Changes have been made to the Land Sales Act 1984 (Qld) (LSA) by the Sustainable Planning & Other Legislation Amendment Act 2011 that are of critical importance to developers of product sold off-the-plan in Queensland. The Act passed is yet to receive Royal Assent.
After receiving submissions, the Government has closed a loophole that jeopardised the enforcement of sales contracts following a buyer’s default.
Section 27 of the LSA requires that a transfer capable of immediate registration be delivered to a buyer under an off-the-plan contract within a set statutory period, being 31/3 years or 51/2 years if extended by regulation. If the seller has not given the transfer capable of immediate registration to the buyer in that timeframe the buyer may avoid the contract.
The concern was that a buyer who failed to settle a contract could still avoid a contract that remained on foot while a seller sought specific performance orders in Court.
The policy intention of the LSA is that there must be a sunset date for delivery of title to off-the-plan lots the subject of sales contracts. In the normal course, a developer would register the plan of subdivision and give notice requiring settlement to occur a short time after registration occurs. Usually, that time period is between 14 and 30 days after registration. This process needs to occur within the LSA period of 31/2 years or 51/2 years, as applicable.
Impact of Market Conditions
In recent times, with changing market conditions and higher rates of buyer default, many sellers have been faced with the buyers failing to complete contracts. The seller’s remedies are then to either terminate the contract, forfeit the deposit and claim damages or to seek specific performance of the contract to compel the defaulting buyer to buy the relevant lot.
Risk to Developers and Financiers
Where a seller seeks specific performance, the contract remains on foot pending the outcome of Court proceedings. If the LSA time period for delivery of a transfer passed before matters in dispute were determined by the Court, the buyer may have been able to avoid the contract relying on its rights under the LSA, regardless of the buyer’s contractual default.
Such an outcome would be inconsistent with the principle that a defaulting party should not be able to rely upon its own default to found a right to avoid the contract.
Once the seller creates title to the lot and properly tenders the transfer at settlement, the seller can do no more to satisfy its obligations under the contract and the LSA. No policy objective would have been served by allowing the LSA to continue to apply where a seller had created title and was ready, able and willing to settle.
The ambiguity in the LSA meant that a seller would risk losing all contractual entitlements flowing from the buyer’s default. The only option for the seller to preserve its rights would have been to terminate the contract and pursue a damages claim. A seller could not take the chance that a Court would prevent a buyer relying on its own default to found an avoidance right under the LSA as a matter of policy. In a depressed market re-selling would not be preferable, particularly where a defaulting buyer had sufficient assets and capacity to complete the contract but was simply attempting to avoid its obligation to settle or obtain concessions from the seller.
For new developments, ambiguity in the legislation that potentially limited the ability of a seller or developer to enforce pre-sales contracts would weaken the underwriting value of those pre-sales as security for development finance. Financiers might not credit pre-sales contracts as security for development funding if the rights to enforce those pre-sales contracts and compel a buyer to complete under the contract could be limited by the LSA even where the buyer defaulted under its contract.
If a buyer has legitimate grounds for not completing the contract, those grounds can be tested in Court in the ordinary course of litigation and the buyer will not be divested of any right in respect of a seller’s breach of contract.
The mandatory statutory sunset date and the buyer’s right to avoid if a developer is not able to create title and deliver the transfer within the relevant statutory period remain.
The Government and the Opposition are to be applauded for a bipartisan approach to closing this loophole and ensuring that the integrity of pre-sales contracts, is not undermined. Sellers already have to comply with a significant range of consumer protection legislation relating to pre-sales disclosure and form.
The legislation has now been amended to limit a buyer’s right to avoid a contract under section 27 of the LSA where the seller has not given a transfer in the statutory period because of the buyer’s default. This is consistent with the legal principle that a defaulting party should not be able to rely on its own default to found a right of action.
Further amendments to the LSA are proposed to allow for parties to fix a contractual date for the delivery of a transfer. Those changes are consistent with returning discretionary rights to the contracting parties and will also, if passed, be beneficial in allowing developers to set realistic timeframes for the delivery of projects, taking into account the circumstances of particular projects, their complexity and construction timeframes.