G is for Guarantees
A guarantee is a legally binding commitment by someone (the guarantor) to honour the obligations, of a third party (the principal party), pursuant to a contract. When dealing in property transactions, a guarantor is quite often a relative of, or connected with, the principal party.
There are two main examples of guarantees in property transactions:
a. where the purchaser of the property is a company, in which case, the seller will require the directors of that company to guarantee the company’s obligations under the contract of sale;
b. in cases where a lender requires the borrower (the purchaser) to obtain a guarantor as a condition of granting the loan (this situation will be covered in a subsequent edition of this series, under R is for Related Party Transactions).
In the first example, the directors need to understand that they are personally guaranteeing all of the obligations of the company pursuant to the contract of sale. Most directors will be willing to enter into such a guarantee as they have already concluded that there will be financial benefits in utilising a corporate structure for the property acquisition. Further, there is generally no choice-it’s an accepted process, within standard property transactions, that directors’ guarantees are required. In fact, the revised general terms and conditions contained within the contract of sale expressly provide for this. Consequently, the key issue is to understand the ramifications, on the director(s), of a default by the corporate purchaser.
Tip for Buyers-at the end of the day, if you utilise a corporate purchaser, as a director you will need to ensure that the property transaction is completed in accordance with its terms. Otherwise, you will be exposed to legal action or, at a minimum, to additional costs and expenses as a result of the default. It is quite different to the normal position involving corporations, where a director can often avoid company obligations due to there being no director’s guarantees in place in relation to any particular transaction.
Sometimes circumstances change resulting in a property purchase going “pear shaped”. This is more likely to occur in long dated transactions (such as off the plan acquisitions), where the passage of time can lead to deterioration of a company’s financial health. If situations do change detrimentally, it is crucial that the director’s assets are properly protected or the decision as to who has been appointed as a director(s) in the first place was correctly made.
Bottom line-when establishing corporate structures make sure you seek legal advice as to the most effective way to set up your structures (family or business) so that personal assets are adequately protected. In relation to property transactions, as a director seek legal advice so that you can fully understand the obligations that you could be exposed to.
H is for Holding Deposit
Prospective buyers of property quite often believe (or are led to believe) that if they pay what the estate agent calls a “holding deposit” (often anywhere between $100 and $1,000) it will secure them the property until formal sale documents have been prepared. Other property enquiries are put on hold as sale documents are prepared. This level of confidence is often increased by the agent having a document called an Intention to Purchase signed by the prospective buyer.
While there may be a legal argument, in some instances, that a seller is bound the key principles are:
a. until a purchaser has signed an acknowledgement that a Vendor’s Statement (S.32) has been sited, no valid contract of sale can exist;
b. even if the above acknowledgement has been signed, until both the buyer and seller have signed a contract (normally in the form of a standard contract of sale), no binding agreement exists
Tip for Buyers-never rely on the fact that you have paid a sum of money to the estate agent as securing a property for you. You will be exposed to having your “offer” shopped around by the agent. If the required sale documents are not yet available, you are far better off putting your proposed offer in writing but also advising the agent that if the sale documents are not available within a specified (and short) period of time-days not weeks, you will be withdrawing your interest in the property and looking elsewhere. This is much more likely to produce your desired result as pressure will be placed on the seller’s solicitor to quickly produce the sale documents. If you have any doubt whether you have a binding contract speak with your solicitor.
I is for Income Tax
If you purchase a property to reside in as your principal place of residence, and provided you hold the property for a period greater than 12 months, you will not need to turn your mind to issues such as income tax. In this regard, note that the measurement of the period of 12 months is based on the date(s) that the contract of sale to purchase and then (subsequently) to sell were entered into. It is not the settlement dates or the dates that the certificate of title is altered.
While it is unlikely that you would purchase a property to live in and sell it in less than 12 months, it can happen. As it is hardly ever anyone’s intention, the most you can do is be aware of it so that if you do decide to move the property so quickly, you can at least get your dates right so that the property is held for more than 12 months (even if just marginally).
The other mistake that is made by property developers is to assume that property that is acquired and subsequently sold, will always be treated in accordance with capital gains tax principles. This may be the case with a property developer’s initial developments but once the developer adds to the property portfolio, there is a risk that the Australian Tax Office might apply income tax, to any surplus, rather than capital gains tax
Tip for Buyers-as your principal place of residence is concerned, be aware that a quick re sale might expose you to an unexpected income tax liability. If this situation arises, speak to your solicitor and financial adviser about the implications and which precise dates you need to be aware of.
If undertaking property developments (even on a small scale) become aware of the principles that drive how any profits will be characterised. This is a complex issue and not a black and white one, so a proactive approach is crucial. Legal advice on structuring is just as important as accounting and tax advice in this area of property transacting.