Australia: Unfair contract terms regime amendments increase penalties for developers

Developers (as sellers) should be aware that any 'off the plan' sale contract they prepare or negotiate may be subject to the Australian Consumer Law's (ACL) 'unfair contracts terms regime', also called the 'unfair contracts regime'.

Recent amendments made to the ACL commence in November 2023 and impose significantly higher penalties for non-compliance with the ACL.

WHICH CONTRACTS WILL THE UNFAIR CONTRACT TERMS REGIME APPLY TO?

The regime will apply to a contract that meets the following criteria:

1. 'Standard form contracts'

In our view, most developer 'off the plan' contracts will be considered 'standard form contracts' under the ACL.

The definition of 'standard form contract' is not prescribed in the ACL. However, if a party claims that a contract is a standard form, it's presumed to be one unless proven otherwise by the other party.

The ACL considers several factors in determining what constitutes a standard form of contract. These steps include whether one of the parties prepared the document and whether one of the parties has made other contracts with the same or substantially similar terms. In the situation that they have, the ACL will consider the number of such contracts they have entered into with those similar terms.

Importantly, the new regime provides that a contract may be determined to be a 'standard form contract' even if there was an opportunity for:

• the seller or buyer to negotiate minor or insubstantial changes to the contract;
• the seller or the buyer to select a term from a range of options provided; or
• a party to another contract or proposed contract to negotiate the terms of the other contract or proposed contract.

2. 'Small business contracts',

A 'small business contract' is a contract where at least any one party (which could be either the seller or the buyer) to the contract either:

• enters into the contract in the course of carrying on business and at a time when the party has fewer than 100 employees; or
• had an annual turnover below $10 million.

WHEN IS THE CONTRACT CONSIDERED 'UNFAIR'?

Broadly speaking, a contract term regulated by the regime will be unfair if:

• it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (the seller);
• it would cause detriment (whether financial or otherwise) to a party (the buyer) if it were to be applied or relied on (by the other party (the seller).

EXAMPLES OF UNFAIR CONTRACT TERMS

Some examples of common 'off the plan' sale contract terms that may contravene the regime in the ACL include:

1. 'Termination for convenience' clauses
   • What is it?
     • A termination for convenience clause permits the seller to terminate the contract at its election and without any specific basis.
   • Changes to consider:
     • Such termination clauses could be amended so that it is only triggered if specific criteria is met (e.g. due to quantifiable increases in construction costs incurred during the project).

2. Termination rights are given to the seller but not the buyer –
   • What is it?
     • Gives a right to terminate the contract given to the seller (only) due to failure of a condition or an event of default.
   • Changes to consider:
     • Such termination clauses could be amended so that each party has a right to terminate the contract due to failure of a condition or an event of default (unless there is a legitimate reason for only one of the parties to have a right to terminate the contract).

3. Extension of time clauses –
   • What is it?
     • a clause the permits the seller (but not the buyer) to extend condition due dates in the contract (e.g. the sunset date) at the discretion of the seller.
   • Changes to consider:
     • Such time clauses could be amended so that any right to extend a date is only triggered if for specific, valid reasons (e.g. inclement weather delays, worker shortages).

4. Dispute resolution clauses – developer appointee to determine dispute –
   • What is it?
     • A clause that gives the seller's consultant (e.g. its architect) the right to make a final determination over disputes under the contract (e.g. regarding defects under the contract).
   • Changes to consider:
     • Such dispute resolution clauses could be amended so that an independent third party is appointed to determine any disputes under the contract.

WHAT ABOUT WHEN PARTIES HAVE USED A PUBLISHED FORM OF TEMPLATE CONTRACT?

Developers sometimes use the template form of sale contract published by the state law society or real estate institute (e.g. the REIQ Contract for Residential Lots in a Community Title Scheme). Although the developer does not create this document, if any changes or additions are made, the ACL's rules may apply if the changes or varied terms are unfair.

WHAT ARE THE PENALTIES FOR BREACH OF THE UNFAIR CONTRACT TERMS REGIME?

The table below summarises the significantly increased civil penalties that will apply for contraventions of the regime in the ACL.

WHAT SHOULD I DO NEXT?

1. The start date of the new regime

The amendments to the unfair contract terms regime will not apply to contracts made before 9 November 2023.

2. Review current 'off the plan' contract templates

Developers should have an experienced property development lawyer review any contract templates currently being used (where the regime applies) to ensure the contracts do not contain clauses that may be considered unfair terms under the ACL regime.

This review should include any amendments or additional terms to a standard, published form of contract template being used by developers.