The current position
Currently, section 13 of the Act prohibits a person from selling five or more lots in a land subdivision or any lots in an off the plan strata development unless the developer/seller is the owner of the underlying parcel of land (or is presently entitled to be the registered proprietor of the land) on which the development is taking place.
If the section is contravened then the seller is not able to enforce the sale contract. But the buyer will be able to enforce the sale contract against the seller. The offending sale contract is akin to a call option held by the buyer.
Consider the following approach to development site acquisitions:
Developer enters into an option to acquire the development site or enters into a contract to buy the development site but settlement is deferred.
Developer undertakes a marketing campaign to see if the development is viable.
Developer enters into contracts to sell lots off the plan, before the developer owns the underlying land.
Developer decides based upon presales that the project is viable and exercises the option or decides to proceed to settlement.
Developer settles on the purchase of the land and becomes the registered proprietor.
In Baker v Midstyle Nominees Pty Ltd  WASCA 75, the Court of Appeal considered section 13 and found that the sale contracts entered into at step 3 above were unenforceable by the seller, but enforceable by the buyer – so in effect, the buyer could get out but the seller could not.
Key amendments proposed
The Bill proposes that section 13 be amended to permit a person to sell one or more lots in a subdivision before they become the owner of the underlying parcel of land provided that the sale contract includes the following:
- Seller’s condition – The sale contract must be conditional on the seller becoming the proprietor of the lots within six months of the contract date or such other period as specified in the sale contract. If this condition is not included, the sale contract will be illegal and void, the buyer may recover the deposit, the seller will commit an offence and be liable for a fine of $100,000. If this condition is not satisfied, the seller or buyer may terminate the sale contract by notice and the buyer may recover the deposit.
- Statutory warning – The sale contract must include a warning that the seller is not the proprietor of the lots. If this warning is not included, the sale contract will be illegal and void, the buyer may recover the deposit, the seller will commit an offence and be liable for a fine of $100,000.
- Deposit – The sale contract must provide that any deposit must be paid by the seller to an Australian legal practitioner, a real estate agent or a settlement agent specified in the sale contract within two working days of receipt from the buyer. If this condition is not included, the sale contract will be illegal and void, the buyer may recover the deposit, the seller will commit an offence and be liable for a fine of $100,000.
Jackson McDonald’s analysis and observations on the proposed changes
- In our opinion, while the proposed legislative changes to section 13 are positive for the property sector, they bring their own challenges and compliance burdens particularly for selling agents preparing sale contracts.
- Penalty - The new penalty of $100,000 is a significant change from the previous penalty of $750. This is of particular concern in the case of an accidental or inadvertent contravention. The new penalty is also per offence. So if a developer enters into five contracts in breach of section 13, the potential liability will be $500,000. In addition, if a corporation breaches section 13 the penalty will actually be five times that stated in the Act pursuant to section 40(5) of the Sentencing Act 1995 (WA).
- Contrast to the Strata Titles Act – It is interesting to compare the proposed amendments to section 13 with the Strata Titles Act 1985 (WA) (STA) in relation to accidental non-disclosure of information. Under the STA, if the seller does not provide the buyer with “notifiable information” the buyer simply has a right to avoid (i.e. get out) of the sale contract and the seller is not subject to a monetary penalty. Whereas, under the proposed amendments to section 13 if the seller does not provide the buyer with the “statutory warning” the sale contract becomes illegal and void and the seller is subject to a significant monetary penalty.
- Seller’s condition - The primary purpose of the Act is to protect buyers of land and to provide clarity as to the current owner. In light of this consumer protection bias, care will need to be taken to ensure that the sale contract properly describes the “period of time” the seller has to become the proprietor of the lot. In particular, the following types of expressions should be avoided: - “the period of time for the seller to become the proprietor of the lot is 12 months but that 12 months can be extended by the period of time equal to delays which arise that are outside the seller’s control”.
- Statutory warning – The form of “statutory warning” which sale contracts must include under section 13 is not yet available for comment.
- Existing breaches – The proposed amendments to section 13 will not be retrospective. This means that the amendments will not “fix” existing sale contracts which currently contravene section 13 of the Act.
- The above summary of the Bill reflects the proposed amending wording as it stands in the Legislative Assembly at 23 June, being the date it was introduced. As at 28 July 2016 no changes to the Bill have been proposed by the Parliament.