Subdivisions and Securing Your Vision – Part 1
You have sold and settled your land lots. Money has come in the door, and you can move on to the next release in your project. But how do you make sure that your purchaser builds your vision? What do you do when they don’t and other customers start complaining? What do you do when they flip their land and on-sell in competition to your remaining sales at a discount to your current pricing? Your reputation, brand and project strategy can be compromised.
In master planned land projects where land is sold off-the-plan, be it residential or industrial product, planning ahead for life after settlement is a critical but often overlooked part of the process. In a project with any more than 3 years to run with multiple stages, there are 3 key post-settlement areas to consider:
- Built Form – how do you regulate what is built and by when?
- Restrictive covenants and use – You might want to oversee what is built, but do you also want to regulate how that product is used? For example, you might want to prohibit a noxious use in an industrial project, such as concrete batching or panel beating.
- Competition – how do you manage competition from your purchasers that want to on-sell their blocks of land
Read on for tips on how to best manage these three areas.
It is clearly important in a project of any length to regulate how and what product is built across your project. Left unregulated by a developer, the quality and style of build would be left to individual preference of purchasers with little consistency. Given each project is a demonstration of a developer’s brand and vision, it is important for future projects that a successful built form outcome is achieved.
Built form is predominantly governed by design guidelines and building envelopes. It is essential to:
- disclose any draft design guidelines and building envelopes in the contract of sale
- establish a design review panel, usually comprised of an architect and developer representative, to oversee the design review process
- draft the contract of sale to clearly articulate that a purchaser must comply with the these documents, and also allow for the draft design guidelines to be amended as the project evolves
- ensure that the plan of subdivision contains a restriction which provides that purchasers must comply with the design guidelines, so that the obligation runs with the title when the title is created.
The contract of sale may also contain additional provisions relating to built form, including obligations:
- not to start works unless the purchaser has obtained all statutory approvals for the works, as well as design guideline approval
- to commence and/or complete construction within a certain timeframe.
Restrictive Covenants and Use
Design guidelines and building envelopes regulate what a building may look like and how it must be built. However, that does not include what the building is used for.
The planning scheme provides one level of regulation. However, there may be a desire to regulate further any use that is allowed by a planning scheme. For example, in an industrial off-the-plan project, regulating that use can be important depending on the intended vision for the project. This can be particularly important if the development will contain a mix of product that is sold and product that is held as an investment asset in the medium to long term.
If the intent is to prohibit particular uses, despite the fact that they may be allowed under the planning scheme, then restrictive covenants on title are the primary mechanism to use. Key issues to consider with restrictive covenants include:
- The nature of the covenant must be negative or restrictive in nature so that it runs with the title to the land. For example, the owner must not use the property as a recycling facility or a display home.
- The list of restricted uses must be clearly specified. If it is too general a description, it may not be enforceable.
- Consider how long the restrictive covenant will run for. Will it sunset after a period of, say, 10 years once the developer is confident that by that point all buildings will have been constructed? Or is the intent for the covenant to remain on title indefinitely.
- Who will enforce the covenant? Will that be left to each lot owner from time to time to enforce against each other, or will the benefit of the covenants be tagged to a lot to be retained by the developer for the majority of the project, so that the developer will enforce the covenant?
In a long term project, a developer will want to manage any re-sales by purchasers. A purchaser may genuinely be unable to construct its dwelling or industrial facility after settlement and need to sell, or it may choose to on-sell its block to make a profit in a rising market. Either way, any such sales will compete with your remaining sales.
There is a sliding scale of mechanisms a developer can include in the contract of sale, depending on how strict it wants to be. Without any of these mechanisms the developer will not be able to control competition. These include:
- restricting any advertising of re-sale at the property or online before the building has been constructed
- requiring that the consent of the developer is obtained for any on-sale before the building has been constructed
- prohibiting any further subdivision of the block.
Plan ahead. In the rush to get to market and sell product, do not overlook the post settlement phase. Take the time to stop and think about how you want to regulate built form, use and competition and set up that regime in your master contract of sale. It is very difficult and a lot more costly to try and retrofit a solution after you have contracted with purchasers.
In the next edition of The Lot, part 2 of this article will cover enforcement of these obligations and restrictions when things do go wrong, and explaining on-sales – what are they, why you need to care and how to best regulate them.
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