Buying property in Victoria?

The tips, traps and legal risks – Part Two

The moderating housing market in Melbourne has provided positive news for buyers. But unlike other industries, the housing market can also be quite volatile. Part two of this article focuses on some of the traps and legal risks associated with buying property.

1.    Contract of sale

Buyers must understand the ‘particulars of sale’ and ‘general conditions’ in any contract of sale. In Victoria, the prescribed standard contract used by agents and lawyers is the “Contract of Sale of Real Estate” issued pursuant to the Estate Agents (Contracts) Regulations 2008. While the seller can use a different form of contract to effect the sale, this must be prepared by a solicitor or licensed conveyancer. The real challenge for buyers is when they are faced with a contract that significantly alters their legal rights, either by way of amendment to the general conditions or by way of overriding “special conditions”.

2.    Special conditions

A solicitor or agent may add additional clauses to go into the contract — known as “special conditions”. While ‘special conditions’ are a common feature in today’s housing market, they are usually requested implemented by the seller. Accordingly, special conditions should not be read lightly and a professional must be retained to interpret such conditions. There are several cases where the Court has found special conditions relating to deposits, completion, time and notice to be void with the consequence of incurring a penalty.

3.    Inspect! Inspect! Inspect!

Buyers must consider whether they need to undertake any pre-contract searches and enquiries and arrange for inspections. Particularly when the sale occurs by way of auction, buyers continuously downplay the importance of pre-contract and pre-settlement inspections. The unfortunate result is that a building defect may be discovered following completion of the contract and, in the absence of a legal warranty, the implications can be quite significant. Some of the overlooked inspections include: building and pest inspections, sewerage and drainage, zoning and reports on landslips.

4.    Read first, sign second

Purchasing property is one of the greatest financial decisions and buyers should ensure that they understand their rights and obligations under the contract. Buyers should also be careful in relying on verbal statements and signing documents based on something they have not read. Buyers should request all representations to be made in writing and if something requires an explanation, professional advice should be sought. For more information, see our article on false statements and promises here.

5.    Buying off the plan

Buying off the plan entails a significant land tax concession in addition to the other grants a buyer may receive from the State Revenue Office. However, there is a great risk that you may end up with a property that is different to the plan, the artist’s impression or the advertising material. Accordingly, it is important that you receive the right legal advice when you buy off the plan, particularly when a firm completion date has not been provided.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.

False statements, promises and negligence – Be smart and alert!

Have you been in a situation where you have you lost your money as a result of your reliance on a promise? You may have relied on a verbal statement made by another person or misled into entering a contract? This is where the law of negligence comes into play. 

The law of negligence concerns the failure of a person to take reasonable care over something. It is a broad area of law and there are countless examples where companies, organisations, individuals have been held to be negligent. Although many of the examples involve a certain degree of damage, what happens in a situation where the loss you suffer is purely monetary?

You may have suffered a considerable amount of money just because a party had been reckless in the information they provided to you. Such information can take the form of advice, market statistics or even online newsfeeds. One example that comes to mind is an investor’s reliance on the opinion of a financial institution regarding the financial viability of a product or a statement made by a person who possesses expert knowledge.

It is important that you obtain legal advice before relying and acting on such information. It becomes more important when a significant portion of your equity is at stake and you have clearly relied on the false information.

You must also consider whether you relied on a statement made by a person with the required skill and knowledge. That statement may be a general statement or made by a person who does not have the required skill and knowledge. At that stage, you may have no action against that person and carry the risk of being sued.

In the majority of cases, you must demonstrate that you have suffered an economic loss as a result of the false, statement or promise made by the person. It is essential that you obtain legal advice before commencing any sort of action because without loss, you cannot ask to be reimbursed for anything. For example, you may have relied on a false statement made by a builder in relation to the construction of a set of units. In this example, it must be demonstrated that the builder’s false statement was the cause of your monetary loss.

Even if you have suffered an economic loss as a result of false statement or promise, you will need to provide evidence of the loss and its connection to the false statement or promise. Usually clients that suffer a loss are those clients that do not consult a lawyer at the outset of the transaction.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.

Buying property in Victoria?

The tips, traps and legal risks – Part One

Buying property in Victoria can be a complicated process. In addition to the personal and commercial considerations, buyers must be aware of their rights and obligations. Part one of this fact sheet focuses on the buyer’s right to information, entitlements and tax implications.

1.    Vendor’s Statement

Before signing the sale of contract, the vendor must provide you with a statement of matters affecting land pursuant to section 32 of the Sale of Land Act 1962. This is known as a ‘vendor’s statement’ and the purchaser's solicitor should check this against any mortgages over the property, covenants, easements, local council zoning restrictions and other important information. Failure of the seller to provide this statement can result in rescission of the contract depending on the legal implications of the failure to comply.

2.    Due Diligence Checklist

Prospective purchasers must be aware of the ‘Due Diligence Checklist’. A copy of the ‘Due Diligence Checklist’ can be found on the Consumer Affairs Victoria website and is an important document that purchasers must consider before buying property. According to the checklist, many people engage a lawyer to help them understand the contract and ensure the sale goes through correctly.

3.    Right to rescind the contract

As the purchaser, you have a right to rescind the contract of sale in a number of situations. For example, where the seller provides you with false information. At the same time, the right to rescind does not apply if a court finds that the seller acted honestly and reasonably. In our experience, buyers assume a right to rescission for simple breach of contract which is a dangerous assumption to make without proper legal advice.

4.    Stamp duty

Purchasers of residential property must be aware of the land transfer duty (stamp duty) and the recent changes in this area. It is also important that the stamp duty figures and applicable concessions are correct to prevent costly drafting mistakes. For instance, any foreign residents wanting to buy property in Victoria must pay an additional stamp duty surcharge of 3 per cent. This applies to any contract of sale entered on or after 1 July 2015. Foreign purchasers must also take into account any fees imposed by the Federal Government to assess applications for foreign nationals to invest in the Australian residential property.

5.    Land tax

Purchasers of commercial or investment properties over the $250,000 mark must pay land tax. From 1 January 2016, Victorian land that belongs to an owner that does not ordinarily reside in Australia will incur a 0.5 per cent land tax. This tax applies to individuals, corporations and absentee trusts. Owners that pay land tax, must also lodge a notice of acquisition. While these requirements may seem straightforward, any mistake or failure to comply results in hefty costs and possibly fines down the track. Therefore, it is important that purchasers obtain proper legal advice when considering investment or commercial property.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.

Interpreting commercial contracts: principles you need to know

This article considers a recent decision of the High Court and its restatement of the proper approach to the construction of commercial contracts.

In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37 the High Court referred to the relevant principles of interpreting contracts by reference to a number of preceding statements of law.

Principles of contract construction

First, the rights and liabilities of a party under any provision of contract are to be determined objectively. That is, you must look at the entire text of the contract, the context and the purpose of that contract.

Second, you must ask what a ‘reasonable businessperson” would have understood the terms of the contract to mean. That is, what a reasonable person in the position of a party to the commercial contract would have understood. According to the High Court, a commercial contract should be given a ‘businesslike interpretation’. This requires a consideration of the language used by the parties, the commercial circumstances and the objects of the contract.

There are situations where you may need to go outside the four corners of a contract and refer to surrounding circumstances in order to decipher the meaning of a term. However, the High Court has said that if the meaning of an expression used in a contract is clear and subject to only one meaning then there is no need to refer to surrounding circumstances. Accordingly, there is an assumption that in the overwhelming majority of cases the written words of a contract will have a fixed meaning.

Third, you cannot admit evidence of the parties’ statements and actions reflecting their actual intentions prior to entering the contract. This is because the actual intentions of the parties are contained and expressed in the contract itself.

Finally, the interpretation of a contract that is preferred is the interpretation that makes commercial sense. That is, there is an assumption at law that the parties to a commercial document intended to produce a commercial result.

Overview of the High Court case

The Mount Bruce case arose out of a dispute concerning the interpretation of a clause in a commercial contract. Mount Bruce Mining Pty Limited was required to pay royalties to Wright Prospecting Pty Limited on iron ore won from what the contract termed as the “MBM area”. The High Court was asked to consider what the meaning of the terms “MBM area” meant in the contract. It held that the starting point was the language used by the parties in the contract and determined that the “MBM area” referred to a physical area. The High Court held that this meaning was the natural and ordinary understanding of the language used, and that this was consistent with the commercial circumstances and purpose of the contract.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.

Crowdfunding: the legal implications of using the crowd

The last couple of years has seen crowdfunding become an international phenomenon. The idea that you can raise funds through an online ‘open-call’ has seen start-ups become multi-million dollar companies overnight. While crowdfunding has its unique advantages, it also carries a number of risks.

Types of crowdfunding models

The application of the law depends on the type of crowdfunding model adopted by the entrepreneur. In this regard, there are four types of crowdfunding models in the market today, with the latter two models gaining the most traction in our global economy: charity, lending, rewards-based and equity.

Rewards-based crowdfunding

Rewards-based crowdfunding allows people to contribute towards a product or service that is yet unbuilt. The funds are made in the form of a donation or advance-purchase in return for a reward or intangible benefit.

Regardless of the amount of reward a funder may receive, the crowdfunding becomes a ‘deal’ that attracts obligations under Australian Consumer Law (ACL). Accordingly, entrepreneurs must appreciate that they have just entered a legal contract with the funders. Like any contract, a rewards-based crowdfunding project is based on promises that an entrepreneur must keep. A breach of a promise may amount to misleading or deceptive conduct under the ACL.

Equity-based crowdfunding

Equity-based crowdfunding allows investors to own a share of the pie. In other words, money is raised by offering equity to investors. But unlike traditional investment options, crowdfunding provides an added level of complexity. One of the major issues facing private company start-ups looking for crowdfunding is the limit of 50 shareholders in the Corporations Act 2001 (Cth). If a private company breaches the limit of shareholders it will be forced to convert to a public company and comply with significant additional governance, disclosure and reporting requirements.

Accordingly, there has been a recent call for the need to ease securities regulation regarding equity-based crowdfunding in Australia. The Australian Government introduced the long-awaited Corporations Amendment (Crowd-sourced Funding) Bill 2015. While this Bill falls short of legitimising equity-based crowdfunding for private companies, it allows start-ups to incorporate as unlisted public companies with reduced governance and other reporting requirements for the first five years.

Other legal implications

Entrepreneurs must look out for intellectual property protection in circumstances where the project involves an invention or a unique service. Registration for trademarks and patents are just some of the risks associated with seeking public funding from the crowd.

Last but not least, entrepreneurs must also be aware of their tax obligations. Unless your crowdfunding is a hobby, financial contributions received may form part of your assessable income and attract income tax. Entrepreneurs should also look out for the goods and services tax (GST) particularly if the reward that is provided to funders is a taxable supply and other crowdfunding activities are subject to the GST.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.