Bank Notes: Update November 2009

Significant changes for FIRB thresholds for investment in property

The softening of Foreign Investment Review Board (FIRB) requirements over the last year for investment in Australian real estate has given more flexibility to both foreign investors and local developers.

Significant changes include:

• No 50% restriction on off the plan sales: Provided that approval has been granted to each foreign purchaser and subject to certain marketing criteria being satisfied, 100% of new dwellings can now be sold to foreign purchasers.
• No developer pre approval for off the plan sales: Off the plan pre approvals to sell up to 50% of residential units in a development to foreign purchasers are no longer available to developers.
• Temporary Residents: Temporary residents can now purchase second hand dwellings and foreign students are no longer subject to $300,000 limit in value. Temporary residents are no longer required to notify FIRB of acquisitions of an established dwelling for their principal place of residence (not investment) or any new dwellings including off the plan purchases or single blocks of vacant residential land.

There are also changes to the rules relating to redevelopment of second hand dwellings and limits on foreign companies purchasing 2nd hand dwellings.

Maddocks can advise further on the changes and their potential impact.

APRA relaxes its capital risk weighting scheme for commercial property loans

APRA has also softened its rules for assessing the level of risk of commercial property loans. The Authority has recently released a 5-part criteria test that will help authorised deposit-taking institutions (ADI s) determine whether to assign commercial property loans into the lower risk ‘corporate lending’ category. The test is aimed to promote the consistent identification of income producing real estate exposures.

In summary, the requirements are:

• the entity is a listed or substantial private company and is managed by a recognised team;
• the ADI’s exposure to the entity is not specifically or substantially financing limited recourse development projects;
• the entity has greater than $250 million in tangible assets;
• property assets are sufficiently diversified; and
• for property operators/investors, tenants are sufficiently diversified.

The impact of the new criteria will hopefully translate into the flow of more credit in the commercial property sector.

Lenders should bear in mind a guarantor’s rights when recovering debt

The recent case of Ronald John Bofinger & ors v Kingsway Group Limited (Bofingers Case) is a timely reminder that a lender must have regard to a guarantor’s rights of subrogation and entitlement to any surplus sale proceeds.

Where a guarantor has contributed to repayment of a first mortgagee’s debt (such as by partially repaying a borrower’s debt) the guarantor may have an entitlement to any surplus proceeds in priority over any subsequent mortgagees.

Such an entitlement by the guarantor may be postponed if there is an agreement in place between the mortgagees and the guarantor to the contrary.

Subsequent mortgagees should ensure that their entitlement under their security is not postponed to any guarantors and should consider entering into deeds of priority also with guarantors to preserve their entitlement to any surplus sale proceeds and the benefits of the first mortgagee’s securities after discharge of the 1st mortgagee’s debt. Conversely guarantors who repay a mortgagee’s debt should ensure that their entitlement to surplus sale proceeds is not overlooked.

Lenders should beware of relying on independent legal advice given to an attorney under a power of attorney

It is standard practice for lenders to require that independent legal advice be obtained with respect to individuals signing loan and security documents. A recent case has highlighted that loan and security documents may not be enforceable where a lender relies on independent legal advice being given to an attorney under a power of attorney rather than to the donor personally.

The case of Spina v Permanent Custodians Limi ted (2009) NSWC A 206 may be distinguished by the fact that it involved a borrower who was 86, giving security over her home for the benefit of her son who held power of attorney on her behalf. The borrower did not receive independent legal advice.

However the case does highlight the risks which a lender takes if it fails to obtain evidence of independent legal advice having been given to a donor even though the loan and security documents will be executed under power of attorney granted by the borrower or guarantor.

Maddocks practice to lenders is to not accept the signing of a guarantee by the attorney except in circumstances where independent legal advice is given to the guarantor and the guarantor ratifies the signing of the guarantee by the attorney.

Large scale property developments and unfair contract provisions

Developers of large scale property projects who issue standard form contracts of sale to consumers need to ensure that terms of the contract of sale are not too one sided in favour of the vendor developer to the point of potentially breaching new provisions of the Trade Practices Act (Cth) and the Victorian Fair Trading Act. This is particularly relevant for standard form off the plan sale contracts which are often drafted to give the vendor wide and extensive powers to do such things as alter the plan of subdivision, building works, substitute fittings and fixtures or rescind the contract for any reason.

Changes to the Trade Practices Act will introduce national provisions which grant rights in respect of land contracts to an individual whose acquisition is wholly or predominantly for personal domestic or household use or consumption where unfair contract provisions may apply. The provisions are likely to become law in January 2010.

Under the legislation (which to an extent adopts the existing Victorian Fair Trading Act provisions) terms of standard form contracts of sale may be deemed to be unfair and held to be in breach the Acts. If the contract term is found to be ‘unfair’ it is void, but the remainder of the contract continues if it is possible for it do so. Developers will carry the onus of disproving that a contract is a standard form.

Examples of potentially relevant unfair terms may include terms permitting:

• unilateral termination
• unilateral rights to vary specifications
• without a right to terminate
• unilateral price variation without a right to terminate.

Whether such terms will be held to be unfair will depend upon whether they would cause a significant imbalance in the parties rights and obligations and whether it is reasonably necessary in order to protect the legal interests of the party who is advantaged.

Terms that define the main subject matter of the contract, the price or which are required by law cannot be declared to be void and there may be instances where there will be exemptions allowed for terms which may be deemed be “industry standard” and therefore permitted.

Lenders and borrowers alike should also consider the impact of the unfair contract provisions on the pre-sale requirements that are typically conditions precedent to funding.

If in doubt, Maddocks can assist by reviewing presale contracts of sale.

Lodging ASIC Notices on time

The case of Brookfield Multiplex Capital Management Ltd [2009] NSWSC 1014 (Brookfield) serves as a good reminder of the need to register all charges and variations with ASIC within the 45 day time frame required.

Section 264 Corporations Act requires that where a company acquires property that is subject to a charge, the company must lodge a notice with ASIC within 45 days. In Brookfield’s Case, Brookfield was the responsible entity of the Multiplex Acumen Property Fund and Permanent Trustee Australia Limited was the beneficial owner of the securities pursuant to a custody agreement. The Fund granted 7 charges in favour of various financial lenders which were registered with ASIC. In due course all charges were assigned to the NAB. There was a change of custodian on 2 occasions after NAB acquired the charges. The changes in custodian were not followed up by registration with ASIC that the relevant custodian companies had acquired property that was subject to a charge.

Whilst leave was granted extending the time to register the variation of charges so as to correct the oversight, it is prudent to remember that ASIC may not always be so receptive.

Whenever changes of ownership of assets of a company or changes to a company’s structure or business are contemplated , you should ensure that you ascertain whether the Corporations Act imposes obligations to notify ASIC.

And so.....a reminder of key lodging dates with ASIC

A reminder that ASIC imposes time frames which are usually strictly enforced within which to lodge notices in relation to companies.

The following are some of the key time limits:

• change of name or address of a director - within 1 month of the date of change
• registration of a charge – 45 days from the date of the charge;
• appointment or cessation of a director – within 1 month of the date of change;
• change of registered office in Australia – within 7 days after the date of change

Failure to register in time may result in the inability of a charge to be registered.

If in doubt, contact Maddocks.

Octaviar’s Case – On appeal

As foreshadowed in the October edition of Bank Notes the Public Trustee of Queensland has filed an application for special leave to appeal to the High Court from the Court of Appeal. As previously reported, the Court of Appeal decision had resoundingly overturned the lower court’s decision which had stated that variations of charges should be registered when a new document or obligation is brought under a charge (such as a guarantee). Whilst it remains to be seen how the High Court will view the facts, in the meantime it is prudent practice to ensure a charge is varied by notice to ASIC if a company widens the transaction documents (such as by increasing or adding additional securities or liabilities).

We will continue to monitor the case.

National Consumer Credit Laws closer to becoming a reality

2010 will see the transfer of regulation of credit from individual states and territories to ASIC thereby making ASIC the national regulator for consumer credit and finance broker. ASIC will also take over the regulation of all credit products and services including personal loans, home loans, credit cards and lines of credit.

So what will this mean for you? The changes are intended to provide an increased level of consumer protection and a reduction of red tape for business. ASIC in its official publications also promotes that it will create an internationally competitive consumer credit regime with nationally consistent regulation and enforcement.

It is aimed to overcome different state and territory approaches and create one uniform consistent regime. It will also introduce new licencing regimes which require providers of consumer credit and credit-related broking services to obtain a licence from ASIC with certain levels of standards required to be met in order to receive a licence.

The National Consumer Credit Code will commence on 1 July 2010 and anyone who engages in certain credit activities will need to register with ASIC between 1 April 2010 and 30 June 2010.