Continuing your development project through COVID-19 – legal considerations
By Nick Sparks• 22 April 2020 • 10 min read
The property development industry, like many others, faces unprecedented challenges with the evolving COVID-19 outbreak. Much of the immediate focus in many organisations has been to address business continuity, including working from home, which is becoming the new normal for many of us.
We have been helping our clients with project-related continuity issues and we would like to share some of these, including managing settlement risk (vendor finance and sunset dates), eContracts, construction and consultants agreements and leasing agreements.
Sales and Transactions
Many of our clients had already moved to the Maddocks eContracts platform before COVID-19. That platform enables clients to transact electronically with purchasers both here and abroad.
In the last few weeks we’ve seen a big increase in clients ditching paper to make it easier and faster for their customers to purchase product. The platform is available to purchasers and agents abroad and we can provide online training for all stakeholders. Now that, at the time of going to press, the government has modified the way physical inspections and auctions are carried out, being able to transact electronically is more important than ever.
Our eContracts page has more information on our award winning eContracts platform – get in touch if you’d like an online demonstration.
Managing Settlement Risk – Vendor Finance and Sunset Dates
Having just come through a market downturn following the banking Royal Commission and the spectre of a possible Labor victory in last year’s federal election, many will be familiar with proactively managing settlement risk. Issues we’re currently helping developers in Victoria with include:
Some purchasers are asking for more time to pay the full purchase price for a number of reasons, including that their funds are linked to the now highly volatile stock market. Rather than risk a sale falling over altogether, or defer a settlement for an extended period of time, vendor finance may assist in some circumstances.
Vendor finance typically involves a purchaser paying as much of the price as it can afford (and that the developer will accept as a minimum) and entering into a loan agreement with the developer to repay the balance over an agreed term. That loan agreement may or may not be secured by a second mortgage.
However, even if there is appetite to provide vendor finance, be mindful of the potential regulation surrounding these arrangements. Such arrangements may constitute credit contracts under the National Credit Code and the National Consumer Credit Protection Act 2009 (Cth). If they are found to be credit contracts, a developer would need to obtain an Australian Credit Licence (ACL) before implementing the arrangement. Obtaining that licence can be costly and time consuming.
There are exemptions to the requirement to obtain an ACL, including:
- interest-free and fee-free loans
- where the purchaser is a company and not an individual or strata corporation
- loans where the term is less than 62 days and the interest rate is less than 5%.
Sunset Dates and Rescission Rights
As a reminder, the plan registration sunset date is fixed in off-the-plan contracts, with no extension rights for either party (the right for vendors to extend sunset dates unilaterally disappeared some time ago in Victoria).
The right to rescind for a purchaser arises if the plan of subdivision is not registered by the sunset date. However, the contract does not automatically fall over. The purchaser has to exercise its right to rescind by correctly serving a rescission notice.
Note that if the sunset date specified in the contract ticks over, but the plan then later registers anyway (for example, 4 weeks after that original sunset date), once the plan has registered, the purchaser’s right to terminate falls away and it will be bound to settle when the vendor triggers settlement.
Be mindful of the following when looking at sunset date risks:
- considering which sunset dates to extend out and change for unsigned contracts in respect of any new sales
- registering those plans that are close as soon as possible
- nursing purchasers along with appropriate direct messaging for those contracts that may be close to sunset dates expiring.
A number of clients have raised this concept in the current circumstances. Catherine Debreceny, partner in our commercial team, has written an excellent piece on force majeure and frustration, Will COVID-19 prevent you from operating? Protecting your business in the face of a global pandemic.
In essence, force majeure is a contractual mechanism designed to exclude liability of a party where that party’s failure to perform is caused by forces (either natural or human) beyond its control. Many commercial contracts contain force majeure clauses giving rise to a number of consequences, including extension of time rights, termination rights and rights to claim damages. However, the operation of such a clause depends on its particular drafting, as the concept of ‘force majeure’ is not recognised at common law. Not all contracts contain force majeure clauses.
In a property development context, consider the following:
Contracts of Sale
Contracts of sale in Victoria do not typically contain force majeure regimes and, as a result, the concept is not usually relevant legally. The time-frames and deliverables in those contracts are fixed and may only be varied by agreement between the parties.
If, commercially, you do need to explore changing timeframes or deliverables in those contracts, please speak to us about how to approach that issue with purchasers, and how best to document those changes to ensure they are legally enforceable. Existing purchasers may be sensitive to any changes, in the current climate.
Agreements for Lease
Many agreements for lease do contain force majeure regimes. For example, the target practical completion dates for landlord works may be subject to force majeure events. It is then important to consider:
How that term is defined: For example, there may be opening wording to the definition similar to ‘….A circumstance beyond the reasonable control of the landlord, meaning…’. There then typically follows an exhaustive list of examples of force majeure events, meaning that the force majeure definition is limited to those examples only. Is a pandemic mentioned? Unlikely. Is an epidemic mentioned? Possibly. What is the difference between a pandemic and epidemic in a force majeure context? The devil really can be in the detail.
How does that regime relate to the construction contract? The developer will appoint a builder to undertake the works. Any force majeure in the agreement for lease should be consistent with the construction contract, or there may be pass through gaps.
What are the consequences of activating a force majeure regime? It may push out landlord target dates, but will it trigger a right for a tenant to claim damages, or terminate, if the works push out beyond a certain date? Be mindful of assessing the bigger picture when considering force majeure rights.
Note that at the time of going to press, the State government is considering amendments to tenancy legislation in light of COVID 19. If relevant, we will provide further updates.
Construction and Consultancy Contracts
Force majeure and frustration in the context of construction contracts is a more common and complex issue. For developers, the concern is around the Contractor delaying works and claiming delay costs or, potentially, shutting down site for a period of time.
Neither of the unamended AS2124 and AS4300 contracts contain force
majeure clauses. For other construction contracts with a force majeure clause, it will be necessary to carefully review the terms of the force majeure clause to determine whether the particular clause encompasses epidemics, pandemics or other public health risks. If the COVID-19 outbreak can be considered to fall within the operation of the force majeure clause, it will likely entitle the Contractor to an extension of time.
In any event, under the unamended standard form contracts, the Contractor has broad rights to claim an extension of time. If a Principal directs the closure of a site or the suspension of the works, the Contractor will likely be entitled to an extension of time and may be entitled to delay costs. If there is a change in law to deal with the outbreak of COVID-19, such that work on a construction site cannot proceed for a period of time, this may also found an entitlement to an extension of time.
As you will appreciate, it is critical to seek advice on whether there is a force majeure or extension of time regime that may apply as a result of COVID-19, and what the legal and commercial consequences may be.
Powers of Attorney
For those agreements that are signed under power of attorney, make sure:
- you have enough attorneys on hand in the event that one attorney cannot sign due to contracting COVID 19; and
- the terms of those powers of attorney are up to date to capture the range of documents that may need to be signed, whether electronically or not.
Aside from contracts of sale through our eContracts platform, there will be many other project documents that may need to be signed and exchanged electronically with many project stakeholders now working from home.
Be mindful that the signing of contracts electronically by corporations or
individuals should be possible if the parties adopt an appropriate signing
and exchange protocol. At the time of going to press the Federal government has amended the Corporations Act 2001 (Cth) (2001 Act) to allow companies to sign deeds and other documents electronically under the 2001 Act. However, note that these amendments only operate from 6 May 2020 to 5 November 2020. Whether the Federal government makes this arrangement permanent remains to be seen (although we would strongly encourage it to do so).
It is also worth noting that the 2001 Act only deals with the way companies sign documents under section 127 of the 2001 Act. It does not change the current position on the way individuals sign documents. However, the COVID-19 Omnibus (Emergency Measures) (Electronic Signing and Witnessing) Regulations 2020 (Vic) which came into effect on 12 May 2020 do change that position by providing that individuals in Vic may now sign deeds electronically (noting that NSW legislation already provides for individuals to electronically sign deeds). Note that the Vic regulations sunset on 25 October 2020. Again, we would hope that the State government acts to make the changes permanent.
Please reach out to us if you have any queries on whether a document can be signed electronically in the current environment.
For those projects that are subject to GAIC, be mindful of GAIC SPA payment dates. If there may be project delays, make sure you apply to extend out GAIC SPA dates at least 10 business days before the relevant SPA payment date.
Now, more than ever, it is important for developers to be across key risk items and arm themselves with as much information as possible to help navigate through immediate challenges and prepare for the road ahead.
Maddocks has produced guides to a range of legal issues raised by COVID-19. You can access these guides here.
Duty on default interest - Recent Supreme Court decision and potential implications for developers
This decision could have significant implications for the assessment of duty on property transfers.
Legislative update – Electronic signing and the reintroduction of rent relief schemes in Victoria & New South Wales
By David Hartney & Athina McGregor
Materials shortages in the construction sector – Implications and mitigation tools for developers
Contractors and developers across Australia are grappling with issues of supply shortages.
Section 9AC of the Sale of Land Act – Lessons for developers from a new case
By Mark Kemp
Restrictions resulting from COVID-19 and absent foreign buyers, has caused banks to impose limits.