The Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 (the ACL) regulates unfair terms in standard form consumer contracts. There has been considerable discussion in relation to the ACL generally, including several of our previous publications, but what does it all mean for property developers?
Application of the ACL
The ACL is likely to have a significant impact on developers' contracts with individuals, and may particularly affect off-the-plan sales where further discretions are usually provided to the developer.
Due to commence after 1 July 2010, the unfair terms provisions of the ACL provide that unfair terms in standard form contracts are void and therefore unenforceable. The ACL's unfair terms provisions will apply where the contract:
- is a "consumer contract";
- is a "standard form contract"; and
- contains "unfair" terms.
What is a consumer contract?
Under the ACL, a "consumer contract" includes any contract involving a sale or grant of an interest in land to an individual wholly or predominately for personal, domestic or household use. This definition goes further than simply covering sales by a developer, and also includes any right, power or privilege granted by a developer over land.
To determine whether or not a contract of sale falls within the definition of a "consumer contract" will depend on the intentions of the Purchaser. Developers' selling agents will need to take detailed notes about prospective purchasers' intentions, such as whether they intend to purchase for investment or private purposes. The ACL will generally not apply where developers sell to investors, as sales to investors will not usually meet the definition of a consumer contract.
What is a standard form contract?
Contracts of sale between a developer and an individual will automatically be deemed to be standard form contracts, unless the developer can convince a court otherwise. This is significant since most developers actually prefer standard contracts on each development for consistency, simplicity for selling agents and to meet financiers' requirements.
Again, to comply with any challenges presented by the introduction of the ACL, developers' selling agents should record all negotiations with purchasers in order to show that purchasers had a genuine, effective opportunity to negotiate and that the contract therefore was not a standard form document. It may be that it is in the best interests of developers to ensure that purchasers are given the opportunity to have their solicitor review and negotiate a contract prior to signing. While this will delay the process of signing up a purchaser and will lead to increased costs, it will limit the risk that a contract is a standard form contract under the ACL, and is thus voidable.
What are unfair terms?
Under the ACL, a term of a developer's contract will be unfair if it:
- causes a significant imbalance in the parties' rights and obligations;
- is not reasonably necessary to protect the developer's legitimate interests; and
- would cause detriment (whether financial or otherwise) to a purchaser if the term were relied on.
There are many clauses of a developer's contract of sale that operate in favour of the developer to provide flexibility in completing the project, but the imbalance in favour of the developer must be "significant" in order to breach the ACL. Whether standard industry practices as to warranties, times for completion and other discretionary terms given to the developer amount to a "significant" imbalance in favour of the developer will be determined by courts in the future.
To determine whether a term is reasonably necessary to protect developers' legitimate interests, developers may be able to provide evidence about the market in which they operate, economic factors imposed by financiers, and other regulation by councils and planning schemes that require a level of flexibility for the developer. Developers should ensure that their contracts provide only as much discretion as is necessary to deliver the end product to the purchaser rather than excessive freedom, which may be deemed unfair by the ACL.
Examples of unfair terms
Courts must consider the likelihood of detriment to a purchaser, the transparency of the term (ie whether it was drafted in a straight-talking manner) and the contract as a whole.
The ACL provides the following examples of potentially unfair terms, such as where the developer can:
- avoid or limit performance of the contract;
- terminate the contract;
- penalise the purchaser for a breach or termination of the contract;
- vary the terms of the contract;
- renew or not renew the contract;
- vary the upfront price without the purchaser being able to terminate;
- unilaterally vary the characteristics of the interest in land to be sold or granted under the contract;
- unilaterally determine whether the contract has been breached or interpret the meaning of the contract;
- limit the developer's vicarious liability for its agents;
- assign the contract to the detriment of the purchaser without their consent;
- limit the purchaser's right to sue the developer; or
- limit the evidence that a purchaser can give or impose an evidential burden on the
- purchaser in proceedings relating to the contract.
The purchaser however, does not have the same rights against the developer. Depending on the circumstances, these types of terms may be unfair and unenforceable.
Terms are not unfair where they:
- define the main subject matter of the contract;
- set the upfront price payable under the contract; or
- are required or expressly permitted by any Commonwealth or State law.
All of our developers' contracts have effective severance clauses in all sales contracts, meaning that a whole contract should generally be able to proceed if an unfair term is struck out by a court. However, if the offending unfair clause is so critical to the contract that it cannot be severed, then contracts may be at risk of being unenforceable.
Considering the ACL may significantly change the landscape on which developers negotiate and contract with individuals, developers should:
- ensure their selling agents are aware of the ACL and keep detailed notes of whether purchasers are investors or purchasing for their own purposes;
- keep detailed records of negotiations and concessions given to purchasers;
- compared to their standard form contracts and in relation to any potentially unfair terms;
- obtain an acknowledgement from purchasers that they had a genuine opportunity to review and negotiate the contract;
- be wary of selling on a "take it or leave it" basis;
- have their lawyers review all of their standard form contracts; and
- have prospective financiers confirm prior to any marketing campaign commencing that they would be prepared to provide construction funding on the basis of the standard form contract.
Middletons will be conducting a review of our developer clients' standard form contracts to identify unfair terms that may breach the ACL once introduced. However, until the terms of the ACL are tested in court, there is a risk that standard practice in the property industry may be substantially out of line with the ACL and will remain a hot topic in the industry for years to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.