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Rental Property Investment
 

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?


New NSW policy welcomes short stay rentals (Airbnb style)

On 5 June 2018, the New South Wales Government announced a new policy for hosts for short-term Airbnb style holiday letting. The new policy will affect both owner-occupiers and investors.

The key is a new cap of 180 days in any one year on short-term lettings for an investment property, meaning a property that is not owner-occupied. The cap does not apply to owner-occupiers who rent a spare room or rooms.

Owner-occupiers - who rent 'rooms' in houses and home units anywhere in NSW - There is no cap on the number of days in a year that rooms can be let for short-term lettings. This applies to owners who let part of the house for short-term lettings, and live in another part. If breakfast is served, a B & B Licence might be needed from the Local Council.

Investors - who rent 'whole' houses and home units outside of Sydney - There is no cap on the number of days in a year that the whole house or home unit can be let for short-term lettings.

Investors - who rent 'whole' houses and home units in Greater Sydney - there is a cap of 180 days in any one year for short-term lettings. The boundary line for the Greater Sydney Region is yet to be drawn.

Investors - who rent home units in Sydney - If the Owners Corporation passes a 75% majority resolution (a special resolution) then it can ban short-term lettings by investors of 'entire' home units in the building. This cannot affect owner-occupiers who let rooms. It is not clear whether existing bans will be allowed to continue, or whether a new resolution will be needed.

For all short-term lettings, there will be a new mandatory Code of Conduct that hosts and guest must follow, accompanied by a two-strike policy, whereby hosts or guests who commit two serious breaches of the code within two years will be banned for five years and listed on an exclusion register.

For more details on the new rules, click Is the new NSW Government policy a win-win for short-term (Airbnb style) holiday letting?


 

The Chapter on Real Estate Law in Australia from the International Real Estate Law Review

The law applying to Real Estate around the world is both similar and different.

Law Business Research invited me to join its expert panel to contribute the chapter on Australia to the international Real Estate Law Review which covers 35 countries from around the world including the United States, Indonesia, Hong Kong and Singapore.

All authors answer a common set of questions in our chapters, which are:

INTRODUCTION TO THE LEGAL FRAMEWORK

OVERVIEW OF REAL ESTATE ACTIVITY

FOREIGN INVESTMENT

STRUCTURING THE INVESTMENT

REAL ESTATE OWNERSHIP

LEASES OF BUSINESS PREMISES

DEVELOPMENTS IN PRACTICE

OUTLOOK AND CONCLUSIONS

The Australian Chapter I have written is an excellent birds-eye view of real estate law in Australia. It is particularly useful for interstate and overseas investors.

Click on this a link - The Real Estate Law Review - Australia Chapter


 

Is it a good idea to switch from a family trust to a company to save tax?

With family trusts under threat as a tax shelter, are companies looking like an attractive tax effective alternative?

The tax effectiveness of a family trust is that profits are distributed to members of the family, as you choose, every year. This means diverting the profit distributions away from high income earners to low income earners (such as adult children) to take advantage of the tax free threshold of $18,200, and the 19 per cent tax bracket up to $37,000, so as to avoid distributions to high income earners who have tax brackets of 37 per cent from $87,000 up to $180,000 and 45 per cent above.

The threat (currently the federal opposition policy) is for family trust distributions to be taxed at a rate of 30 per cent. For example: if the low income earner is earning wages (from casual or part-time work) of $15,000 pa, then that is tax free because it is earned income. But on every dollar of trust distribution which tops up income up to $37,000, the tax rate is proposed to be 30 per cent. Trust distributions which top up income above $37,000 will be taxed according to the tax bracket, which is 32.5 per cent.

Company profits are kept by the company - they do not need to be fully distributed each year - unlike profits from a family trust which must be distributed. After paying company tax, the profits do not need to be paid out as dividends. Therefore, if the shareholders are high income earners, they can avoid receiving income which is taxable in a high tax bracket.

The icing on the cake is the recent company tax rate cuts, which for a company with an annual income of less than $25 million, means a tax rate of 27.5 per cent instead of 30 per cent. This means that small company can retain more of its profits.

But the 27.5 per cent tax rate is available only if 20 per cent or more of the company's income is from business activities. That is, pure investment income does not qualify, such as rent, interest, dividends, capital gains and trust distributions

Conclusion: If a flat tax rate of 27.5 per cent is attractive, then it's a good idea to switch to using a company for a new active investment or business.

For more information, click on Real estate investment companies must pass the 80% passive income test to qualify for the company tax rate cut


 

Court rules that Airbnb style holiday letting is unlawful in a strata building

The "Pinnacle" is an exclusive residential condominium on Grace Bay Beach in the Turks and Caicos Islands.

The developer aimed to attract buyers looking for an exclusive place to live, not the holidaymakers along the beach. So the developer included a strata by-law which banned owners from renting out their apartment for less than one (1) month.

This ban was ignored by the owners of apartment 102, who rented to holidaymakers, usually with one week stays. The body corporate sued the owners for breaching the strata by-law. The owners countered by arguing that the strata by-law was invalid because the Strata Law did not permit any restriction on a strata owner’s right to rent out their apartment. The Strata Law is the same in Turks and Caicos as it is in Australia.

The case was fiercely fought, all the way to Judicial Committee of the Privy Council in London, which was also Australia's final court of appeal until 1986.

In the last year or two, the topic of Airbnb style holiday lettings in strata apartments has been hugely controversial in Australia. NSW Fair Trading has advised and the NSW Civil and Administrative Tribunal has ruled that a strata by-law cannot restrict the rights of an owner to rent out their apartment in any way.

The Privy Council rejected this strict interpretation. It ruled on 21 December 2017 that it was possible that the owner’s rights be restricted, if the restrictions were reasonable. In this case, the strata by-law was a reasonable restriction on the right to lease because it was aimed at preserving the residential use of the building. It was reasonable to draw the line at 30 days to distinguish a residential use from a holiday letting use. Therefore the strata by-law was valid.

The ruling is a game changer. This is the new game plan (in my view):

  • The NSW Fair Trading advisory and the Tribunal ruling can be ignored as they are both wrong to reject any restriction on the right to lease.
     
  • If a strata scheme wants to restrict Airbnb style holiday lettings, it passes a strata by-law with a one (1) month minimum stay requirement, just like in the "Pinnacle"!
     
  • If an owner is unhappy with the strata by-law restriction, they can apply to the Local Council or Planning Authority for an approval or permit to use their apartment or villa as a serviced apartment or as a bed and breakfast establishment. If an approval or permit is granted, it will override the strata by-law.
     
  • If the strata scheme does not pass a strata by-law, then the owner can continue with their Airbnb style holiday lettings.

For a detailed analysis read my case note: Can a strata by-law restrict Airbnb style holiday lettings? A new legal decision is a game changer


How to handle Airbnb-style letting in NSW – all you need know

Airbnb is growing fast in Australia and almost half the properties involved are located in New South Wales. Many would-be hosts are wondering about the legal, tax and insurance implications – and their questions have now been answered.

The answers are given in a new video released by Sydney-based specialist travel and tourism lawyer, Anthony Cordato. The video, which is covers six topics, has been placed on YouTube.

“Airbnb-style short-term letting for apartments, for holiday houses and for spare rooms is growing rapidly in popularity for home owners, investors, and of course leisure and business travellers,” Cordato says.

“The regulatory environment is playing catch-up in NSW, and while it is, the legal framework is a grey area.”

New South Wales is a hotspot for Airbnb. There are 30,000 properties in NSW, 70,000 in Australia and 2 million worldwide.

“These are big figures,” Cordato notes.

This video covers six topics:

  1. What Planning Approvals are required for short-term lettings?
  2. What restrictions are there for strata titles properties?
  3. How does Airbnb work?
  4. Insurance
  5. Tax
  6. Loans using Airbnb income

Filmed at a property investment seminar, the video includes interesting and relevant questions and comments from the audience.

If you are thinking of venturing into the world of Airbnb, or similar letting platforms, this is essential viewing.

Written by Peter Needham, chief travel writer, eGlobal Travel Media

 

 


Help the NSW Govt decide on how to deal with Airbnb style short stay letting!

The NSW Government is under pressure from traditional holiday apartment operators, from strata residents, from Airbnb and Stayz, and from property owners who all have a different view about how short-term letting should and should not be regulated in NSW.

After a Parliamentary Committee failed to come up with a politically acceptable compromise, it has issued an Options Paper. It has asked the stakeholders, the general public and the industry to let it know what it should do.

The NSW Government puts forward four options:

  1. Self Regulation: where the industry / operators adhere to a Code of Conduct, which includes complaints management, education and ongoing monitoring and reporting.

  2. Special Rules for Strata Properties: where owners corporations cannot ban short-term letting, but are allowed to make by-laws to make owners liable for breaches by their tenants, to streamline enforcement, to levy extra and to strengthen the powers of the Tribunal.

  3. Regulation through the Planning System: The Government would like to lay down clear planning guidelines for Local Councils, as it sees them as the best gatekeepers.

  4. Registration or Licensing: This is seen a lighter touch than regulation through the Planning System.

This will not be a quick process. In the meantime, the fast growing industry will continue to grow in a legal grey area.

For more information on the NSW Government Policy click: What policy would you recommend to the NSW Govt for short stay traveller accommodation?


Property investors lose two tax breaks in Budget 2017

The Federal Budget 2017 has cut two long standing tax deductions that residential property investors enjoy.

The first is the tax deduction for travel expenses, which has been cut out: Property Investors like to visit their rental property to inspect it between tenancies, to carry out maintenance and repairs and collect rentals. The petrol, the airfares, the accommodation, and other travel expenses will no longer be tax deductible for travel after 30 June.

Tip Visit your rental property before 30 June.

The second is the tax depreciation for plant and equipment, which has been cut down:

There is no longer any depreciation if the plant or equipment is in a property purchased after 7:30 pm (AEST) on 9 May 2017 (the time when Budget 2017 was handed down). In a new house or off-the-plan apartment, this could be worth up to $2,000 per annum.

What does this apply to? According to the Budget Papers: Plant and equipment items (usually mechanical fixtures or those which can be ‘easily’ removed from a property) such as dishwashers and ceiling fans. We will need to wait for the full list, but it is likely to include: stoves, range hoods, hot water systems, clothes dryers, air conditioning units and solar panels.

The plant and equipment will not be depreciable if it is already in the property when it is purchased. It will be depreciable if purchased by the property investor.

Tip Buy plant and equipment separately, (not as part of a property purchase contract).

For more information click on the current law and a full extract on the new law from the Budget Papers Federal Budget 2017 – Residential Property Investors lose depreciation and travel deductions


Does Airbnb give Boutique Hotels and B&Bs a competitive edge?

Traditional hotel chains and large resorts have long dominated the accommodation industry because of their strong brand marketing and distribution channels.

But as with so many other industries, the internet is disrupting the traveller accommodation industry. Through internet booking platform operators such as Airbnb, Stayz, eDreams and Bookings.com, the internet is providing small accommodation providers with easy and cheap access to a global market for travellers, whether it is for business or pleasure.

There are four services which Airbnb provides, which give Boutique Hotels and Bed & Breakfasts a competitive edge over traditional hotels and resorts, and which allows them to by-pass the traditional travel agents (brick & mortar or online) in making bookings:

  • Marketing
  • Bookings Management
  • Payments Platform
  • Property Damage & Injuries cover

These services are increasing lodging occupancy and pricing power for small accommodation providers.

For more information about how Airbnb is empowering Boutique Hotels and B&Bs to build their business, Click Here


Is Airbnb the answer to boosting cash flow for property owners?

If an owner has a spare room in their home, or has a granny flat, or an investment apartment near a business centre, or a holiday house, then

they can boost their cash flow by renting it out as short-term stays to business and holiday travellers.

This is how it works: The owner sets the rent higher than the long-term rent because it is a short-term letting. For instance, the Airbnb rent might be $65 per day (plus a cleaning charge) for the room, which is higher than the weekly rent of $245 per week ($35 per day) for the same room. This suits the guest because the rent is cheaper than the daily tariff charged by a hotel.

Airbnb is therefore effective way to boost cash flow from a property, whether it is a spare room, a granny flat or a whole house or apartment.

Click for more
 



How liable are you if a visitor slips or trips when entering your property?

VERY LIABLE according a Victorian Supreme Court decision of Scott v Wanklyn.
Of course, liability is not automatic. The property owner/tenant must be at fault (i.e. negligent) in some way.

Click for more on aged visitors and uneven access 
 


The property buyers guide to Contract Deposits
A Deposit is paid and the Contract is signed – these are the fundamentals of entering into a legally binding purchase contract. There are many questions:

Why is a 10% deposit required for a property purchase contract? Is it possible to pay less than a 10% deposit? What ways are there to fund the deposit? Are there creative ways to fund a deposit? What happens to the deposit after it is paid?

Click here for The property buyers guide to Contract Deposits.
 


The property buyers guide to Cooling Off
Cooling off periods apply by law to all contracts for the sale of residential property, with the exception of sales at action or where a solicitor or conveyancer has provided a 66W Certificate.

How do you use a cooling off period to give you the breathing space you need to obtain unconditional loan approval, pest and building inspections, etc?

Click here for The property buyers guide to Cooling Off.



Without liability insurance, home owners are exposed to million dollar law suits
Personal injury law suits represent the single largest threat to a home owner's and landlord's assets.

Compensation awards can exceed $1 million for head injuries or spinal cord injuries caused by falling from a ladder, slipping on stairs, and tripping over.

For this reason, it is essential for home owners and landlords to have Liability insurance cover as part of their Home Insurance / Landlord's Insurance policy.

The importance of having Liability insurance cover was recently highlighted in a decision of the Supreme Court of Tasmania. The court ordered the home owner (i.e. their insurer) to pay their roofer over $1.1 million in compensation for his severe head injuries because they owed him a duty of care for his safety while working on the roof.

Without Liability insurance, such an award would have been devastating for the home owner. They would have been forced to sell their home to pay the award, and face bankruptcy for the shortfall.

For more information, click - Roofer falls off ladder set up by home owner; Court orders home owner to pay $1.1m
 


Landlord’s Guide to Renting
This Renting Guide is a reference for landlords to use to make more informed decisions. It is not a DIY (Do It Yourself) guide for landlords.
 


Buying an off-the-plan apartment in Sydney
Why aren't the prices of off-the-plan apartments falling, like the prices of mobile phones have fallen, when so many are under construction in Sydney?
 


Buying and renting pet friendly home units
Home unit owners are either strongly pro pets or anti pets. The strata by-laws in a block of home units / apartments will reflect the views of the majority of owners.
 


Why missing a credit card payment makes it harder to qualify for a property loan.
Pay a credit card or home loan more than 14 days late after the due date, and the missed payment will be recorded as a black mark against your name on your personal credit file.
 


How do you tell if you are carrying on a rental property business?
Are property partners investors or business partners? The ATO reviews the position of partners carrying on a rental property business.
 


Mortgage Brokers – What duty of care do they owe to residential property investors?
Mortgage Brokers / Finance Brokers are not often targets in loan enforcement proceedings.
 


The Investor’s Guide to buying property - In whose name do you buy your next property
Do you buy investment property in a personal name, or use a property investment structure such as a company, a family trust or a self-managed super fund?
 


How not to structure an investment property purchase - Part I Access to investment losses
The holy grail for tax and estate planners is to structure investment property purchases to have access to investment losses to reduce the taxpayer’s personal tax and yet to protect the investment property inside a discretionary trust.
 


Buying and Selling with delayed settlement contracts
How does Deposit Builder work for buying and selling a property?

 

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