Introduction

On 1 July 2010 the Australian Consumer Law (ACL) was introduced. The ACL gives the Australian Securities and Investments Commission extensive new powers to regulate the fairness of consumer contracts. The ACL applies to contracts for sale of an interest in land to owner-occupiers which includes, of course, off-the-plan contracts for sale of apartments by developers.

Unfair terms in a consumer contract will be void. Even terms which are currently accepted as standard in the property industry under standard form contracts could be challenged under the ACL.

Developers need to review their existing contracts, and adapt their contracts and processes for future developments, to ensure that their documentation and their processes comply with the new requirements. Otherwise, developers risk significant contract terms being declared void, which could jeopardise the viability of residential development projects.

Commencing date and application

The ACL came into force on 1 July 2010. It applies to standard form consumer contracts entered into on or after that date. A consumer contract is a contract for the supply of goods or services to individuals for domestic or household use or consumption. The ACL does not apply to contracts for sale to investors, or ‘business to business’ or commercial transactions.

A contract entered into before 1 July 2010 may also be subject to the ACL if the contract is varied after 1 July 2010. The ACL will only apply to the part of a contract that is varied.

Importantly, the ACL provides purchasers with ‘group rights’. That is, if one purchaser proves that a contract term is unfair and is entitled to relief from the Courts, every other purchaser under the same form of contact may be entitled to claim that same relief without having to launch their own legal action. This is a major risk factor for large scale residential developments.

What is a standard form contract?

The term standard form contract is not defined in the ACL. However, a standard form contract will typically be a contract that has been prepared by one party (such as a property developer’s solicitor) and is not open for negotiation. In other words it is presented to the purchaser on a ‘take it or leave it’ basis.

Most contracts for the sale of apartments in off-the-plan projects are based on the NSW Law Society standard form (Law Society Form) and include numerous special conditions amending or adding to the Law Society Form. It is unlikely that the Law Society Form will be the subject of attack under the ACL because it has been drafted and adapted over the years to provide a balance between the competing rights and obligations of developers and purchasers. However, special conditions that are written solely for a developer’s benefit and convenience are likely to be challenged.

Under the ACL if a purchaser alleges that a contract is a standard form contract, the contract is deemed to a standard form contract unless the developer proves otherwise. Factors which may determine that an off-the-plan contract is a standard form contract (and therefore regulated by the ACL) include:

• The developer has all or most of the bargaining power;
• The developer submits a standard contract for each sale, before any discussion relating to the terms of a specific sale has occurred;
• The developer or its agent presents the contract to the purchaser on a ‘take-it-or-leave-it’ basis;
• The purchaser is not given an effective opportunity to negotiate the terms of the contract; and
• The terms of the contract do not take into account the specific characteristics of the purchaser and/or the particular transaction.

What are unfair terms?

A term of a standard form contract is unfair if:

• It would cause a significant imbalance between the rights and obligations of different parties to a contract (for instance, it gives the developer unfettered rights to vary a development document or extend the completion date);
• The term is not necessary to protect the legitimate interests of the developer (for example, the right to vary a development document is unqualified and is only for the vendor’s convenience);
  •  The developer would carry the onus of proof to show that the term is necessary to legitimately protect its interest if it is challenged by a purchaser.
  •  Very broad discretions or unilateral rights for the developer to alter the layout of buildings or plans may fall foul of this provision; and
• It would cause detriment (either financial or otherwise) if the term was enforced.

The Courts may take into account any matters that they think relevant to determine whether a term is unfair. But the Courts must take into account the context of the contract as a whole and whether the term is transparent.

A term is transparent if it is legible, presented clearly and written in plain English. This means that the language and the format of a contract can influence whether or not its terms will be interpreted as unfair.

Examples of unfair terms in off the plan contracts

The following types of clauses in off-the-plan contracts, which typically give broad or unilateral rights to developers, may be unfair under the ACL:

• Exclusion of warranty clauses – the developer makes no representation or warranty that documents attached to the contract are accurate or reliable
• Extension of completion – the developer has the right to unilaterally extend the completion date under certain (typically very broad) circumstances;
  • The Courts might consider that these largely unqualified powers are more than is necessary to protect the vendor, especially if the purchaser has no right to resist the extension or to rescind;
• No re-sale clauses – purchasers are prohibited from on-selling their lot before completion; 
  • Although a vendor may argue that a secondary market may adversely affect their interest, a blanket prohibition could be seen as too extreme if the developer relies upon it as well as exercising a power to extend the completion date;
• Amending clauses – the developer can unilaterally change or replace documents attached to a contract such as car parking allocation and lot boundaries (for instance by up to 5% net lettable area);
• Time frames and waiver of rights – purchasers have strict and short periods of time to respond to major changes to development documents;
  • For example provisions where the purchaser has 7 days (time of the essence) to decide whether to rescind after a strata plan has been varied which affects their lot by reducing the area by more than say 5%;
• Defects liability clauses – the purchaser is entitled to lodge only 1 defect notice within a specified period and the developer has an extended (or even uncapped) time within which to remedy defects;
• Designated matter clauses – the developer has the power to drive through changes to by-laws without any input from purchasers;
• Penalty clauses – even standard interest-for-default clauses have been targeted by certain lawyers as open to challenge; and
• No objection clauses – limitations on or blanket prohibitions against a purchaser right to object to or claim compensation under the contract.

What to do now?

Developers can reduce their risks under the ACL by:

• Reviewing their existing contracts to assess whether there are particular terms which may be seen as unfair if challenged. Be prepared to deal with problem clauses on a case by case basis to avoid litigation and setting unhelpful precedents under the ACL;
• Reviewing and, where relevant, amending their template documents to be used for future projects. This means assessing particular clauses that give developers wide discretions or unilateral rights that cannot be objected to;
• Reviewing their procedures to ensure that, if challenged, the developer can show that it engaged in negotiations with particular purchasers, and agreed the terms of particular contract, in the context of that purchaser’s specific transaction; and
• Keeping detailed notes on why particular terms were included in contracts. This may assist a developer to show that the particular clauses were specifically considered as a way to protect its legitimate interests in relation to a specific site or purchaser.

If you have entered into, or intend to enter into, an off-the-plan contract for sale of land, then you should obtain legal advice on the matters or comments contained in this article. Blackstone Waterhouse Lawyers is happy to assist you in that regard.


If you have any queries in relation to any aspect of this article please contact:

Danny Arraj
Managing Partner
02 9279 0288
darraj@blackstonewaterhouse.com.au

Mark Fitzpatrick
Special Counsel
02 9279 0288
mfitzpatrick@blackstonewaterhouse.com.au