Update on ipso facto clauses and proposed exemptions relevant to real estate transactions
In our last 5 Minute Fix, we mentioned the 1 July commencement of amendments to the Corporations Act that will impose a statutory stay on a party's ability to exercise rights, including to terminate an agreement if a prescribed insolvency event occurs.
The regime has wide-ranging implications, particularly where innocent parties may be required to continue to perform significant obligations during the stay, for example under development agreements, construction contracts or agreements for lease.
Treasury has released the Exposure Draft of the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 and the Corporations (Stay on Enforcing Certain Rights) Declaration 2018 setting out the types of contracts and rights which will be excluded from the statutory stay.
The proposed exemptions are broader than expected, and there may be further changes before the final Regulations are released. The types of contracts or rights currently proposed to be exempted from the stay include government licences or permits, the sale of a business, contracts with an SPV as a party, and the variation, assignment or novation after 1 July of a contract or agreement entered into before that date.
The SPV exemption (as an example) is intended to exclude "complex arrangements between sophisticated parties" and raises the prospect of parties structuring transactions through SPVs to fall within the exception.
For more information on the proposed exemptions see:
Exemptions to the stay on ipso facto clauses released for comment.
We are keeping a watching brief on the draft exemptions.
GST Withholding update
The "GST at settlement" measure, which applies from 1 July 2018, requires a buyer of new residential premises or potential residential land to pay the GST on the purchase price directly to the Australian Tax Office at settlement instead of to the seller. Sellers and financiers will need to consider the commercial and cash flow impact of these changes as the GST component of the purchase price will no longer be received by the seller on completion of a contract.
All sellers of residential premises or potential residential land must give a notice to the buyer stating whether the buyer is required to make the GST withholding payment, regardless of whether the seller is registered or required to be registered for GST.
The mechanics of the new regime are quite complex and affect both sale contracts and development agreements. The provisions do not apply to contracts entered into before 1 July where consideration (other than a deposit) is first provided before 1 Jul 2020. Off the plan contracts entered into before 1 July should be monitored because if they do not settle before 1 July 2020, they will be caught by the regime and the GST will have to be paid to the ATO on settlement.
While the legislation contemplates development agreements, parties will need to ensure the legislation does not adversely impact on waterfall payment and distribution arrangements for both existing and new development agreements. Parties to pre-1 July options will also need to consider their position under any contracts formed on exercise of the option from 1 July.
The amount payable will generally be 1/11th of the contract price (or 7% where the margin scheme applies). Normal adjustments such as rates and water are not taken into account in this calculation.
The ACT and NSW contracts for the sale and purchase of land have been updated to deal with GST Withholding. Amendments to the Qld REIQ contracts have just been released and the Victorian LIV contract is expected to be updated soon.
The Law Society of Western Australia has not as yet released any proposals for a new provision which specifically deal with GST Withholding.
For further information, see:
New GST Withholding regime on "new" residential property transactions - will you be ready?
ATO Draft Companion Ruling LCR 2018/D1
Mandatory electronic lodgements of transfers, caveats and mortgages in NSW from 1 July
From 1 July 2018, the NSW Conveyancing Rules require the following NSW documents, provided the titles and transactions are eligible, to be lodged electronically:
- standalone caveats;
- standalone transfers; and
- standalone mortgages and discharge of mortgages or any combination of those (for example, refinance transactions).
"Standalone" means that the documents are not lodged with another dealing (eg transfer plus discharge of mortgage is not standalone).
The Office of the Registrar General has advised of its intention to continue to allow private unrepresented individuals to lodge private mortgages (ie not with an Authorised Deposit-taking Institution, eg between a parent and child), caveats and transfers in paper until 1 July 2019. For more information see Registrar General NSW conveyancing rule waivers.
To support completion of an electronic transaction, you need to be prepared by:
- providing requested evidence/information to your legal advisers to help them establish that you are a legal person/entity that has the right to enter into the transaction;
- arranging with your legal advisers for the Verification of Identity of your authorised signatories completed to the VOI Standard in Schedule 8 of the NSW Participation Rules for Electronic Conveyancing;
- arranging for a completed Client Authorisation Form with your legal advisers; and
- having contracts that allow for electronic lodgement.
Verification of Identity to the VOI Standard requires a face-to-face in person interview with your legal adviser, as well as the presentation of your original and current identification documents for review bhttps://web.archive.org/web/20180320102931/https://www.arnecc.gov.au/__data/assets/pdf_file/0007/698434/Client_Authorisation_Form_Version_4.pdfy your legal adviser.
Client Authorisation Forms are mandatory prescribed forms that establish the types of electronic transactions your legal adviser can complete on your behalf. They are not to be confused with your usual engagement letter.
The NSW contract for the sale and purchase of land 2018 edition by default requires the transaction to be dealt with electronically. Prior versions of the NSW contract for the sale and purchase of land need to be amended to allow for electronic lodgement of the transfer.
Clayton Utz has full electronic lodgement capability and can assist you with all electronic transactions.
For more information, see:
Electronic lodgement networks for land dealings and what this means for you
NSW's new Low Rise Medium Density Housing Code commences 6 July
The new Low Rise Medium Density Housing Code is part of the drive to improve housing affordability and provide more housing choice in NSW. It will allow fast-tracked development approvals for 1 or 2 storey dual occupancy dwellings, manor houses and terraces on sites where medium density development is already permitted. The site must also be within Zones R1-R3 or RU5.
For more information see:
Low Rise Medium Density Housing Code
Medium Density Design Guide
Short term letting industry to be regulated in NSW
After an extensive consultation period, the NSW government has released plans to regulate Air BNB-style letting. The Fair Trading Amendment (Short-term Rental Accommodation) Bill 2018 was introduced on 6 June. It proposes a mandatory code of conduct for the short term rental accommodation industry, and amends the Strata Schemes Management Act 2015 to allow strata scheme bylaws to ban short term letting of apartments, where the host is not a resident, on a 75% majority vote. There will be significant financial penalties for breaches of the Code of Conduct (up to $1.1 million for companies and $220,000 for individuals).
In addition, a statewide planning instrument will:
- place a 180 day cap on the number of days properties in Greater Sydney can be rented on a short term basis when hosts are not present (up to 365 days in other areas of NSW)
- classify short term holiday letting as an exempt development 365 days a year if the host is present.
NSW Strata Building Bond and Inspections Scheme proposed changes
The NSW Government has proposed changes to the Strata Management Act in relation to building bonds and inspections, including earlier lodgement of building bonds, requirements that the developer and owners corporation must agree on amounts to be released from the bond (with the Secretary deciding if they cannot agree), increased investigative powers for Fair Trading and increases in penalties.
The consultation period has now closed and submissions are being considered.
New building regulations for Victoria from 2 June 2018
A new set of building regulations commenced in Victoria on 2 June, replacing the 2006 Regulations and the Interim Regulations of 2017. There are new forms and additional information is required for permits, orders and notices. The new regulations are designed to improve fire safety in multi-storey residential buildings by introducing a new notification and mandatory inspections procedure if building work relates to fire and smoke resistant building elements. Those elements broadly comprise:
- lightweight fire-resistant construction in multi-storey residential buildings; and
- fire and smoke resistant service penetrations in multi-storey residential and healthcare buildings.
All forms have also been updated to deal with numbering changes.
For more information see:
Building Regulations 2018 Summary of Changes
Qld Foreign Acquirer Duty and land tax rates to increase from 1 July
As expected, the Queensland budget introduced an increase in the rate of additional foreign acquirer duty from 3% to 7% on transactions involving certain residential land. The new rate applies where the liability for transfer duty, landholder duty or corporate trustee duty arises on or after 1 July 2018 (e.g. where the contract is dated 1 July 2018 or later). Exemptions can be applied for in certain circumstances (e.g. for the acquisition of land for a significant development which will benefit the State).
Land tax rates have also increased by 0.5% in respect of land owned at midnight on 30 June 2018, where aggregated landholdings are above $10 million. The increase applies to individuals, companies, trustees and absentees. The additional 1.5% absentee surcharge remains unchanged.
For a comparison of foreign buyer duty and land tax surcharges, see:
Australian foreign duty and land tax changes infographic
WA changes to foreign duty rate
The Western Australia budget proposes to increase the foreign purchaser duty surcharge on certain residential properties to 7 percent. The surcharge is intended to come into effect on 1 January 2019, but legislation is yet to be enacted. The surcharge is in addition to transfer duty or landholder duty payable on the direct or indirect acquisition of property.
To limit any impact the surcharge could have on the construction industry, the Government of Western Australia is proposing the following exemptions:
- Commercial residential premises will be excluded, including contentious asset classes such as student accommodation and retirement villages.
- Mixed use premises used primarily for commercial purposes will be excluded.
- Significant developments will be excluded, meaning residential developments that produce 10 or more dwellings, or lots on which 10 or more dwellings can be constructed.
For a comparison of foreign buyer duty and land tax surcharges, see:
Australian foreign duty and land tax changes infographic
WA changes to Verification of Identity and Authority procedures for paper based transactions require full compliance from 5 June
These changes were introduced in February 2018 with a transitional period until 5 June. The changes apply to paper based land transactions in WA. All documents lodged after 5 June should comply with the updated VOI practice.
For more information, see WA Landgate Verification of Identity and Authority