Sales and settlement risk in a difficult market | Part 1 – Changes to plans of subdivisions
Developers cannot avoid their obligations and with more purchaser scrutiny to plans of subdivisions you need to know how to successfully manage the legal risk.
The past 12 months or so have been tough for developers. Land has been hard to sell and apartments, even harder. There are multiple causes, including tightening credit conditions, an oversupply of apartments and the exit of foreign buyers. As a result, those purchasers that are still in the market are more discerning.
With greater purchaser expectations and scrutiny, comes greater legal risk for developers. Issues which in a hot market were not as heavily scrutinised by purchasers are now coming to the fore, particularly if a purchaser is looking for a reason to exit a contract. In particular, we are seeing much more purchaser scrutiny and examination around changes to plans of subdivision, which goes to settlement risk. It is important to be aware of the legal framework around this issue to successfully manage legal risk.
Section 9AC of the Sale of Land Act
Section 9AC of the Sale of Land Act 1962 (Vic) (SLA) provides that:
- if changes are made to a proposed plan of subdivision after a contract is entered into and before it is registered, the vendor must notify purchasers within 14 days of making the amendment (commonly called a ‘section 9AC notice’); and
- a purchaser may rescind its contract if the amendment “will materially affect the lot to which the contract relates”.
It is not possible to contract out of section 9AC of the SLA. It also worth noting that section 9AC of the SLA applies to any type of product sold off-the-plan, be it industrial, residential, office or retail.
What is a material change?
Importantly, and often incorrectly understood by the market, “materially affect the lot” does not have to mean the change is detrimental or prejudicial to the purchaser. It could be beneficial. In Lockwood v PSP Investments Pty Ltd  VSC 10 this issue was considered. It was noted that section 9AC of the SLA makes no reference to material being detrimental or adverse and a purchaser is not required to prove detriment. Rather, the Court held that it is “the totality of the scheme and arrangement by which the property is to be subdivided” that must be considered.
Therefore, making a change to a plan which the developer does not consider adverse or detrimental, does not mean that a purchaser does not have the right to seek rescission. The change may still materially affect the lot.
When should a developer notify?
It is also important to remember that section 9AC of the SLA requires a developer to notify purchasers of any change. There is no exemption from notifying if a developer itself considers that the change is not material – it must still notify purchasers.
The question then turns to when to notify. What is the best approach? Seek legal advice, as the time to notify requires careful consideration. However, it is safe to say that leaving it to the last minute (the settlement run in) is far from ideal as purchasers and their advisors will be more active in scrutinising notices.
Takeaways for developers
Whilst developers cannot avoid their obligations under section 9AC of the SLA , to assist in minimising the risk of rescissions or claims by purchasers, they should:
- endeavour to keep changes to a minimum
- ensure they are meeting their statutory obligations to notify purchasers of changes, and seek legal advice on the timing of such notices
- engage with purchasers affected by material changes early to manage the impact of those changes.
Look out for the next installment of this two part series where we look at ways that developers can avoid purchasers challenging measurements on their off-the-plan purchase.
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