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Keeping the dream alive – creative ways to maximise settlements in a difficult apartment market

It is no secret that settlements of residential apartments are, depending on the type and location of a project, taking longer to achieve. The positive message is that the world has not ended and settlements in apartment projects we are involved in still happen. The developers we work with are thinking outside the box to utilise creative strategies to support their purchasers, achieve settlements and bring in revenue. Below are three settlement strategies we are currently seeing being implemented with success.

Nomination Sales

From 1 July 2017 the Victorian State Government removed the off-the-plan stamp duty concession for anyone other than owner occupiers. As a result, contracts of sale that were exchanged prior to 1 July 2017 retain an added element of value in that the off-the-plan stamp duty concession is available to all purchasers, not just owner occupiers.

A strategy currently being used by some developers is not to rescind a contract but, rather, to be proactive and seek a nominee purchaser for the lot. The advantages of this approach are:

  • the off-the-plan stamp duty concession will be preserved for contracts entered into prior to 1 July 2017, and available to nominees upon settlement;
  • the developer can seek payment of holding costs from the contractual settlement date from the nominee or original purchaser;
  • the deposit can be released to the developer after service of a deposit release statement pursuant to section 27 of the Sale of Land Act 1962 (Vic) (SLA) on the assumption that the plan of subdivision has been registered and the occupancy certificate issued (and other contract conditions have been satisfied); and
  • the deposit can be used to pay additional agents’ commission for the nomination sale, along with any other costs incurred by the developer.

Note that any nominees that are foreign purchasers will still be liable to pay the foreign purchaser additional duty surcharge (which is currently 7% of the purchase price) if the nomination is made after 1 July 2015. This applies even if the contract was entered into before 1 July 2015.

Vendor Finance

Obtaining finance for purchasers in the current market can still be challenging. If purchasers do obtain finance, they may find that they are not able to borrow as much as they anticipated. Many developers are working with their purchasers to help them approach lenders who may be able to loan a greater amount. However, after alternative funding sources have been explored, the purchaser may still be short of sufficient funds to settle.

Some developers are then entertaining vendor finance for a period of time. There are a number of legal issues developers need to consider before deciding whether or not to provide such vendor finance, such as ACL licence and security.

ACL licence

Vendor financing to purchasers is deemed to be regulated lending under the National Consumer Credit and Protection Act 2009 (NCCP), which imposes a range of compliance issues. Primarily, the provision of credit by a corporation to a purchaser to acquire residential real estate requires the lender to hold an Australian Credit Licence (ACL). Unless the developer already holds such an ACL, it takes considerable time for it to apply to hold an ACL, which is often not a viable solution in short term financing timelines.

There are a number of exemptions under the NCCP which could potentially be utilised, including:

  1. Short term credit exemption – if the provision of credit is for less than 62 days, then an ACL is not required nor do the provisions of the NCCP apply.
  2. No credit charge – vendor finance is not considered to be the provision of ‘credit’ if no credit charge (i.e. interest) is payable by a purchaser. This means, in effect, that developers can offer interest free loans to purchasers for a reasonably short period of time, such as 3 – 6 months, to assist the purchaser to complete the purchase.
Security

Depending on the amount outstanding, security other than the contractual obligation to repay may be required.

Such security could be structured by way of a second registered or unregistered mortgage. However, if there is a first mortgage, a second mortgage may not be possible if the first mortgagee refuses to consent or makes the deal overly complex with a lengthy deed of priority. If such a second mortgage does not prove possible, the next alternative is a caveat over the title to the property. Whilst a caveat does not afford any statutory priority in the event of a purchaser default or insolvency, it does provide visibility over any attempts to deal with the title to the property.

Deferred Settlements and Partial Payments

Another method some developers have adopted on a limited basis is to allow a purchaser a settlement extension, in return for the payment and release of one or more instalments towards the balance of the purchase price. For example, in return for a further 45 days to settle, a developer may collect a further 10% instalment towards the price (in addition to the deposit).

This strategy would only be available for a purchaser with the means to pay a further instalment. However, where there is a willing purchaser that is genuinely attempting to settle, this strategy can help to reduce settlement risk for that particular purchaser, keeping them motivated to settle.

When considering this strategy there are a number of legal issues to work through before implementation.

  • Firstly, any further instalment must not be paid until after the plan of subdivision has been registered, and should be categorised as a payment being made in return for a settlement extension. The reason for this approach is that no more than 10% of the price can be paid before registration of a plan of subdivision under section 9AA of the SLA. It is also important to provide that any further payment is made in return for a settlement extension (due to a purchaser default) so that the terms contract provisions of the SLA do not apply.
  • Secondly, there is a risk that payment by the purchaser of any more than 10% of the price could be construed as a penalty. Whilst any additional payment may serve as a security deposit to incentivise a purchaser to settle, there is a risk that if the purchaser did not ultimately settle any payments made in addition to the deposit may need to be refunded. It is important to work through and discuss the law on penalties with your legal advisor to maximise the funds that may be retained in return for affording a buyer further time to settle.

Conclusion

Despite much negative press on the state of the residential apartment market, the sky has not fallen. As the strategies outlined above demonstrate, proactively managing settlements can help yield better results. However, forward planning and flexibility are critical. That planning should include input and discussions with all parties involved in the settlement process, including the developer, lawyers, project managers, sales agents and, if not yet paid out, project financiers.

Authors
Nick Sparks | Partner
+61 3 9258 3523
nicholas.sparks@maddocks.com.au
Ian Beattie | Partner
+61 3 9258 3689
ian.beattie@maddocks.com.au

It is no secret that settlements of residential apartments are, depending on the type and location of a project, taking longer to achieve. The positive message is that the world has not ended and settlements in apartment projects we are involved in still happen. The developers we work with are thinking outside the box to utilise creative strategies to support their purchasers, achieve settlements and bring in revenue. Below are three settlement strategies we are currently seeing being implemented with success.

Nomination Sales

From 1 July 2017 the Victorian State Government removed the off-the-plan stamp duty concession for anyone other than owner occupiers. As a result, contracts of sale that were exchanged prior to 1 July 2017 retain an added element of value in that the off-the-plan stamp duty concession is available to all purchasers, not just owner occupiers.

A strategy currently being used by some developers is not to rescind a contract but, rather, to be proactive and seek a nominee purchaser for the lot. The advantages of this approach are:

  • the off-the-plan stamp duty concession will be preserved for contracts entered into prior to 1 July 2017, and available to nominees upon settlement;
  • the developer can seek payment of holding costs from the contractual settlement date from the nominee or original purchaser;
  • the deposit can be released to the developer after service of a deposit release statement pursuant to section 27 of the Sale of Land Act 1962 (Vic) (SLA) on the assumption that the plan of subdivision has been registered and the occupancy certificate issued (and other contract conditions have been satisfied); and
  • the deposit can be used to pay additional agents’ commission for the nomination sale, along with any other costs incurred by the developer.

Note that any nominees that are foreign purchasers will still be liable to pay the foreign purchaser additional duty surcharge (which is currently 7% of the purchase price) if the nomination is made after 1 July 2015. This applies even if the contract was entered into before 1 July 2015.

Vendor Finance

Obtaining finance for purchasers in the current market can still be challenging. If purchasers do obtain finance, they may find that they are not able to borrow as much as they anticipated. Many developers are working with their purchasers to help them approach lenders who may be able to loan a greater amount. However, after alternative funding sources have been explored, the purchaser may still be short of sufficient funds to settle.

Some developers are then entertaining vendor finance for a period of time. There are a number of legal issues developers need to consider before deciding whether or not to provide such vendor finance, such as ACL licence and security.

ACL licence

Vendor financing to purchasers is deemed to be regulated lending under the National Consumer Credit and Protection Act 2009 (NCCP), which imposes a range of compliance issues. Primarily, the provision of credit by a corporation to a purchaser to acquire residential real estate requires the lender to hold an Australian Credit Licence (ACL). Unless the developer already holds such an ACL, it takes considerable time for it to apply to hold an ACL, which is often not a viable solution in short term financing timelines.

There are a number of exemptions under the NCCP which could potentially be utilised, including:

  1. Short term credit exemption – if the provision of credit is for less than 62 days, then an ACL is not required nor do the provisions of the NCCP apply.
  2. No credit charge – vendor finance is not considered to be the provision of ‘credit’ if no credit charge (i.e. interest) is payable by a purchaser. This means, in effect, that developers can offer interest free loans to purchasers for a reasonably short period of time, such as 3 – 6 months, to assist the purchaser to complete the purchase.
Security

Depending on the amount outstanding, security other than the contractual obligation to repay may be required.

Such security could be structured by way of a second registered or unregistered mortgage. However, if there is a first mortgage, a second mortgage may not be possible if the first mortgagee refuses to consent or makes the deal overly complex with a lengthy deed of priority. If such a second mortgage does not prove possible, the next alternative is a caveat over the title to the property. Whilst a caveat does not afford any statutory priority in the event of a purchaser default or insolvency, it does provide visibility over any attempts to deal with the title to the property.

Deferred Settlements and Partial Payments

Another method some developers have adopted on a limited basis is to allow a purchaser a settlement extension, in return for the payment and release of one or more instalments towards the balance of the purchase price. For example, in return for a further 45 days to settle, a developer may collect a further 10% instalment towards the price (in addition to the deposit).

This strategy would only be available for a purchaser with the means to pay a further instalment. However, where there is a willing purchaser that is genuinely attempting to settle, this strategy can help to reduce settlement risk for that particular purchaser, keeping them motivated to settle.

When considering this strategy there are a number of legal issues to work through before implementation.

  • Firstly, any further instalment must not be paid until after the plan of subdivision has been registered, and should be categorised as a payment being made in return for a settlement extension. The reason for this approach is that no more than 10% of the price can be paid before registration of a plan of subdivision under section 9AA of the SLA. It is also important to provide that any further payment is made in return for a settlement extension (due to a purchaser default) so that the terms contract provisions of the SLA do not apply.
  • Secondly, there is a risk that payment by the purchaser of any more than 10% of the price could be construed as a penalty. Whilst any additional payment may serve as a security deposit to incentivise a purchaser to settle, there is a risk that if the purchaser did not ultimately settle any payments made in addition to the deposit may need to be refunded. It is important to work through and discuss the law on penalties with your legal advisor to maximise the funds that may be retained in return for affording a buyer further time to settle.

Conclusion

Despite much negative press on the state of the residential apartment market, the sky has not fallen. As the strategies outlined above demonstrate, proactively managing settlements can help yield better results. However, forward planning and flexibility are critical. That planning should include input and discussions with all parties involved in the settlement process, including the developer, lawyers, project managers, sales agents and, if not yet paid out, project financiers.

Authors
Nick Sparks | Partner
+61 3 9258 3523
nicholas.sparks@maddocks.com.au
Ian Beattie | Partner
+61 3 9258 3689
ian.beattie@maddocks.com.au