The importance of Reputation on Reforms Affecting Property Developers

The importance of Reputation on Reforms Affecting Property Developers

In our last Real Estate Investment Alert (click here) we highlighted the impact of the building industry reforms, currently being worked through by most states and territories in Australia, on the ability of developers to obtain finance.

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

 

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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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