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Delivering developers value – part two

Feature Articles

Cite as: (2003) 77(3) LIJ, p.52

Part one of this article lastmonth reviewed the general legal and drafting matters to consider when acting for developers. Part two deals with the more sophisticated projects and project-specific drafting required.

By Nick Holuigue

Project specific drafting should be carried out in consultation with the developer’s town planners and selling agents. The developer may even choose to include its engineers, architects and designers. It is only in consultation with these parties that the true intentions of the developer can be captured in the contract and appropriate flexibility provided.

Below are specific responses to the following style of projects:

(a) residential tower developments; and
(b) green acre subdivisions.

RESIDENTIAL TOWER

Residential tower developments can easily have cost bases exceeding $10 million and timeframes of 18 to 32 months. For this reason, there are many issues that should be provided for in more detail than in sale documentation suitable for smaller projects.

In addition to the generic drafting considerations set out in part one of this article, some further ones are set out below.

  • Unavoidable delays: more particular drafting providing for extension of registration date in event of unavoidable delay (for example, weather, terrorism, fire, union dispute).
  • Further subdivision: the developer may wish to retain rights and ownership of land in a plan including common property (for example, preserving airspace rights for developers for telco towers or further construction).
  • Fixtures and fittings: what amount of detail is the developer prepared to commit to? Are there to be options or alternatives?
  • A plan of the unit?: if a plan for the unit is to appear in the contract what representations are to be made?
  • Selling activities: should the vendor be permitted to conduct certain selling activities before and after settlement date at the property?
  • Agreement to bind purchaser: should the purchaser be buying subject to certain agreements (for example, maintenance and service agreements)?
  • Purchaser nomination/right to sell: contract may restrict right of purchaser to nominate substitute purchaser before settlement; may seek to provide that purchaser may not sell land without consent of vendor until all lots sold.
  • Defects liability provision?: consider if one is to be offered.
  • Dealing with bodies corporate:
    – are specific provisions required regarding establishment of body corporate?;
    – are leases to be entered into by the body corporate over common property (for example, hotel foyers on common property, outdoor seating on common property for retail lots)?;
    – are employment agreements with the body corporate required (for example, service and maintenance agreements)?.
  • Assignment, mortgage or charge: vendor may wish to retain right to mortgage or refinance property before registration of plan, and also to assign rights.
  • Projects staging: purchaser may need to acknowledge that neighbouring site may be developed and will not hold vendor liable for inconvenience due to works. Section 32(3)(ba) of the Sale of Land Act 1962 must also be complied with.
  • Stamp duty savings: what should a vendor say? What is market place requiring?

GREENACRE

Different drafting considerations exist when developers are creating broadacre rather than high-rise communities.

Essentially the issues are market driven. Purchasers are often more concerned about what vision is contemplated for the new community and specific drafting responses are required for this.

Set out below are some examples of topics that should be addressed in these sorts of contracts.

  • Restrictive covenants: these may need to be created by registration of transfers of land to purchasers; they are often very particular (for example, single dwelling covenant, type of external building material, roof materials and height, fence restrictions, number of storeys, maintenance of landscapes, restriction on use of land, advertising of land).
  • Incentives: are incentives intended for purchasers (for example, rebate if landscaping occurs within six months of settlement)?
  • Design guidelines: housing design and landscaping guidelines specific to development to bind purchasers.
  • Access to land by purchaser: restricted access may be required before settlement date (for example, for builder purchasers to carry out works).
  • Dividing fences: purchaser’s responsibility; no right to recover from purchaser preserve; developer’s right to build and recover cost.
  • Project-driven common areas: waterways, parkland and environment features often require specific drafting responses.
  • Occupancy of land: consider imposing post-settlement restrictions on purchasers (for example, cannot reside before certain works carried out).
  • Body corporate: even if there is no common property, a body corporate may be required to give effect to the developer’s intentions (for example, to enforce design guidelines).

SUBDIVISION PITFALLS

It is wrong to assume that the lawyer is simply a “post box” to lodge the subdivisions at the Land Registry.

Inquiries before lodging/contract
A lawyer must consult with the developer’s surveyor, perhaps even the Land Registry, before a development proceeds to contract and certainly before a plan is lodged at the Land Registry.

In assisting a developer with a subdivision there are a number of things that should be considered or carried out. These include:

  • confirming who the registered proprietors are in a subdivision. The lodging of a subdivision over parts of land not in common ownership (NICO) subdivision is an issue that often creates complexities and attracts additional complications (for example, in whose names titles will issue post-registration);
  • are any consents required by third parties to lodge the subdivision?;
  • who has control of the title to which the subdivision relates?;
  • input from surveyor;
  • what fees will be required from the developer?;
  • who is to be in control of the statement of compliance?; and
  • will a refinance requirement be triggered after registration of the plan?

It is also important to discuss with the client any specific requirements for the subdivision. For instance:

  • is more than one body corporate intended/desirable for the development? If so, ensure the plan complies with s27(2B) of the Subdivision Act;
  • are lot liability and lot entitlement fairly allocated? Should they differ? This can affect the value of a lot in the market;
  • is a staged plan more appropriate for the development?;
  • are car spaces to be included in the plan? Are there to be body corporate leases of common property?;
  • do they wish to create restrictive covenants under the plan?; and
  • who is to own the air space above the development?

LEGAL PRACTITIONERS LIABILITY COMMITTEE

In recent times, the Legal Practitioners Liability Committee has introduced a subdivision category to monitor increasing claims in this area. Previously, these sorts of claims fell into the miscellaneous category.

Set out below are some examples that relate to the management of subdivisions by practitioners.

Acting for the vendor or developer

(a) In one instance, a solicitor for a vendor replaced only one of several pages of the plan of subdivision, with the final version, in a s32 (of the Sale of Land Act) statement. The effect was that the correct details of the plan of subdivision were not disclosed in the sale documentation and the subdivision was misrepresented to the purchaser.

(b) In another instance, a solicitor for a developer delayed preparing an adverse possession claim which needed to be lodged before a plan of subdivision to be approved. The result was that the delay caused increases in holding costs etc. and a claim was made by the developer against the solicitor.

(c) The vendor’s solicitor was provided with the amended plan by the engineer. The plan of subdivision was approved by the local council with an increase in drainage easement from 2 to 10m. However, nobody informed the developer client of the change in dimensions of the easement. The plan was then lodged and registered. The result was that the developer arguably suffered loss and damage as a result of the increase in the size of the drainage easement.

(d) Solicitors acted for a council which approved a property development subject to a s173 (of the Planning and Environment Act) agreement affecting lot 1. The council prepared the application and referred to the wrong lot. The solicitors acting for the developer lodged the documents and did not pick up the error. This was another lesson in studying the documentation and not adopting a “post box” mentality.

(e) A solicitor prepared a master contract to be used by the vendor and its agent. The contract included clauses for fit-out. The sale of one lot was for a shell. The agent failed to delete the inapplicable clauses. The criticism of the solicitor was that there were insufficient directions as to the variable clauses that may need to be added or deleted for different types of sales.

(f) The contracts of sale for property being sold off-the-plan specifically authorised the vendor’s solicitors to invest the deposit. The money was not invested by the vendor’s solicitors but stayed in the agent’s trust account. When the transaction fell through the purchaser sought their deposit and interest back. It was argued by the purchaser that the vendor’s solicitors should have invested the deposit in order to protect the purchaser.

(g) A solicitor for a vendor failed to ensure that a specific building covenant was included on all of the titles in a subdivision. The purchaser was obliged to include the covenant in the transfer but failed to do so and it was not picked up at the vendor’s solicitor’s office because the relevant partner was on holidays.

(h) The vendor instructed its solicitor to sell one lot in the subdivision and agreed the remaining lots would be subject to a restrictive covenant. The restrictive covenant was lodged at the Titles Office by the first purchaser’s solicitors.
When the vendor’s solicitor went to prepare contracts and s32 statements for the next lot, the restrictive covenant had not yet been lodged and did not show up on the title search. The vendor’s solicitor, in relying on the title search but not checking its initial instructions, failed to make any note of the restrictive covenant in the contract or s32 for the remaining lots. There were protracted negotiations with the purchaser of the second lot and several months later the contract was signed but new searches were not obtained for the s32. A contract and s32 statement for the next lot were prepared a month later but the restrictive covenant did not appear on the title nor was there an unregistered dealing slip on the Titles Office file (not clear why). The result was that no mention was made in the documents to the restrictive covenant.
Instructions to prepare contracts for the last lot were obtained two months later. No title search was performed because no separate titles had issued so the search from the previous lot file was used, perpetuating the missing restrictive covenant.

The clear result here is that incomplete disclosure was made to a number of purchasers.

Acting for the purchaser

(a) The purchaser was a developer client planning to subdivide property after it had been purchased. The solicitor failed to check the planning schemes to ensure that the proposed development could meet the requirements, such as car parking spaces. When the development did not receive approval, the solicitor was blamed for not advising the purchaser of these issues. The purchaser was a sophisticated developer and in those circumstances, the solicitor conceded that it acted essentially as a “post box”. Nevertheless, the dispute remains on foot.

(b) The purchaser’s solicitor failed to ensure that the vendor had the right to sell or lease an accessory unit (car space). The facts of the claim were that the vendor’s lease for the car parking spaces within the building had been rescinded. The purchaser’s solicitor didn’t make the necessary inquiries to establish that the lease had in fact been rescinded. The purchaser then did not have a car space included in its sale. The facts indicated that it was often the case that car spaces were treated as an after-thought by solicitors.

(c) An accessory unit was initially included in the project ads but dropped from the contract when it was realised that there was no available car space. The purchaser’s solicitor failed to realise that there was no accessory unit included in the contract. These facts only became apparent once the contract had settled and the purchaser endeavoured to park in the car space it thought was owned by it. It was only then established that the car space was in fact allocated to another unit. The purchaser sought compensation from its practitioner for not notifying it that no car space was included in the sale.

(d) The purchasers offered to purchase off-the-plan subject to a six metre tree reserve. The purchasers claimed that their solicitors did not explain that there was a standard clause in the contract that the lot size may be reduced by the vendor in order to have the plan of subdivision registered. The land was in fact reduced by 16 per cent and the purchasers denied being told of the clause.

CONCLUSION

Acting for developers is not substantially different to acting for any other conveyancing client. The devil is in the detail.

In spending time with the developer and its consultants at the early stages of the development, many of the issues addressed in this article will be captured.


NICK HOLUIGUE is a senior associate in the real estate division of Minter Ellison. He has acted for developers and financiers in the residential and industrial markets for many years advising on site acquisitions, subdivisions and sales. He has been a member of the LIV Property Law Section – Liquor, Leisure and Hospitality Division since 1997.

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