The importance of easements

Recent experience highlights two important aspects of easements: the need to secure formal easement rights, and whether money has to be spent in order to use an easement.

Neighbour says “Nay”

A client owns a rural property on which she runs a horse stud. For many years, she used a driveway on her neighbour’s property to access parts of her own property, with the neighbour’s consent. There was no easement and nothing in writing, just a friendly oral arrangement with no money changing hands. The client used the driveway for vehicular access to an office, stables and other buildings on her property. Being virtually on the (unfenced) boundary, and facing the neighbour’s property, these buildings can really only be accessed via the neighbour’s driveway. Access is needed for the client to move stock, feed and water around the property. It is not practical for her to create an alternative vehicular access route over her own property.

Problems arose when the neighbour sold his property. The new neighbours swiftly announced their intention to close off our client’s access to the driveway. They have since fenced the boundary, meaning our client has no vehicular access to the relevant buildings. Our client tried to negotiate an easement along the driveway, and has offered to pay the neighbours compensation, but her requests have fallen on deaf ears. She is considering an application for a Court-ordered easement under section 88K of the Conveyancing Act, but the expected legal costs of Supreme Court proceedings are a major deterrent, particularly given the presumption in section 88K(5) that the applicant is to pay the neighbours’ costs of the proceedings.

The lesson: if you rely on access over a neighbour’s property, make sure you formalise your access right by getting an easement registered on title. Your friendly neighbour may move at any time, and the new neighbour may not be quite as friendly!

The bargain that wasn’t

A client purchased a very large acreage property at auction. Prior to auction the client was aware there was no road frontage, but the auction contract disclosed that there is legal access to the property from the public road, via a right of way over a neighbour’s property. No driveway is yet constructed on the easement site, but the client (whose background is in construction) believed there would be no difficulty constructing one at a reasonable cost after he bought the property.

The client felt he’d secured a bargain, as he paid far below the reserve price, until a few weeks later when he got a quote to build the driveway. Due to the land’s topography, a driveway built within the right of way will cost roughly $200,000, far more than he had expected.

The client is now asking his neighbour to vary the route of the easement over some flatter terrain, to reduce the cost of the driveway. If negotiations with the neighbour are not successful, he may need to consider making a section 88K application to the Court.
The lesson, as expressed by the client himself: “I shoulda done my homework!” Legal due diligence only takes you so far. If you are planning to carry out works on the land you are buying, then you need to consider other relevant due diligence, including planning and construction issues.

What happens if a residential property is damaged between exchange and completion?

With the early onset of bushfires this summer you might be wondering what happens if a catastrophic event like a bushfire occurs and a dwelling is destroyed or damaged between exchange and completion of a contract for the sale of residential property.

Who is responsible for the property between exchange and completion?

In the sale of a residential property, risk as to the property does not pass to the buyer until completion of the property. This means the seller is responsible for the property and should retain insurance until the sale completes. The only time this position would be different would be if the buyer took early possession of the property. In this case, the buyer takes on the risk for the property from the day they take possession. This means the buyer needs insurance from that date. In practical terms, a seller should never give a buyer early possession without seeing evidence that the buyer has insurance in place.

If there is damage to the property after exchange but before completion the options available to the parties are governed by the provisions of Part 4 Division 7 of the Conveyancing Act and depend on whether the damage is categorised as substantial or not.

Substantial Damage

If the damage to the property is categorised as substantial the buyer may rescind the contract within 28 days of the buyer becoming aware of the damage. In this case, the buyer will receive their deposit back and is released from any obligations under the contract. An exception to this right is if the damage is caused by a wilful or negligent act or omission of the buyer. This provides some protection to the seller if early possession was granted to the buyer and after the buyer took possession and before completion the buyer caused substantial damage to the property. In that case, if the buyer caused the damage the buyer would have to complete and wear the cost of the damage.

However, if the damage is substantial and the buyer still wants to proceed with the purchase, the seller cannot be forced to perform the contract if it would be just or inequitable to require the seller to complete the sale. For example, if a house was destroyed by fire and a total rebuild were required it would be onerous on a seller to have to claim on insurance and re-build the dwelling. The best course of action would be for the buyer to rescind the contract so that the seller could manage their own insurance claim and any rebuild.

Substantial damage is defined as damage which renders the land materially different from that which the buyer contracted to buy. The definition of land includes buildings and other fixtures. In practical terms, if a residential dwelling was purchased for the purpose of a residential use and it was burnt down and uninhabitable before completion, a buyer would be able to rescind on the basis that the land was substantially damaged.

An example where damage was found not to be substantial so as to invoke the buyer’s right to rescind is Bakhos v Fenner and Anor [2007] NSWSC 641. In this case, there was a fire in a property in Lane Cove which resulted in smoke damage, the windows being shattered, carpets being burnt and two ceilings were sagging from water from the fire fighters. The court found that there had not been substantial damage and the buyer’s attempt to rescind the contract was taken to be a repudiation of the contract and the seller was entitled to retain the deposit.

The circumstances which resulted in this finding were the fact that the structure of the property had not been damaged and the condition of the property before the fire. The property was a 50 year old 2 bedroom brick and tile house which was showing signs of its age. In addition, the seller had fixed the damage within a few weeks and before the required date for completion. The court took the view that these circumstances combined with the buyer having lodged an application to redevelop the property and the buyer’s behaviour (which suggested he had no intention of completing the contract) indicated that it was ‘extremely improbable that the house and the condition of the house were material in the valuation of the property or in [the buyers] decision to buy the property.’ In short, the court took the view that the buyer had purchased the property to re-develop the site so the damage caused by the fire did not result in the land being materially different to that which the buyer had contracted to buy.

Damage which is not substantial

If there is damage to the property after exchange and before risk passes to the buyer the purchase price is to be reduced by a just and equitable amount and, if the purchase price is not reduced on completion, the buyer may recover the amount by which the purchase price should have reduced from the seller as a debt. If a buyer takes early possession they cannot claim an abatement of the purchase price after they take early possession even if the property is damaged.

Tips for buyers and sellers

Buyers

If there is substantial damage after exchange and before completion buyers have options to address the damage either by getting out of the contract or negotiating a price reduction. If the damage is not substantial, buyers are still entitled to negotiate a price reduction.

Ideally buyers should sort out any price reduction before completion as the risks, costs and difficulties associated with pursuing the price reduction after completion may make the recovery of those costs impractical. Although the price reduction applies where damage is not substantial these protections are only to be relied on in the case of significant damage to a property and not something minor. Regardless, these provisions highlight the importance of a thorough pre-settlement completion so that if there is significant damage it can be addressed with the seller before completion.

If you agree to take early possession make sure you do a thorough inspection before taking possession. The act of taking possession passes the risk to the buyer and ends the buyers right to claim for any damage to the property before completion.

Sellers

Keep your insurance in place! Where there is significant damage to a property you are selling (but it is not substantial or it is substantial but the buyer still wants to proceed) you may have to consider a price reduction or to agree to fix the damage before completion. However, sellers can’t be forced to complete the contract if the damage is substantial and it would be just and inequitable for the buyer to require the seller to complete.

The value of post-exchange enquiries

In today’s fiercely competitive residential conveyancing market, the cost of a purchaser’s post-exchange statutory enquiries makes up a significant proportion of the overall legal spend. While it may be tempting for clients to cut costs by narrowing the range of enquiries, practitioners need to remind purchasers of the potential risks.

We recently acted for a couple purchasing a house. Contracts were exchanged with a cooling off period and the cooling off period duly expired without incident.

Immediately after expiry of the cooling off period, we ordered our firm’s usual set of purchaser’s enquiries. One of those is a certificate under Section 121ZP of the Environmental Planning and Assessment Act. This is commonly known as an “Outstanding Orders” certificate and it states whether or not there are any outstanding Notices or Orders issued by the Council in respect of the property, for example an Order to carry out demolition or other works to the improvements.

In our experience, it is unusual for such a certificate to reveal the existence of any outstanding Notice or Order, particularly where no Order or Notice is disclosed in the contract. Yet these were precisely the circumstances in this case. The certificate issued by the Council stated that there was an outstanding Order requiring the owner to:

  • Demolish the carport at the front of the dwelling;
  • Demolish the awning at the rear of the dwelling; and
  • Restore the room depicted as a “proposed hobby room” [on specified DA drawings] to the approved form as a garage. This will involve removal of internal linings on the external walls, removal of floor framing and re-instating a roller door or similar to allow a vehicle to enter the garage.

The Council’s reasons for issuing the Order were: the relevant alterations were carried out without approval; parts of the alterations encroached on to an easement affecting the property; and there was no evidence that the garage conversion complied with habitable construction requirements.

The contract for sale did not mention these matters. However it transpired that both the vendor and the vendor’s agent were aware that the relevant structures had earlier been found to be non-compliant. Two years ago, the agent had assisted the vendor to lodge “an application” with Council to remedy the non-compliance, which was presumably either an application for a building certificate or a DA. When questioned, the agent explained that when he subsequently marketed the property for sale, he simply assumed that the non-compliance had been remedied and he did not follow this up with the vendor.

We advised our clients that, if they would not have bought the property had they known of these matters, they were entitled to rescind the contract for breach of the purchaser’s statutory warranty, pursuant to Clause 16 of the Conveyancing (Sale of Land) Regulation 2010. Our clients assured us that they would not have bought the property had they known.
The vendor offered to delay settlement while he attempted to remedy the non-compliance, but it appeared likely that the issues with Council would take at least several months to resolve, and even then there was no guarantee of a satisfactory outcome.

Alternatively, the vendor offered to complete immediately, with part of the sale proceeds held aside on trust, to be used if necessary by our clients in attempting to remedy the non-compliance themselves.

Our client decided that neither alternative was satisfactory, and they elected to rescind the contract. The vendor did not dispute the rescission.

If we had not obtained the certificate for the purchasers, then our client would have completed the contract, only to later discover the Order had been issued. In those circumstances, our clients could perhaps have sought to sue the vendor, or more usefully the vendor’s agent, based on misleading or deceptive conduct. Although it is arguable that the relevant consumer protection legislation does not apply to a vendor in a private residential sale, it would no doubt apply to the vendor’s agent.

Just as likely however, would be a claim by our client against us, their solicitors, for failing to obtain the certificate.

This case highlights the risks involved, to purchasers and their legal representatives, in not ordering this particular post-exchange enquiry. This is something for purchasers and practitioners to keep in mind when clients query whether they need to incur the cost of the outstanding orders search.

Expect surprises when you buy off the plan

Expect surprises when you buy off the plan…. Lessons from a Green Square development

Eamon Duff at the Sydney Morning Herald in an article on 5 May 2013 has exposed an interesting situation where buyers of off-the plan luxury apartments in a proposed strata scheme in Waterloo are up in arms the proposed use of the ground floor component of the apartment block they are buying into at Green Square. You can read the full article here.
In short, Duff’s article indicates that 75% of the residential units in a development named VikingbyCrown were sold off the plan. The marketing material associated with the development suggested a luxury apartment block and artists drawings (including those still shown on the promotional website at vikingbycrown.com.au) show a car show room on the ground floor. An application has now been lodged with the council (which is currently being assessed by City of Sydney Council) to use the ground floor of the building for a multi purpose function centre and place of public worship. Duff’s article indicates some buyers are upset as this is not the use they envisaged as part of the luxury apartment scheme they were buying into.

This is a timely reminder of the potential pitfalls and risks you must be aware of when buying apartments off the plan. Standard off-the-plan contracts generally provide rights for purchasers to rescind if the apartment they are buying is materially different once constructed to that which was contemplated in the plans attached to the contract. However, these rights are usually limited to matters like a significant change in size or lay out. They do not generally cover a change in the overall scheme or use of another lot.

The matter of the proposed use of a commercial part of the apartment block you are buying into would not generally be something for which purchasers could exercise a right to rescind. In fact most off the plan contracts for larger strata and community title developments include special conditions disclosing that the developer will continue to develop the balance of the land and that the purchaser cannot object to or terminate the contract because of its activities and development on the balance of the land.
In addition, often the building is structured so the retail and commercial part is a separate strata scheme to the residential part. So the two strata schemes operate separately except for certain aspects which are governed by a Building Management Statement.

Some of the lessons for potential purchasers are:

  • Do your homework and understand the risks:
    – buying off the plan is tricky because you can’t see, touch or feel what you are buying.
    – understand that changes to the development of the balance of the scheme or land may occur and your contractual remedies if you don’t like these may be limited.
    – understand the timing and the developer’s rights to extend the time for completion – usually there is a sunset date by which the development must be completed and your purchase must be finalised but there are also usually rights for the vendor to extend that date in certain circumstances – make sure you understand these and they fit with your plans.
    – discuss with your lawyer the circumstances where you would not want to go through with the purchase and either make sure they are covered in your rescission rights in the contract or don’t proceed – each buyer will have different ‘deal breakers’.
  • Understand the structure of the scheme:
    – How is the strata building structured?
    – Is there one strata scheme for the whole building or is it a stratum subdivision?
    – Often where there will be residential apartments in the upper levels and commercial or retail space in the lower and ground floor levels a separate strata scheme is established for the residential part and for the commercial and retail part.
    – this sort of ‘mixed structure’ impacts on your ability as an owner of a residential apartment to control what happens in the commercial/retail part.
    – If it is a mixed structure there should be a Building Management Statement in place which sets out how the two strata schemes co-exist.
  • Have a look at other developments the developer has completed. Do you like them? Do the finishes look of good quality?
  • Get a copy of the full development consent for the scheme you are buying into and read it and have your lawyer read it.

Tenant leasing: Your landlord can always change … Coles blind sides Woolworths

Often when I am advising commercial and retail tenants on their leases when we are discussing negotiating the lease terms with the landlord and there is a particular issue which needs negotiating or amending in the lease, the tenant will instruct me not to push the issue saying ‘don’t worry about that one, the landlords a good guy we don’t need to worry about that’. At that point I remind the tenant that their landlord can always change…. At anytime…. and generally, without any notice until the new landlord has purchased the property.

The next instalment in the ongoing saga between Coles and Woolworths is an interesting example of how this can happen…even to Woolworths and was reported in the SMH on March 23 by Adele Ferguson and Chris Vedelago.

In short, Coles bought the real estate at Grosvenor Street Neutral Bay where one of Woolworths high volume high sales store is located. The lease to Woolworths expires in 2014 with a 10 year option to renew. Woolworths were not aware of the sale until it had occurred. In Woolworth’s defence, Coles set up an elaborate purchasing structure which means that it would not have been immediately apparent that Coles was behind the structure of the new landlord. What this now means for both of the Supermarket giants is yet to be reported. However, at the very least Coles as landlord will have the right to inspect Woolworths sales data as part of the normal rent review processes in a retail lease like this.

An extreme case perhaps. But is it is a timely reminder to all tenants that your landlord can change at any time. The important thing is to make sure your lease reflects your commercial agreement and you understand and are comfortable with the terms…whoever your landlord is. That nice guy that you have a good relationship may not be your landlord when the lease expires and the issue of make good has to be finalised.

National business names register

ASIC Keys

In May 2012 business names which were previously held in state based registers were migrated over to the National Names Register which is administered by ASIC. ASIC does not have a shop front for dealing with the registration and transfer of business names and the register is administered on-line.

All business name holders are now required to have an ASIC Key for a business name registered on the National Names Register. The ASIC Key is different to the ASIC Key you may already have if you are the director of an ASIC Company. The ASIC Key is issued by ASIC to the holder of a business name when business names are registered or renewed. The ASIC Key is required if you want to deal with your business name in any way, for example when you want to sell your business.

However, as most business names in NSW are registered for a 3 year period if you have not had to renew your business name since the National Names Register commenced in May 2012 you will not have received your ASIC Key for the business name. This can cause issues if you wish to sell your business and transfer the business name to the purchaser as you need your ASIC Key to apply for the ‘consent to transfer number’ which you need to provide to the purchaser of your business to enable them to register themselves as the new holder of the business name. You can request the ASIC Key for your business name online. Click hereand then click on the link to find out more about ASIC Keys and how to apply for one.

Changes to the Transfer of Business Names

When you are selling your business and the purchaser is buying your business name you apply to ASIC for a consent to transfer number. Before 27 January 2013 once you applied for that number your business name was stored on a temporary register for 28 days until the transfer was completed. The process has now changed and since 27 January 2013 details of the previous and new business name holder are immediately displayed on the national business names register for a period of 28 days. After that the register updates to show the new business name holder.