Legal Insights

Sale of School sites in land projects

By Nick Sparks, David Hartney, Shannon Derbyshire

• 10 September 2020 • 8 min read

The Victorian government announced a state-wide building blitz in its initial COVID-19 economic stimulus package. In particular it has been reported that the investment will be to open 100 new schools between 2019 and 2026.

Developments in growth corridors with emerging communities are often targeted as in-demand locations for schools (whether public or private, and often mandated under relevant Precinct Structure Plan) to service growing communities.

Acting for many developers representing a large portion of the Victorian development market, Maddocks has acted on a numerous sales of land parcels for schools, both public and private. We share below some key insights from acting on those transactions.

Same, same but different

Whilst the subject matter of the sale is the same (a site for a school), there are many varying ways to structure a sale of a school site.

At one end of the spectrum some sites for schools are sold as relatively straightforward vacant land transactions, with very little vendor or purchaser commitments. It’s essentially just the sale of vacant land.

At the extreme, they can be complicated transactions with a multitude of legal and practical issues, and vendor and purchaser commitments on a range of issues such as vendor delivery of services, school opening, vendor input on design of school, construction timeframes for building the school, and more.

The particular transaction requirements are driven by both the commercial and practical interests of the parties and planning requirements, such as the Precinct Structure Plan covering the relevant site.

Below we set out some of the common issues and considerations that arise which developers should be aware of when structuring school sale transactions.

Issue

Considerations/our experiences

Developer works

It is common to see developer commitments to deliver works such as:

  • cross overs;
  • intersections;
  • roads;
  • utilities such as water, power and sewerage,

to service school sites, particularly where the broader development is in its infancy and those types of services are not yet completed.

These types of works can be a significant commitment both financially and in terms of delivery for the developer, but important from the purchaser’s perspective in buying the site.

It is likely that the developer will ultimately need to give some commitments around timeframe for delivery of such vendor works, agree a regime that part of the purchase price is retained in a trust account until the works are completed as security to the purchaser for the vendor’s performance of those works, or a step in regime for the purchaser in the event the vendor does not finish the works as agreed.

It is critical to ensure the developer has adequate protections such as the right to extend time for completion of vendor works due, to events beyond its control.

Do: allow sufficient time in your contract to complete the works

Do: ensure your contract with your contractor for the works covers off the occupational health and safety risks as principal contractor

Do: include a right to extend the time for completion of works due to events beyond your control

Resist: allowing the purchaser step in rights to complete the works in the event the vendor works are not completed in the agreed time

Site free from encumbrances

One issue that frequently arises is that the school purchaser wants to take the site free of encumbrances (i.e. removal of existing section 173 agreements, or a commitment that the vendor will not enter into any section 173). This will need to be considered on a case by case basis depending on any planning permit requirements.

Developer activities which impact on use of land as school

School purchasers can be sensitive to developer activities which may impact on the use of the land as a school, such as the developer undertaking development works on adjacent parts of the development which can create dust, noise and similar disturbances.

There often needs to be a balance struck in the contract to allow the developer sufficient flexibility to undertake its broader development, whilst being mindful of a school operating on the site. Examples of such works might include earthworks or other civil works being undertaken or construction of adjacent buildings in close proximity to the operational school, which the developer needs the ability to progress with as part of the broader surrounding development.

Purchaser taking title before full payment of price

Some school site transactions involve purchasers taking title to the land early and staggering payment of the price over time. This enables the school to get onto the site and commence construction and open, whilst assisting their cashflow and funding by back-ending the payment obligations.

To ensure security to the developer of the remainder of the price (and other obligations such as school opening dates, obligations to obtain permits, school registration, etc) this should only be done with an adequate and well considered security package back to the vendor.. This may include a range of security measures including, at a minimum, a first or subsequent ranking mortgage over the subject site and/or other assets, and appropriate priority deeds where other mortgagees (such as construction financiers) are involved.

Purchaser commitments

Commitments from the purchaser as to:

  • its start and end dates for construction
  • obtaining permits and school registration
  • design of the school; and
  • official opening dates,

may be important to you as a developer in terms of commitments to your residential purchasers.

This is particularly relevant where for example the developer is allowing the school to pay some of the price in instalments after settlement (as explained above).

GAIC and excluded subdivisions and building works

If the development is subject to Growth Areas Infrastructure Contribution (GAIC), careful analysis and advice is required as soon as possible on the strategy for dealing with school land, as there are a number of options available to manage and/or minimise GAIC:

  • GAIC may be offset against that land by a GAIC Works In Kind agreement (GAIC WIK), depending on the requirements of the Precinct Structure Plan relating to the development. In these cases, the ‘purchase price’ or consideration by the purchaser is allowing the developer an offset against its GAIC rather than paying a purchase price in exchange for the title.
  • Where a GAIC WIK is not applicable, if GAIC applies to the land the developer will need to obtain an excluded subdivision exemption which allows creation of a lot which is solely to provide a lot for a school without triggering the GAIC. Developers need to carefully prepare this plan to ensure it fits within the excluded subdivision definition. The purchaser would then defer the GAIC which would be triggered on the dutiable event constituted by transfer of the title.

It is also worth noting that GAIC is not imposed on building works relating to a school or a proposed school so the school can defer at settlement and not trigger GAIC on issue of its building permit.

Price adjustment

It is not unusual as part of the subdivision process that the size of a lot may change from the day of sale to registration of the plan. Where the lot is sold off the plan, it may be appropriate for caps and collars on adjustments, which may or may not be subject to a price adjustment mechanism whereby the price ultimately payable by the purchaser increases or decreases by an agreed rate if the size of the lot increases or decreases within agreed parameters.

The take home

There is no one model for school site transactions. There is a real balancing act needed between preserving the developer’s flexibility to deliver the broader development, and the particular requirements school purchasers who can add significant value for your emerging community.

The Maddocks Development Team regularly advises developers and can add value on all aspects of school site sales. We are well placed to assist you in structuring and documenting these transactions to deliver practical solutions, manage risk, secure your interests and maximise outcomes.

Need more information?

Get in touch with the Development team.

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