A new national unfair terms regime

Residential developers should be aware that many contracts they enter into for off-the-plan sales of apartments or lots are subject to the new Federal unfair terms regime. This regime, which took effect on 1 July 2010, allows a Court to declare an “unfair term” in standard form consumer contracts void.

Unfair terms legislation has been in existence in New South Wales since 1980 and in Victoria since 2003 (although the Victorian legislation did not apply to contracts concerning land).  The regime is the first comprehensive national regime to cover unfair terms.

Developers should also take note of some minor changes to the Victorian legislation applying to off-the-plan sales.

Many off-the-plan contracts will be caught

The regime applies to standard form consumer contracts.

Consumer contracts are contracts with individuals purchasing for personal, domestic or household use.  This means that corporate purchasers and individuals purchasing property for investment purposes will not be protected by the regime. 

The following matters are relevant to deciding whether a contract is a standard form contact:

  • Does one party have all or most of the bargaining power?
  • Was the contract prepared by a party before any discussion?
  • Did the other party have an effective opportunity to negotiate terms?
  • Did the terms of the contract take into account the specific characteristics of another party or the particular transaction?

Most off-the-plan contracts are in a standard form prepared by the developer and it is rare for individual purchasers to negotiate their terms.  These circumstances make it very likely that an off-the-plan contract would be a standard form contract.

Which terms could be unfair

Under the regime, a term is unfair if:

  • it will cause a significant imbalance in the parties’ rights and obligations;
  • it is not reasonably necessary in order to protect the legitimate interests of the advantaged party; and
  • it would cause detriment to one party.

The legislation gives a number of examples of terms that may be considered unfair.  Click here to see a few that could be applicable to off-the-plan contracts.

However, developers may still be able to show that terms of this nature are reasonably necessary for their legitimate interests.  Evidence about the market in which developers operate, economic factors imposed by financiers, and other regulation by councils and planning schemes would all assist in demonstrating the need for contractual flexibility.

Contracts that provide only as much discretion as is necessary to deliver the end product to the purchaser will limit the risk of a court finding a term to be unfair.

Terms cannot be unfair where they:

  • define the main subject matter of the contract (a consumer cannot allege that a term is unfair because they have changed their mind about the land that they have agreed to purchase);
  • set the upfront price payable under the contract; or
  • are required or expressly permitted by law.

Consequences

If a Court finds that a term is unfair, it will be void.  Importantly, this does not mean that the contract is void if it can continue to operate without the term.  However, this could still cause practical difficulties if the developer is relying on its ability to enforce the term.

Postscript:  Victorian off-the-plan legislation

Victorian developers should also be aware of three key changes made to the regulation of off-the-plan contracts by the Sale of Land Act 1962 (Vic).  These changes will come into operation on 1 September 2011, unless proclaimed earlier (but watch this space, there is a bill before the Victorian parliament to extend this date to 30 June 2012, to permit more time for contracts to be amended).

  1. The option to pay a deposit from an off-the-plan sale into a special purpose account in the name of the parties has been removed.  Deposit monies will now need to be held by a lawyer or conveyancer for one of the parties.
  2. The front page of an off the plan contract will need to advise that:
  • the amount of the deposit is negotiable,
  • a substantial period of time may elapse between when the contract is signed and when the purchaser becomes the registered proprietor of the lot; and
  • the value of the lot may change in the period between when the contract is signed and when the purchaser becomes the registered proprietor of the lot.

A failure to include this notice on the front page will allow a purchaser to walk away from the land sale contract at any time before the plan of subdivision is registered.

  1. Purchasers of land will no longer be restricted from exercising cooling-off rights if they have sought and received advice from a legal practitioner before signing the contract of sale.

As a result, the ‘important notice to purchasers’ in relation to cooling-off periods on the front page of contracts will need to be amended.