Property Update - June 2009

GOVERNMENT SWIFT TO BACK DEVELOPERS

The Queensland Government has reacted quickly to the decision of the Queensland Court of Appeal in Bossichix Pty Ltd v Martinek Holdings Pty Ltd [2009] QCA 154 handed down on 5 June 2009 with the passing by Parliament on 22 June 2009 of the Body Corporate and Community Management Amendment Act 2009 (“the Amending Act”).

Minister for Fair Trading, Peter Lawlor, who introduced the Amending Act into Parliament, had previously advised that Parliament would be introducing the legislation to ensure that the parties to a contract “are returned to the situation they believed to be the case – and agreed to – at the time of the signing of the contract”.

Stating that the decision “puts hundreds and potentially thousands of off-the-plan contracts at risk”, Mr Lawlor believed that the court’s decision:

• could have been used to terminate a contract where a purchaser simply regretted entering into a contract;
• could have been used to terminate a contract where a purchaser could have purchased a property for a lower price;
• went against the intention of the Body Corporate and Community Management Act 1997 (“the Act”); and
• created great uncertainty for sellers and developers, especially where there was a long period of time between contract execution and settlement.

The Previous Law

The court’s decision concerns section 212 of the Act which (prior to the amendments made under the Amending Act) provided that a contract for the sale of a lot proposed to form part of a community title scheme (commonly referred to as an “off-the-plan” contract) must provide that settlement must not take place earlier than 14 days after the seller gives notice to the buyer that the scheme has been established under the Act.

The court held that it was not enough for a contract to merely state that the settlement date will be 14 days after the developer notifies the buyer that the plan of subdivision has registered (as opposed to establishment of the scheme), even though the two events are, in practice, the same.

The court found that the contract must refer to scheme establishment to be compliant with the Act (prior to the amendments made under the Amending Act) because the purpose of the previous section 212 was to allow the buyer sufficient opportunity to make all relevant enquiries before settlement.

The decision was of great significance as it meant that, where the wording in a contract did not comply with section 212 of the Act (prior to the amendments made under the Amending Act), a buyer would have had a right to terminate the contract regardless of whether they had suffered any material detriment as a result of the non-compliance.

The New Law

However, under the Amending Act, section 212 of the Act has been amended so that a right of termination on the part of the buyer will now not arise in respect of a non-complying contract – rather, the contract will now be taken to include a term that settlement of the contract will occur a period of at least 14 days (to be decided by the seller) after the seller gives notice to the buyer that the scheme has been established.

As such, focus on compliance under the new section 212 of the Act has moved from the contract to the form of the notice given requiring settlement thereby securing completion of the contract (subject to the parties complying with all other terms and conditions).

The amendments made to the Act will act retrospectively in respect of any contracts except for those:

• settled or lawfully terminated prior to 5 June 2009; or
• in respect of which court proceedings as to the lawfulness of termination under the previous section 212 have commenced, are on foot or have been concluded prior to the commencement of the Amending Act, that is, prior to 22 June 2009.

What Now?

Whilst the Government has taken swift action to overcome the unintended consequences of enforcing the previous section 212 in the way applied in the case, it remains crucial that any off-the-plan contracts are drafted to strictly comply with the Act.

COURT OF APPEAL PUTS RATCHET BACK IN RETAIL SHOP LEASE TOOLBOX

Retail shop landlords and tenants across Queensland are waiting for the fallout from the recent Court of Appeal decision in Connor Hunter (A Firm) v Keencrest Pty Ltd & Ors [2009] QCA 156 following the court’s majority decision (McMurdo J dissenting) to validate two ratchet clauses in a retail shop lease.

The Facts

The retail shop lease involved in the case contained two ratchet clauses, the first relating to increases by reference to the consumer price index during the term of the lease and the other in relation to a market review upon commencement of the option period under the lease. In both cases, the review was expressed with the proviso that the yearly rent determined under the review could not be less than the rent payable in the preceding year. It is the operation of this proviso in such clauses that has resulted in them being called “ratchet” clauses.

The Law and Issues

The tenant argued that the clauses contravened, and as a result were prohibited by, sections 27 and 36 of the Retail Shop Leases Act 1994 (“the Act”) as each clause provides for 2 methods/bases of review. The issue then to be determined was the argument made by the tenant that the proviso in each review clause constituted a second method/basis of review.

The court decided that at the core of a method/basis of review is a mechanism for the rent to change. On that basis, the court disagreed with the tenant as the proviso merely maintains the status quo which does not involve a change of rent.

The court’s decision is of great significance for landlords and tenants because it has been common practice that ratchet clauses are not included in retail shop leases as the intention of the Act has been expressed to prevent them. Their use in commercial and industrial leases has been common in the past and continues.

The consequences of including a clause which contains more than one method/basis of review as prohibited by the Act is such that the tenant will be entitled to choose which method/review it wishes to apply.

What Now?

However, in the absence of a further appeal or legislative change, landlords and tenants should be aware that rent review clauses in retail shop leases that ratchet to the previous year’s rent as a minimum may be valid. Of course, the validity of those clauses will be determined on a case by case basis and a great deal of care should be taken in the drafting process.