Schedule 2 to the Competition and Consumer Act 2010 (Cth) also known as the Australian Consumer Law (ACL), regulates unfair terms in consumer contracts.
What does this mean for property developers?
The ACL is consumer legislation primarily intended to address significant problems regarding the provision of services like telecommunications and other utilities and gym services where there are standard contracts that are not usually submitted for legal advice and, in any event, are usually provided on a take it or leave it basis.
Off the plan sales do not generally fall into this category and hopefully the courts will deal with the application of the ACL to such contracts in a practical way that is fair and reasonable in the circumstances. There is, however, cause for pessimism in this regard because the other parties involved are developers.
Only time (and a few cases decided by the courts in the future) will provide an answer.
The table below summarises the operation of the ACL in diagrammatic form. Each step is then explained in more detail overleaf.
Application of the ACL
The ACL may have a significant impact on developer's contracts with individuals who are not investors and may particularly affect off the plan sales.
The ACL provides that a term of a consumer contract is void if:
- the term is unfair; and
- the contract is a standard form contract.
What is a consumer contract?
Under the ACL, a consumer contract includes any contract for the sale or grant of an interest in land to an individual wholly or predominantly for personal, domestic or household use.
Whether or not a contract for the sale or grant of an interest in land is a consumer contract depends on the intentions of the purchaser. We recommend that developer's selling agents take detailed notes about prospective purchaser's intentions, such as whether they are purchasing for investment purposes or private use. The ACL should not apply where purchasers buy for investment rather than private purposes.
What is a standard form contract?
Under the ACL, contracts for sale between a developer as vendor and an individual as purchaser are presumed to be standard form contracts unless the developer can establish otherwise. This is significant as most developers prefer a standardised contract for each development. This is for consistency, simplicity for selling agents and to meet financier's requirements.
In order to be able to overturn this presumption, developer's selling agents and selling solicitors should record the negotiations with purchasers in order to show that the purchasers have a genuine, effective opportunity to negotiate the contract. It may be that developers should encourage a purchaser to arrange for their solicitor or conveyancer to review and negotiate a contract prior to signing. While this may delay the process of securing an exchange of contracts, it should limit the risk that the contract is a standard form contract.
Is a term unfair?
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;
- it is not reasonably necessary to protect the developer's legitimate interests; and
- it would cause detriment (whether financial or otherwise) to a purchaser if the term were relied on.
All these elements must be present for a term to be unfair.
There are many provisions, particularly in a developer's off the plan sale contract that operate in favour of the developer, that is, an imbalance is created. If the contract has an appropriate level of transparency, the provisions can be justified on the basis they provide a degree of flexibility necessary for the purpose of completing the project.
Whether individual standard provisions in accordance with well established industry norms create a significant imbalance in favour of the developer remains to be determined by the courts in the future.
Whether a term is reasonably necessary to protect a developer's legitimate interests is obviously a matter for judgment. In the absence of the ACL, the issue of reasonable necessity was resolved according to a developer's subjective opinion and may not have been carefully weighed. Now there is certainly a real necessity for care and developers should ensure that their contracts provide no more discretion than is necessary to deliver the product and do not provide for greater freedom than is necessary.
What is a detriment and how significant it must be to be relevant is obscure and remains to be determined by the courts in the future.
You should note that terms that define the main subject matter, set the upfront prices or are required by law are not subject to this regime.
Most developer's sale contracts contain effective severance provisions so that a whole contract should generally be able to proceed if an unfair term is void. However, if the void term is such an important element of the contract that it cannot be severed, the contract may be unenforceable. In addition and perhaps of more concern, the void term may be such an important protection that the developer would prefer the contract did not proceed in its absence.
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.