Subdivisions for Developers – Part 2 – Securing Your Vision
In our previous edition of The Lot, part 1 of this article covered the different regimes available to developers to regulate built form, use and competing sales and some key considerations when setting up these regimes. Part 2 of this article focuses on on-sales, how they can assist a developer with ongoing regulation of the developer’s requirements and some legal and practical enforcement measures when a purchaser does not comply with built form requirements.
What are 'On-Sales'?
In implementing any regime to regulate built form, use and competition, it is important to consider how on-sales are regulated. On-sales are when a purchaser wishes to sell its property to a third party, either before it has settled (think a quick profit in a rising market), or after it has settled but before it has completed construction.
If a developer does not regulate on-sales, then:
- If the block is on-sold by the purchaser, the developer will no longer have privity of contract with the new purchaser (as the developer is not a party to the contract with the third party). The developer will not be able to enforce any relevant provisions of the contract against the new purchaser.
- The developer will not be able to manage competition with its remaining sales.
If that is a concern for a developer, then the contract should prohibit on-sales before construction of the building has been completed, unless the consent of the developer is obtained. If such consent is granted, then an on-sale deed should be entered into between the developer, the original purchaser and the new purchaser.
Under that deed the new purchaser will agree with the developer to comply with the relevant provisions of the contract that survive settlement (such as complying with design guidelines and commencing and completing construction by a certain point). For example, an on-sale deed is critical in any display village when a builder makes a request to sell and leaseback its property before the display village has closed.
It is all well and good setting up obligations on purchasers dealing with built form, use and competition, but how do you enforce those mechanisms when a purchaser defaults? Two of the main options include pursuing the purchaser for:
- breach of the relevant contract terms; and/or
- breach of covenants or plan restriction. If applicable, these are the restrictions that sit outside of the contract and burden the title.
If there is a breach of these items by the purchaser, then a developer can sue for damages or try and sue and seek specific performance for that breach. However, whilst potentially helpful, both of those issues can be time consuming and costly to prove or obtain. Further some obligations or restrictions may be difficult to obtain judgement in a court for. For example, how does a developer prove its loss if a purchaser includes fake turf or roller blinds contrary to design guidelines?
It is important to consider these purely legal approaches with the following practical concepts:
- Bonds – holding a bond from the purchaser for the purposes of ensuring compliance with the design guidelines and construction commencement and completion time-frames that the developer can draw upon for non-compliance.
- Options to buy back – including an option to buy back in favour of the developer in the contract not only gives a developer that right to buy back the block in certain circumstances (such as if a dwelling is not constructed in time), but the option provisions may also create a caveatable interest.
- Caveat – if a caveatable interest has been created in the contract, registering a caveat against the title to the block will frustrate any attempted sale by a purchaser until it has complied with the relevant obligation or restriction or negotiated a satisfactory compromise with the developer.
- Withdrawing incentives – if the developer is providing incentives to purchasers, for example landscaping packages, ensuring that purchasers are only entitled to these incentives if they are not in breach of the contract of sale (whether before or after settlement).
Having taken the time and thought to set up your contract of sale so that you have a range of practical and legal measures to help you enforce your requirements, make sure you allocate the resources and time to actually enforce those measures.
This is particularly relevant at the outset of larger projects where tighter control is required to help ensure that the vision is delivered. It also equally relevant for the sale of strategic assets in a project, such as retail sites and neighbourhood activity centres, display village sites and those sites that are at the entrance of a project.
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