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Property Development

 

 

Do property joint ventures need to be in writing?

Property developers don't beat around the bush. So when John Cappello phoned John Scrivener to ask for his share of the joint venture profits, Scrivener told him “You’ve got nothing in writing … Good luck if you want to try and get anything in court”.

The property development was the amalgamation of three 5 acre parcels of land at Rouse Hills, Sydney, for a medium density subdivision (see image). Put & Call Options were obtained, a Development Consent was granted, and the site was sold at a large profit.

But while the property development was a great success, the relationship between the partners was not. This was because after securing the site, and contributing to an option fee, John Cappello had taken a backseat role as a silent partner, allowing John Scrivener to pursue the development project in his name. This led to John Scrivener thinking it was all his project.

The property joint venture made a $9 million profit. So it was well worth John Cappello taking his claim to the NSW Supreme Court, in a trial which lasted 7 days and cost hundreds a thousands of dollars in legal fees.

John Cappello's weakness was that there was no joint venture agreement in writing. There was no Joint Venture Agreement, no Joint Venture Company, not even a Heads of Agreement to document the joint venture.

The evidence was an unsatisfactory mixture of emails and recollections of conversations at meetings, in phone calls, at a cafe and over lunch, many years before.

The good news for John Cappello is that the NSW Supreme Court awarded him a one half share of the joint venture profit treating his relationship with John Scrivener as a partnership.

For my case note click Do joint venture partners need to put their property venture into writing? (a case study)


 

Why is strata title better than company title?

Everyone has heard of strata title because it is the property title used for apartments and townhouses.
But this was not

always the case. Before strata title there was company title.

Company title is found in many blocks of apartments in places in Sydney like Darling Point, Double Bay, Kirribilli and even the Blues Point Tower. Almost all were built before 1961 when strata title took over as the favourite title for apartment buildings.

Company title is experiencing a revival. It is used in duplexes, in cases where the Local Council allows a duplex to be built but does not allow it to be strata titled.

This is how company title works: the property is purchased in the name of a limited liability company. The duplex is built. Then, instead of selling each dwelling in the duplex with a strata title, the owners of the company (the shareholders) sell their shares. The shares are not ordinary shares, they are special shares because some shares give the right to occupy one duplex, while other shares give the right to occupy the other duplex.

Lenders will lend against company title shares, but not as much as they lend on strata title. Valuers value company title properties at 10% to 15% less than comparable strata title apartments. This makes company title apartments good value for buyers who pay cash or have good cash deposits.

What are the downsides to company title? The main downside is that if there is a dispute between the owners, a liquidator and administrator need to be appointed to handle the dispute. By way of contrast, a strata title dispute is handled by the Tribunal – NCAT, making it much cheaper and more efficient.

To find out more click on Why strata title is superior to company title.


New duplex


 

Stamp duty on property options

Property options are used to acquire properties for purposes such as:

  1. Property Subdivisions of acreage
     
  2. Small scale townhouse developments
     
  3. High rise apartments or offices
     
  4. Flipping properties

The stamp duty regime is favourable provided you steer clear of put and call options.

  • On grant of call option or put and call option - no duty is payable
     
  • On exercise of option - duty is payable on the Contract on the full price
     
  • On nomination of someone else to exercise the option - the nominee pays duty on the fee paid, and if a put and call option, the nominator pays duty on the full price.
     
  • On assignment of the option - the assignee pays duty on the fee paid, and if a put and call option, the assignor pays duty on the full price.
     
  • On lapsing of the option (i.e. it is not exercised) - no duty is payable

Note: this is the situation in NSW. Other states have similar, although not always the same, regimes.

For more details click on my article When is stamp duty payable on property options in NSW?

 


Is the deposit all you lose if you walk away from an off the plan contract?

Buying off the plan means paying a deposit of 10% of the price to buy a home unit, townhouse or block of land and then waiting until the building is built or the land is subdivided. The wait can be anywhere from a few months to 2 or 3 years.

During that time, the off the plan purchaser has the peace of mind of a fixed price and the opportunity to save up a little more or the price before they need to settle the purchase contract.

But life does not always go smoothly. Divorce, ill health and unemployment are the three most common disruptions. It's not only life, it could be that property values fall below the contract price.

What then are the consequences of walking away from an off the plan contract? Is your deposit all you lose? Or are you exposed to more losses?

The answer is that you are exposed if the vendor's loss on resale exceeds the amount of the deposit. For instance, if the purchase price is $500,000 and the deposit is $50,000, if the vendor resells for $425,000, then the loss on resale is $25,000. The vendor is also entitled to recover the costs of the default and the costs of the resale.

And don't think that you are protected if you buy in the name of a company! There will be a personal guarantee clause in the contract which makes the company director personally liable for the loss.

This result was illustrated in a recent decision of Justice Darke in the NSW Supreme Court, in which he ordered that a purchaser who walked away from a contract to purchase a property in which the value had fallen 20% to pay $458,500 to the vendor as compensation for the breach of contract.

For more click on my case note Purchaser walks away from property purchase contract; pays vendor $458,500 for loss on resale


What happens to an off the plan purchase if the building is not completed before the sunset date?

Let's start by making it clear that a sunset date is not a romantic meeting. A sunset date is a date that a property developer inserts into off the plan sale contract by which they expect the building to be completed and the strata plan to be registered.

Until 2 November 2015, there were no restrictions on vendors or purchasers terminating the sale contract if the building was not completed by the sunset date. But in a rising property market, some property developers were delaying completion and were using the sunset clause to terminate then re-sell at a profit.

In response, the NSW Government introduced a Sunset Clause Law which requires the vendor in the contract to obtain permission from the NSW Supreme Court to rescind the contract. Permission is granted if the court is satisfied that it is just and equitable in all the circumstances to be able to rescind.

In only the second case which has been decided under the Sunset Clause Law, the Court has decided to refuse permission to the property developer to rescind nine off the sale contracts in an apartment development in Surry Hills, Sydney.

The court refused because the purchasers would lose the benefit of an average increase in value of $200,000 above the Contract Price and lose the 'lifestyle' choice of moving in. This was so, even though the property developer was not wholly to blame for the delay in completing the building because its builder went into administration.



For more details, click on my case note Sunset Clause Law bites property developer.


What happens when a purchaser caveats the property they are buying?

Property vendors are anxious to know what happens when a purchaser registers a Caveat over the property they are selling under a Contract for Sale.

They ask: Will the Caveat derail the sale and what should I do? This is a guide.

First: Why has the purchaser registered a Caveat? If it is because they have released the deposit to the vendor or if settlement is deferred beyond the standard time, then it is perfectly justifiable for a purchaser to register a Caveat, provided they have been granted a 'caveatable interest' in the Contract for Sale.

Second: How does the Caveat affect the vendor? Anyone searching the title will see the Caveat - if they are a lender, they will not lend more money to the vendor; if they are another purchaser, they will not enter into a Contract of Sale with the vendor; unless the Caveat is removed. So a Caveat restricts the vendor in refinancing or re-selling the property.

Third: Is there a dispute with the purchaser? If there is no dispute, then the purchaser is using the Caveat to legitimately protect their interests, and will come to settlement with a Withdrawal of Caveat. But if there is a dispute, the purchaser is using the Caveat as a bargaining chip against the vendor. If so, the vendor needs to take action.

Fourth: What action can a vendor take to remove the caveat? The process is called lapsing the caveat. The vendor serves a lapsing notice which gives the purchaser 21 days (in NSW) (14 days in Qld) to apply to the Supreme Court to maintain the Caveat on the title. If the purchaser does nothing, the Caveat will be removed from the title by the Lands Registry.

Fifth: What happens if the purchaser goes to Court? For a vendor, the most significant part is that the purchaser must 'proffer an undertaking as to damages' which means that they accept responsibility to compensate the vendor for all losses, if the court agrees to maintain the caveat on the title until the dispute with the vendor is determined by the court.

In a recent case before the Supreme Court of NSW, the purchaser applied to maintain their caveat. But when the moment came, they refused to accept responsibility for losses the vendor might suffer. As a result, the Court ordered the Caveat be removed and the purchaser pay the vendor's legal costs of going to court.

For my case note click Will a purchaser's caveat stand without an undertaking as to damages?


 

The news is all bad for Timbercorp investors

Timbercorp investors lost their investments when Timbercorp collapsed in April 2009.

But the investors did not lose their liability to repay their loans with Timbercorp Finance. The loans remained due and payable with interest.

For a while, KordaMentha who were appointed receivers of Timbercorp Finance took no recovery action, as they waited for an investor class action to be concluded.

Then, when the class action failed, they took recovery action, but were stayed pending a High Court Appeal which found that the investors could still defend the recovery claims.

But now, the Supreme Court of Victoria has shut the door on those defences, and the investors will have no choice but to pay up or go bankrupt.

For my case note, click Timbercorp investors have failed in their ‘no loan’ defences to loan recovery claims


 

Good news at last for Great Southern Plantations Investors - Bendigo Bank loan recovery claims can be beaten!

Not a lot has gone right for investors in the 43 Agricultural Investment Schemes promoted by the Great Southern Plantations Group between 1998 and 2008.

They invested in timber, beef cattle, wine grapes, almond and olive projects. Yes, their investment was tax driven - the money invested was tax deductible immediately. But it was also an investment - they expected to receive their money back and good profits on their investment over the 10 to 12 year term of the project.

Many investors used borrowed money to fund their investment. They took out a loan from Great Southern Finance (another group company), which then on-sold their loan to the Bendigo and Adelaide Bank. Click for more


 

Is a caveat good security for an investor in a property development?
Investors can make good profits by investing in a property development. A common situation is a land owner who owns land which is ripe for subdivision. But they are missing one vital ingredient - the money - to obtain the approvals and to carry out the site work. Click for more
 

 

How property developers can profit from using vendor finance.
Is there some way we can use Vendor Finance by which we can ensure sales and that both the Vendor and Buyer are happy?  Click for more


 

Two Property Developers hit the wall – after clutching at straws to forestall possession orders on their properties
Property developers are known to use ingenious arguments to forestall possession orders sought by their lenders, after the lender calls up the loan. Click for more



 

Joint Ventures for Real Estate Investment and Development
If two people combine their knowledge and their money in a property venture, they will often achieve more as partners than they would achieve on their own. Click for more

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