Sometimes a property developer will allow the purchaser to
settle without receiving the full balance of the purchase price
because the purchaser is unable to obtain adequate financing to
complete a settlement. The shortfall amount may be payable by the
purchaser to the property developer at a later date. However, care
should be exercised when taking this approach and varying the
payment terms under a contract of sale for land for purchasers of
The Australian Securities and Investments Commission (ASIC) is
currently reviewing the practices of property developers that allow
purchasers to postpone part payment of the purchase price until
after settlement. ASIC is concerned that the practice of delaying
part payment may in some cases involve the 'provision of
credit', which is regulated by the National Credit Code (NCC).
In those cases, the property developer would need an Australian
credit licence to engage in such practices.
Engaging in credit activities without an Australian credit
licence is an offence under the National Consumer Credit
Protection Act 2009 (Cth) (NCCP Act). Penalties include a fine
of up to AUD1.7 million and up to two years imprisonment.
If you are engaging in such practices, extreme care should be
Application of the National Credit Code
The NCC and the NCCP Act will apply to an arrangement if:
credit is provided under a contract either where payment of a
debt owed by one person to another is deferred or where one person
incurs a deferred debt to another (section 3(1) of the NCC)
the debtor is a natural person (s 5(1)(a) of the NCC)
the credit is provided or intended to be provided wholly or
pre-dominantly for household, domestic or personal use; or to
purchase, renovate or improve residential property or investment
property (s 5(1)(b) of the NCC)
a charge is or may be made for providing the credit (s 5(1)(c)
of the NCC) – note this can be fees (including legal fees)
and/or interest charged in respect of the shortfall loan
the credit provider provides the credit in the course of
business of providing credit carried on in Australia or as part of
or incidentally to any other business of the credit provider
carried on in Australia.
Traps for Property Developers
A shortfall arrangement between the property developer and the
purchaser may satisfy the above requirements and may be categorised
as a 'credit contract'. If so, the property developer will
need to be licensed under the NCCP Act as a 'credit
provider'. Further, if an intermediary, such as a real estate
agent or solicitor, negotiated or assisted in proposing the
shortfall arrangement, that intermediary may also be engaging in a
credit activity and will either need to be licensed or appointed as
a credit representative.
Since 2010, the NCCP Act applies to credit provided to purchase
a residential property by an individual, including purchase of an
investment property. If you are entering into arrangements for
payment of a shortfall amount with an individual purchaser, then
this may be a credit activity even if you are not in the business
of lending money.
Property Development Industry Review
Property developers should undertake a review of their practices
to ensure that they are not inadvertently engaging in credit
activities. We have assisted a number of property developers that
offer a shortfall payment arrangement on an ad hoc basis. We
consider that it is possible to structure the shortfall arrangement
whereby it is not regulated by the NCC and the NCCP Act –
however, extreme care must be exercised.
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.
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