to seek rent relief, the drafting is unclear in other circumstances. Will previously agreed rent relief (which extends beyond expiry of Regulation No.1) continue to apply if the both tests are not met? Do the JobKeeper 1.0 tests need to be met if rent relief is only sought for a period commencing on or after 24 October 2020?

How can property investors protect their interests where tenants fail to provide information required to determine acceptable rent relief?

This remains ambiguous.

Regulation No.2 requires both parties to commence their good faith negotiations within 14 days of either party requesting renegotiation of rent or other terms of impacted leases.

Landlords may be able to take “prescribed action” if tenants fail to commence such negotiations or provide evidence to demonstrate that the lessee is an impacted lessee (as defined). Unfortunately, there are no guidelines as to the nature of the evidence to be provided or the timeframes within which it must be provided. This can delay negotiations and adversely affect a landlord’s enforcement rights.

While landlords may have the right to take prescribed action in the above circumstances, Regulation No. 2 still contains a requirement for mediation to be undertaken to resolve a dispute before a landlord can take action for breach by a tenant.

As a result, property investors’ rights remain unclear.

Can parties seek to negotiate further rent relief or other changes if their circumstances change during the prescribed period?

Yes but (unless the parties otherwise agree) the further renegotiation can only relate to rent for a period in respect of which there has been no previous agreement to provide rent relief.

If parties have previously agreed to rent relief for a period, then notwithstanding their changed circumstances, there are no rights or obligations under the Regulation to further negotiate the rent for that period. The parties can, however, agree to do so.

What happens if negotiations are not completed by the date of termination of the Regulation?

Negotiations not completed by 31 December 2020 may be concluded after that date. It is unclear whether the parties would be bound by the requirements of Regulation No.2 in respect of such negotiations, as it will no longer be law at that time.

DO THE CHANGES IMPROVE THE POSITION OF PROPERTY INVESTORS AND THEIR FINANCIERS?

We have previously highlighted the financial and practical consequences of the Mandatory Leasing Code – see our May 2020 Alert.

It appears that Regulation No.2 has not clarified a number of questions raised in relation to Regulation No.1 and has raised some more questions. As a result, the financial and practical issues identified in our May 2020 Alert continue to be relevant.

Parties will continue to require expert advice on these matters.

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

Peter Faludi Consulting

Connect with me on LinkedIn

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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.

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