High Court decision underlines the need for urgent estate planning for Baby Boomers

The High Court case of Stanford v Stanford (judgment delivered 20 November 2012) underlines the urgent need for families, particularly blended families “baby boomers” to carefully organise their affairs while they are able to do so.

Stanford involved a couple that had been married for 40 years. It was the second marriage for both, and both had adult children of their previous relationships. The marriage had not broken down. However, they were physically separated as the Wife needed to move to a nursing home. The Husband remained in their matrimonial home. The Wife’s children applied as case guardian for a property settlement in the Family Court. Not surprisingly the Husband opposed that application. The Full Court of the Family Court determined that a property settlement in these circumstances could be ordered. However, the High Court unanimously rejected that proposition. While spousal maintenance could be ordered, the ability to seek a property settlement in these circumstances would be a rare occurrence.

The above decision highlights the need for urgent estate planning to ensure that assets follow the line intended. With blended families the likelihood of plans being thwarted is high and restructuring is difficult without the consent of the donor. As indicated in the High Court decision, the Wife could not change her Will. She had lost capacity. A division under the Family Law Act would result in a far more favourable result for the Wife’s estate and the ultimate recipients, her children. Their entitlements under family provision legislation would be far less generous.

There are options available to ensure that the Stanford problem does not arise. For example, a pre-nuptial agreement at the time the couple married could set out their intentions should they separate. Their intentions in that document are also relevant if they are married or one of the parties dies. Clearly such planning must take place well before the Stanford situation arises.

This article was written by Peter Szabo, Principal, M+K Private Clients team. 

What happens when SMSF trustees don’t agree?

Abstract:  A recent NSW Supreme Court case highlights the importance of appropriate trustee combinations as well as strategic mechanisms that assist when trustees don’t agree

 

By David Oon (doon@dbalawyers.com.au), Lawyer, and Daniel Butler (dbutler@dbalawyers.com.au), Director, DBA Lawyers

 

The last thing on the mind of most new SMSF trustees is what might happen years down the track when they are unable to agree with their fellow trustees. Unfortunately, a number of things can sometimes go wrong with an SMSF’s management. This article considers several thorny issues and a number of preventative steps.

 

Unwise combinations in the office of trustee — Notaras v Notaras

 

Often, as two or more people’s affairs intermingle (usually because they are family or business partners), the natural desire may be to start an SMSF to act as a vehicle to hold assets such as real property. Of course, there is nothing inherently wrong with this. No relationship is immune from conflict. However, some combinations of trustees are more unwise than others. This is illustrated well by the recent New South Wales Supreme Court decision of Notaras v Notaras [2012] NSWSC 947 (‘Notaras’).

 

The facts of Notaras are hinted at by the case title, representing an unfortunate dispute between two brothers. The plaintiff (Basil) was the brother of the defendant (Brinos). Both were the only trustees and members of an SMSF. By 2011, relations between the two had soured over a separate property dispute that also reached the Supreme Court of New South Wales, which was decided in favour of Basil. In December 2010, Brinos had made withdrawals of over $220,000 from the SMSF’s bank accounts. This was $57,839 more than Brinos was entitled to as a member. Subsequent to the withdrawals, the SMSF’s accountant (who was also Basil’s wife) sent a letter to Brinos, including tax returns and member statements that needed signing. Brinos returned the documents without signing them. While the judge in the case (Rein J) did not explicitly find that Brinos refused to sign them (partly because Brinos had not been expressly asked to do so in the letter), his Honour found (at [7]) that the ‘net effect…was that no further steps were taken… with a consequence that the trustees of the Fund [had] put themselves in breach of the Act’.

 

Basil sought an order (pursuant to s 70 of the Trustee Act 1925 (NSW)) that Brinos be removed as a trustee and replaced with a company. The company, Bazport, had Basil as the sole director and shareholder. Other states and territories usually confer similar powers on courts (eg, s 48 of the Trustee Act 1958 (Vic)).

 

The order was granted. This was an unusual outcome in that it contemplated the trustees of the Fund becoming both Basil, as well as his company Bazport. Because Rein J still considered Brinos to be a member despite having only a ‘nominal interest’ ([12]), his Honour noted that Basil and Bazport would be seeking permission from the ATO to have the SMSF exempt from the relevant requirements of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’). That is, an exemption would be sought from the requirement that each member is a trustee or a director of the corporate trustee.

 

The eventual result of Basil’s request to the ATO will probably not be made public. What is quite certain, however, is that the exercise of resolving the dispute via the Supreme Court was likely to have been time-consuming and quite costly. The case therefore shows that one should think carefully before starting an SMSF along with a family member, especially where there are shared business interests. Further, there are other relationships that may present a higher degree of risk that a dispute will arise. These include: parent–child SMSFs, SMSFs with in-laws and SMSFs shared between business associates.

Decision making — must it be unanimous?

Related to the issues raised by Notaras is the topic of trustee decision making. There is a general law principle that, where joint trustees are appointed, they must act unanimously. This was affirmed by Kaye J in Beath v Kousal [2010] VSC 24 [18] (12 February 2010). This means that it is near impossible to make decisions if joint trustees do not agree. However, this general position can be modified by the governing rules (usually annexed to the trust deed) providing that decisions can be made in some other manner. For example, deadlocks in trustee decisions could be broken if the governing rules provide that votes are weighted according to the member balance that each trustee has (if any). Not all governing rules will provide for this.

 

Removal of a trustee

 

A pertinent question to ask in the case of SMSFs where trustees cannot agree is: can the trustee be removed, other than by a court? In order to avoid a costly court process and likely time delays, a properly drafted trust deed and governing rules can provide for a procedure by which a trustee can be removed, and a new one appointed. An appropriate process may be that the member or members who have greater than half the total account balance are able to appoint a new trustee and remove an existing one. Again, not all governing rules are the same, and many will not provide for this.

 

Interestingly, Notaras did not contain any discussion of the trust deed or governing rules of Basil and Brinos’ SMSF. It appears that under the governing rules of Basil’s SMSF, he did not have adequate power to remove Brinos, despite Basil clearly being the member with the majority account balance.

 

Additionally, the governing rules also determine whether the power to hire and fire a trustee (ie, the appointor power) comes with fiduciary obligations attached, such as the obligation to exercise the power in good faith (Berger v Lysteron Pty Ltd [2012] VSC 95). Unless the rules provide that the power does not have to be exercised in good faith, the decision to remove and appoint a trustee may be subject to attack on various grounds.

 

Accordingly, to protect the interests of the members with the majority of benefits, governing rules should ensure that the appointor power can be exercised without associated fiduciary duties (these duties would be similar to those of a trustee). Few governing rules will provide for this.

 

Forcibly removing a member

 

A trustee who cannot agree with fellow trustees is also likely to be a member of the SMSF. This individual may not reply to correspondence and may generally refuse to participate in management of the SMSF. The question then arises: is it possible to forcibly remove the person as a member?

The governing rules can provide for a mechanism to remove a member. However, the larger hurdle is the requirements under the regulations, where, broadly, prior consent of the member to be removed is required. Of course, this may be impossible to obtain where there is a falling out.

Going forward, a strategy for SMSFs to consider to overcome this potential impasse is for the member with the larger account balance to obtain a signed consent up-front from the other member (in their capacity as both trustee and member) that, upon the occurrence of certain events (eg, disagreement about a material SMSF decision, relationship breakdown or legal dispute), the trustee can remove the other member from the fund and transfer their benefit to another complying superannuation fund.

Another option for a person ‘stuck’ in an SMSF with a trustee/member who will not cooperate is to remove themselves from that fund (and roll over funds into a new SMSF). However, legally and (sometimes) practically, this itself may require the consent of the other trustees (for example, authority to deal with the bank).

Conclusion

 

The problem of an uncooperative trustee can prove extremely difficult due to the law of trusts, as well as laws protecting the interest of members of superannuation funds. This can be made more difficult by documents that do not confer strategic powers.

 

In closing, a wise initial step is to consider carefully who to share an SMSF with.

 

Further, strategically drafted trust deeds and governing rules, as well as good initial planning, can assist to cure problems, or better yet, prevent them.

 

Lastly, for those already part of an SMSF, it worth considering whether the current structure is prone to problems, and whether a restructure would be worthwhile.

 

*        *        *

 

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

 

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.

Amendments to the Fair Work Act 2009

Amendments to the Fair Work Act 2009 Fair Work Australia renamed Fair Work Commission; and changes to time limits for bringing unfair dismissal and general protections applications. Amendments to the Fair Work Act 2009 commenced on 1 January 2013. A few of the more important changes are noted below. Fair Work Australia has been renamed the Fair Work Commission. There are various other organisational changes, including the introduction of two new vice president positions. The time limit for lodging unfair dismissal applications has increased from 14 to 21 days. The amendments also introduce additional circumstances in which the Commission may make a costs order against a party or lawyer in unfair dismissal matters. The time limit for lodging a general protections (or adverse action) application arising out of a dismissal has been reduced from 60 days to 21 days. The changed time limits noted above apply to all employees dismissed on or after 1 January 2013. The Employment Law Guide provides detailed commentary on how to bring and conduct unfair dismissal and adverse action matters before the Fair Work Commission, with links to the relevant forms. That commentary will shortly be updated to reflect the recent amendments. The Employment Law Guide, written by barristers Paul Moorhouse and Gerard Boyce, includes detailed commentary on how to bring and conduct unfair dismissal and adverse action matters before the Fair Work Commission, with links to the relevant forms. Unsubscribe

OFF the PLAN SALES

Many properties are sold ‘off the plan’.  This is the phrase used to describe a property that is a lot on a PROPOSED plan of subdivision, meaning that the plan of subdivision creating the lot has been drawn but it is not yet registered at the Land Titles Office.

 

Historically, it was not permissible to sell ‘off the plan’.  Until amendments to the Sale of Land Act 1962 it was basically illegal to enter into a contract for the sale of a piece of land unless that land had its own title.  Unfortunately the subdivision process can be very time consuming as the infrastructure required for the plan to get to a stage where responsible authorities are satisfied that the plan can be registered and separate titles issued is often substantial.  In the case of land subdivision, this involves the provision of roads and services and in the case of building subdivision, it involves construction of the building.  However the market consisted of vendors who were keen to secure purchasers for these separate lots and purchasers who were keen to secure their ‘little piece of heaven’ and so the restriction on sale that was a dampener on economic activity was eased.

 

However, in recognition that such contracts generally involve a developer and a consumer and therefore are conducted in an uneven bargaining environment, some restrictions still apply to such sales.  These restrictions also recognise that there is likely to be a substantial delay between contract and settlement.  Indeed, this very month, an obligation to include a conspicuous Notice to that effect in every off the plan contract has come into force.  Other statutory provisions relating to such sale include limitation on the amount of the deposit and an obligation that it be held on trust, an obligation to include information about land surface works, a default period for registration (sunset clause) after which time the purchaser may avoid the contract and protection against changes to the proposed plan.  These obligations require the inclusion of various provisions in the contract and these are included in the General Conditions.

 

Despite the fact that off the plan sales form a substantial part of the market, there have been relatively few decisions that have considered the meaning of these statutory protections.  In the apartment market, there were some proceedings involving dissatisfied purchasers in the early days of the Docklands project, but those complaints tended to relate to price rather than off the plan issues.  In the land subdivision market, the lack of cases probably reflects the fact that it is just too expensive for John Citizen to consider taking a land developer to Court in relation to such matters.

 

In recent years off the plan sales have become popular in an area that is something of a combination of the other two areas.  Urban renewal and infill housing has created a market for small land subdivisions that involve the subdivider either constructing a home on the subdivided land or arranging for that construction.  This scenario produced the recent case of Joseph Street P/L v Tan discussed in the September 2012 column and has now produced Besser v Alma Homes P/L [2012] VSC 460.

 

This case involved a 4 lot plan of subdivision of a large block on a main road in Caulfield and the purchaser entered into an off the plan contract for a ‘front’ unit for $1,250,000.  The contract included a copy of the proposed plan of subdivision which included a plan showing a common driveway between the two front blocks giving road access for the two rear units and revealed that an owners corporation would be created with each unit having a 25% entitlement and liability.  After registration of the plan the purchaser became aware that the lot entitlement and liability had changed so that each front unit had an entitlement and liability of 1 out of 202 – less than 0.5%.  This unilateral decision by the developer had apparently been made on the basis that the front units would not use the common property and, on a liability basis, could be seen to advantage the front units.

 

However this proposal had not been communicated to the purchaser, who took the view that the change amounted to “an amendment to the plan of subdivision which will materially affect the lot” thereby entitling the purchaser to avoid the contract pursuant to s.9AC of the Sale of Land Act 1962.  The vendor argued that the change to the lot entitlement and liability schedule was not a change to the plan, but that argument was rejected.  Similarly, the vendor’s argument that the amendment did not “materially affect” the lot was, not surprisingly, rejected.  Pagone J. alluded to the loss of voting rights consequent upon the amendment, but the affect on insurance entitlement in the case of a combined building policy would also be a powerful reason to find material affectation.

 

Interestingly, the fact that the notification of the amendment and the purchaser’s avoidance was made after registration of the plan was not an issue.  Section 9AC(1) does include the words ‘before the registration of the plan’ but presumably the vendor accepted that as notification came after registration of the plan, an attempt to limit the purchaser’s avoidance right to prior to registration would be doomed to fail.  The interaction between s9AC and s.10, which also creates an avoidance right but is limited to exercise prior to registration, is uncertain and legislative clarification of the purchaser’s rights in this regard is needed.

 

Russell Cocks

LANDLORDS BEWARE

Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent.  Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent.  It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact.  However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis [2006] VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”

 

That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises.  Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion.  The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.

 

The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was over-holding in accordance with the terms of the ‘standard’ lease.  The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks.  Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.

 

This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546.  This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods.  The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.

The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant.  The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.

 

The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods.  The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods.  Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies.  This argument was accepted.

 

The landlord relied upon two clauses in the lease to justify its actions.  Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘re-entry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant.  The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’.  It followed that such a clause is contrary to public policy and therefore void.  It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.

 

The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.”  The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.

 

This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods AFTER termination of the lease.  It simply means that such clauses must be VERY carefully drawn.

 

Russell Cocks

TWO TOPICS

This column is concerned with two cases on entirely different topics, but connected by a similarity in the name of the principal parties and the fact that they are recent decisions in the Real Property List of VCAT, a jurisdiction that is growing in importance for property lawyers.  Pavlovic v GEADSI Nominees P/L [2012] VCAT 997 (Pavlovic) concerns an easement and Pavlovich v Pavlovich [2012] VCAT 869 (Pavlovich) concerns co-ownership.

 

Pavlovic took place in a fairly conventional inner suburban setting.  The two protagonists were neighbours, with Pavlovic having purchased his property in recent years with the intention of renovating and living in the property and GEADSI having constructed three units on the adjoining property some 15 years previously.  At that time GEASDI had obtained from the then owner of the Pavlovic property consent to construct a stormwater drain across the Pavlovic property and a stormwater pipe had been constructed such as to take the stormwater from the GEADSI land through the Pavlovic land and to a laneway at the rear.  This pipe was below the surface of the ground and Pavlovic was not aware of the pipe when he purchased the property as it was not recorded as an easement on the title, not evident to a physical inspection and he was not otherwise been informed of its existence.

 

Pavlovic intended to construct improvements in the backyard and discovered that the soil was so saturated that it would be necessary to remove the soil at a cost of $15,550 before commencing construction. Additionally, it would be necessary relocate the pipe to prevent the ongoing saturation of the soil below the improvements.  Pavlovic wanted the pipe removed.  He commenced these proceedings for an order pursuant to s.16 Water Act 1989.

 

GEADSI argued that the pipe constituted an implied easement and that Pavlovic, as subsequent purchaser, was bound by that easement.  The Tribunal rejected that argument, effectively finding that the consent given by the previous owner did not create a proprietary right and was not enforceable against subsequent owners.  An argument based on a prescriptive easement was rejected on the basis that the right to use the pipe arose by consent.  The recent case of Kitching v Phillips [2011] WASCA 19 was referred to.  Effectively, the Tribunal was of the view that the original temporary solution to the drainage problem should not be allowed to impact on the proprietary rights of the new owner – a glowing endorsement of fundamental Torrens principles.

GEADSI was ordered to pay the costs of removing the saturated soil and to remove the pipe.

 

Pavlovich on the other hand concerned an application by a co-owner pursuant to the ‘partition provisions’ of the Property Law Act 1958, specifically s.228.  The parties to the proceedings were registered joint tenants and, unusually, the application was not for a ‘partition’ as that word is generally understood but rather a transfer from one co-owning joint tenant to the other joint tenant.  Whether VCAT had power to do so occupied the first portion of the judgement, with a conclusion that the power conferred by s.228 did indeed authorise such a transfer.

 

The parties were mother and son.  There was evidence that as part of a downsizing exercise the mother had purchased a property but was unable to gain temporary finance, so the son was added as a joint tenant.  Shortly after, the loan was repaid from the proceeds of sale of the mother’s original property and so the subject property was owned as joint tenants, although the son had effectively made no financial contribution.

 

Ten years later the mother applied for an order that the son transfer his interest in the property to the mother.  The mother argued that it had always been intended that the son would do so when the loan was repaid.  The son argued that it had been agreed at the time that the son would remain as joint tenant and then ‘inherit’ the property upon his mother’s death as gifts were made to other siblings that would be ‘offset’ by the son taking the property.  Essentially the issue was a factual one and the Tribunal accepted the mother’s version.

 

The Tribunal concluded that whilst the son was a legal joint tenant, beneficial ownership resided entirely with the mother, therefore the son was ordered to transfer his interest in the property to the mother so that she would become sole legal and beneficial owner.  Concern was raised, but dismissed, that because the Tribunal was therefore finding that the son had no beneficial interest, he could not be a co-owner within the meaning if the Act and VCAT therefore had no jurisdiction.

 

This is similar to an argument raised in Garnett v Jessop [2012] VCAT 156.  Jessop was the sole registered proprietor and Garnett sought partition on the basis that he had made contributions and therefore held an equitable interest on the basis of a constructive trust.  VCAT dismissed a submission that only legal (registered) owners qualify as ‘co-owners’ within the meaning of the Act and held that a party claiming an equitable interest is a ‘co-owner’ and therefore entitled to seek partition.

 

Russell Cocks

BEST ENDEAVOURS (part 2)

The April 2011 column considered the case of Joseph Street Pty Ltd v Tan, a decision at first instance reported at [2011] VSC 586.  The case has now been reversed on appeal, reported at [2012] VSCA 113.

 

The effect of the Court of Appeal decision would appear to make the entering into of a s.173 Agreement COMPULSORY for developers in all circumstances where the municipal council is prepared to enter into such an Agreement.

 

The case involved a ‘villa unit’ style development of 6 single storey units in Box Hill.  Units were sold off the plan with settlement to be after registration of the plan in accordance with common practice.  The builder that the developer had contracted to undertake construction failed to do so and the developer was forced to find another builder.  As a result, construction was not completed within the time allowed by the contract for registration of the plan (the sunset period) and the developer rescinded the contract.

 

The purchaser refused to accept rescission and sued for specific performance of the contract on the basis that the vendor had failed to use ‘best endeavours’ to have the plan registered.  It had been established at first instance that this obligation consisted of BOTH an express contractual obligation and also as an implied obligation.

 

The Full Court identified that registration of the plan could only be achieved when the council had issued a Certificate of Compliance, but that there were two methods by which the developer could obtain that Certificate and thus fulfil the contractual obligation to secure registration of the plan:

 

1.       the developer could complete all the building works to the satisfaction of all relevant service authorities; or

 

2.       the developer could enter into a s.173 Agreement with Council after entering into agreements with service providers.

 

Evidence given on behalf of the developer suggested that the s.173 Agreement option was limited to ‘greenfield’ developments and had not been contemplated by the developer as an option.  However evidence from the council suggested that s.173 Agreements were common in ‘smaller’ developments and indeed the planning permit issued in respect of the development had referred to the possibility of just such an Agreement.

 

The effect of the s.173 Agreement is to give the council the ability to register on the ‘parent’ title (the title to the unsubdivided land) the requirement that the development be constructed in accordance with the planning permit issued in respect of the development.  If council has the benefit of such an Agreement then, subject to the satisfaction of other relevant authorities, council is able to be satisfied that the development will be built in accordance with the permit and council’s planning responsibility in relation to supervision of construction is thereby satisfied.  If construction is not in accordance with the permit, council is entitled to enforce the s.173 Agreement against the developer and all subsequent registered owners.

 

The s.173 Agreement process appears to be a shortcut to registration of the plan, as a certificate of compliance may be issued by council well in advance of completion of all construction and infrastructure works.  The requirement that the developer enter into satisfactory agreements with infrastructure providers is a pre-condition to a s.173 Agreement and such arrangements may be tedious to negotiate, but once achieved registration of the plan can quickly follow.

 

This might cause concern for a purchaser if the only requirement on the vendor is registration of the plan.  As can be seen from the above, this could be achieved well before construction is complete, but no purchaser is going to want to pay for a half finished property.  Thus a purchaser needs to be satisfied that settlement will only be due after BOTH registration of the plan AND issue of a certificate of occupancy.  Whilst there is much to be said against a certificate of occupancy being a true reflection that all works have been completed, it is at least an objective confirmation that most works have been completed.  A better test is a satisfactory report from the purchaser’s building consultant, but few developers are prepared to countenance such a hurdle.

 

Whilst the Court of Appeal in Joseph Street may have identified a shortcut that was open to the developer, it is interesting to note that the developer was not aware of that possibility and there is no suggestion that the purchaser ever suggested to the developer that such a process was available, let alone that the developer refused to follow that course.  Apparently, the mere fact that the option was available and not taken was enough to satisfy the Court that the developer had failed to use his best endeavours.  A true case of IGNORANCE IS NO EXCUSE.

 

Russell Cocks

COSTS and CAVEATS

A caveat is a document authorised by s.89 Transfer of Land Act 1958 (Vic.) as a means by which a person claiming an interest in the land of another person can record that interest on the title to land owned by that other person.  The virtue of a caveat is that it serves to give notice to the world of the interest of the caveator and generally means that a person dealing with the registered proprietor of the land will require that the caveat be satisfied prior to completion of any transaction.  A caveat is often used by a person who is owed money by the registered proprietor to provide quasi-security for that debt.

 

A caveat must be supported by a caveatable interest in the land and whilst a simple debt owed by the registered proprietor to a creditor will not, of itself, create a caveatable interest, a debt supported by a charging clause will do so.  Thus a document that records the debt and charges the land with repayment of that debt will justify a caveat.

 

Lawyers perform services for clients and are entitled to charge costs for those services.  Many lawyers enter into Costs Agreements with clients in respect of those costs and those Costs Agreements may include a term whereby the client charges the client’s land, or the client’s interest in the land of another, with payment of those costs (Porter v Bonrrigo [2009] VSC 500).  Prudently, the Costs Agreement would also include a term whereby the client acknowledges that the lawyer may lodge a caveat over that land to secure payment of those costs.

 

There may be an argument that the lawyer in such circumstances should advise the client to seek independent legal advice in relation to the proposed charge and caveat, but that is a matter for another day.

 

In passing it may be noted that the caveat may be lodged against a property even if the client is only one of the registered proprietors and indeed may be lodged against the property of a person other than the client, if it can be established that the client also has an (unregistered interest) in that property, for instance, by way of a constructive trust.  Thus caveats are common in family law disputes where one party may not have access to funds but does have an interest (either registered or unregistered) in matrimonial property.  However the case of Brott v Shtrambrandt [2009] VSC 467 highlights a potential problem with such caveats, particularly in the family law area.

Beach J. held that lawyers’ Costs Agreement are, in appropriate circumstances, subject to what was then the Consumer Credit (Victoria) Code, arising out of the Consumer Credit (Victoria) Act 1995, the current equivalent of which is the National Credit Code, arising out of the National Consumer Credit Protection Act 2009 (Cth.).

 

The Code is designed to regulate consumer lender.  At first glance one might wonder how a Costs Agreement can constitute lending, but the various definitions in the Act mean that deferral of payment of a debt constitutes the giving of credit and any agreement to secure the payment of that debt constitutes a mortgage.  If the agreement includes a provision whereby “a charge is or may be made for providing the credit” then the Code applies.  Lawyers are entitled to charge interest on unpaid accounts (Legal Practice Act 1996 ss.3.4.21(4)) and a Cost Agreement that provides for the payment of interest will be a “credit contract”.  A lawyer’s practice clearly satisfies the requirement that the credit be provided in the course of business and so, provided the client is a “natural person” or a “strata corporation” and the “credit” is provided for personal purposes, the Costs Agreement will be subject to the National Credit Code.  These two latter requirements makes the Code particularly relevant in a family law environment, but it will apply to all clients who operate as a personal, as opposed to corporate, entity in other than a business environment.

 

A Costs Agreement may therefore be a “credit contract” and also constitute a “mortgage” under the National Credit Code.  Section 44(1) of the Code requires a mortgage to “describe or identify the property which is subject to the mortgage” and ss(2) makes a provision that “charges all the property of the mortgagor” void.  Thus a provision in Costs Agreement that fails to identify the charged property or seeks to charge all the property of the client will be struck down and any caveat lodged pursuant to such a Costs Agreement will be susceptible to challenge.

 

This decision later played out in Shtrambrandt v Hanscombe [2012] VSC 102.  Beach J. had identified the successful legal challenge to the caveats lodged pursuant to the Cost Agreement independently of arguments advanced by the parties.  By that stage Shtrambrandt was self-represented but he had been represented by various solicitors and barristers in the proceedings over several years and he sued those lawyers for failing to have identified this defence.  After a 13 day trial in relation to this and other issues Ferguson J. decided that, given the novelty of the argument, the lawyers had not been negligent in failing to identify that defence.

 

Russell Cocks

Russell Cocks’ Newsletter

HOUSEKEEPING

 

 

MENTOR

 

 

This NEWSLETTER is mainly devoted to explaining the MAJOR CHANGE that is occurring in 2013.  After nearly 20 years of providing this Service to the Victorian legal profession I am merging my Service into a broader Service that will extend the areas of law and also the geographic base of the Service.

 

I am able to do this because of my great relationship with Guy and Danni Dawson of BY LAWYERS FOR LAWYERS in New South Wales.  BLFL has provided the legal content for the LEAP Legal software system for over 10 years.  During that time Guy and Danni have developed Step by Step Guides in over 20 common areas of law and have established a ‘stable’ of authors to write and maintain those Guides.  In recent years we have discussed and planned the extension of the BLFL product from simply a texted-based information resource to become a response-based Service modelled on my Service.

 

This has been trialled over the last two years as a Question & Answer Service attached to the BLFL Step by Step Guides and it has been well received.  Subscribers email questions to BLFL and the question is then allocated to the appropriate expert for answer.  This is usually given within 24 hours of receipt of the question.  We have now named the Service MENTOR to reflect the objective of providing a Service based on experience and expertise to the legal profession.

 

This Service is now ready to go live.  SMOKEBALL is the vehicle by which lawyers will be able to access MENTOR.  SMOKEBALL is essentially the publishing arm of LEAP.  LEAP subscribers have automatic access to the BLFL Step by Step Guides through LEAP but non-LEAP subscribers are also able to access SMOKEBALL products, which include the Step by Step Guides but also many other publications.

 

The MENTOR subscription is a stand-alone subscription Service.  If your firm is an existing LEAP or SMOKEBALL subscriber, you simply subscribe to MENTOR as an additional product.  If you do not presently subscribe to LEAP or any SMOKEBALL product then you simply subscribe to MENTOR (through SMOKEBALL) as a stand alone subscription.  Once you have subscribed to MENTOR you simply open the www.smokeball.com.au site and click on the MENTOR tab on the right hand side of the homepage, type your question and send it to MENTOR.  The question will then be allocated to the appropriate author and a response provided, generally within 24 hours, if not sooner.

 

The MENTOR subscription is a firm-wide subscription and there are no limits to who in the firm can ask the question or the number of questions that can be asked.

 

MENTOR will be a wonderful resource for the small practitioner who acts across a wide range of areas of law, but also more specialist practitioners who will be able to ‘bounce off’ another experienced practitioner questions relating to their speciality.  Young practitioners and support staff will have a resource that they can access before bothering a busy principal and the principal will thereby benefit from less interruptions.  Large firms will add it to the suite of resources that they provide to staff to encourage on-line research.

 

MENTOR does not provide legal advice.  An appropriate disclaimer will appear with all responses.  A dictionary definition of MENTOR is “a person who is considered to have sufficient experience or expertise to be able to assist others less experienced”.  MENTOR will help you get started or point you in the right direction to assist with the resolution of a problem.  It will not replace the need to seek assistance from Counsel from time to time but it will assist in identifying the problem that you are facing and, hopefully, the answer to that problem.

 

My experience over 20 years of answering questions is that 80% of the time I am able to point the inquirer in the right direction, 10% of the time I simply confirm what they were thinking and 10% of time I suggest that they need to brief Counsel.  I expect that the same will apply to MENTOR.

 

In recent years I have moved my inquirers away from the telephone to email.  I now receive 90% of my inquiries by email, 99% of which I answer overnight.  The introduction of MENTOR fits nicely with my planned trip in 2013.  I will be away from May until October and all inquiries during that time will need to be by email.  Due to the time difference, questions asked before 3pm will generally be answered before 5pm THE SAME DAY but certainly overnight at worse.  The only difference is that the email will be sent via MENTOR rather than directly to me.  When asking the question you can specify that you want the question to be sent to me.

 

 

MENTOR costs $660 pa. plus GST – that is a total cost of $726 pa.

 

This can be paid monthly at the rate of $55 plus GST ($60.50pcm).

 

Payments can be by cheque, direct debit or credit card.

 

The MENTOR INVOICE for 2013 is attached to this Newsletter for those members of SIS whose subscription expires in December 2012.

 

 

 

I have included an ORIGINAL Invoice that you retain for your records and a COPY invoice that you return with payment.  The ORIGINAL Invoice just has the annual fee but the COPY has details of the various methods of payment.

 

If you pay the full year by cheque, just attach the cheque to the COPY Invoice and return by post.  If you pay the full year by direct debit, please complete and return the COPY Invoice by post with the appropriate details for payment by direct debit.

 

If you wish to pay by credit card (either in full or monthly) return the COPY Invoice by post with your credit card details.  Alternatively, if you are paying by credit card, you can ignore my Invoice and simply go directly to the MENTOR homepage on www.smokeball.com.au to register and pay there.

 

If returning the Invoice, it is important that you include an email address on the COPY Invoice.  This will be the email address that you enter to sign in to access MENTOR.  May I suggest that you use

mentor@yourfirmname.com.au

 

You must make sure that you establish this email address as a valid email address on your system as it will be the email address that MENTOR uses to communicate with you.  Once registered you will then need to establish a PASSWORD which can be a firm wide PASSWORD giving all your staff access.

 

When you want to ask a question you go to the MENTOR tab and enter the email address and PASSWORD.  As the email address and PASSWORD is common to all users in your firm it is just a matter of you making sure all potential users are aware of this email address and PASSWORD.  With this in mind, the next page of this NEWSLETTER is designed to be photocopied and circulated throughout your office.  Just insert your MENTOR email address and PASSWORD once you have registered.

 

Answers do not need to come back through this generic email – you can specify an email address for the answer when you ask the question.

 

You can begin to use MENTOR as soon as you register and pay.  If your SIS subscription is paid until December 2012, you can subscribe to MENTOR now or you can wait until the New Year to join MENTOR.  If your SIS subscription is paid until June 2013 (and therefore no Invoice is attached) you can continue to email me directly until 30 June 2013.  However, if you see the value of MENTOR in those many other areas of law that MENTOR covers and I do not, then you might decide to subscribe to MENTOR immediately and enjoy those additional benefits.  If so, just go to www.smokeball.com.au, hit the MENTOR tab and register.  This method requires monthly payment by credit card.

 

 

 

 

 

MENTOR

 

 

 

 

WE NOW SUBSCRIBE TO THE MENTOR ON-LINE INFORMATION SERVICE.

THIS IS SIMILAR TO THE SERVICE PROVIDED BY RUSSELL COCKS BUT IT COVERS ALL COMMON AREAS OF LAW.

 

YOU CAN ASK A QUESTION OR SEEK INFORMATION ABOUT VIRTUALLY ANY AREA OF LAW THAT WE PRACTICE IN AND EXPECT TO RECEIVE A RESPONSE WITHIN 24 HOURS.

 

 

GO TO                 www.smokeball.com.au

 

HIT THE              MENTOR tab                         on the right hand side

 

TYPE IN              email address

(SUGGESTION   mentor@ourfirmname.com.au)

 

PASSWORD

(you choose)

 

 

 

If you are working in LEAP then simply go to the USE GUIDE tab and a link to MENTOR appears.  Hit the MENTOR tab and type in the above email address and PASSWORD.

 

 

 

LAST CHANCE SALOON

RUSSELL COCKS

WILL BE PRESENTING A PROGRAM OF

6 HOURS OF SUBSTANTIVE LAW CPD

on

THURSDAY 28 March 2013

(the day before Easter Friday)

at

ETIHAD STADIUM

DOCKLANDS                     MELBOURNE

 

SPEAKERS WILL INCLUDE WELL KNOWN BARRISTERS & EXPERTS

 

9.30 – 1.00	Property Law topics	$330
1.30 – 5.00	Property Law topics	$330

$660 per registrant for both sessions – 6 hours CPD

sessions may be booked for just morning or afternoon at $330 per session

$550 per registrant for 2 registrants from one firm

$275 per registrant per single session if 2 registrants

$440 per registrant for 3or more registrants from one firm

$220 per registrant per single session if 3 or more registrants

 

NAME(S) ..………………………………………..   cheque enclosed $………..

 

 

ADDRESS (DX if any)…………………………………………………………

photocopy and return with cheque to

Russell Cocks      DX 483       or        GPO Box 2149   Melbourne      3001

TAX INVOICE          ABN 13 460 951 767                  incl. 10% GST

 

CONFIRMATION OF REGISTRATION WILL BE SENT

 

CPD IN EUROPE

May – September 2013

Russell Cocks is conducting CPD in NINE European locations during the northern Spring & Summer.  Sessions will be in the first and third weeks in each of the months from May until September.

 

VENUES FOR 2013

 

                                                          week 1                                                 week 3

 

MAY                                                            PARIS                                                BARCELONA

 

JUNE                                               SAN REMO                                      LAKE COMO

 

JULY                                                                                                           LONDON (The Ashes)

 

AUGUST                                         St. PETERSBURG                           BERLIN

 

SEPTEMBER                                 VENICE                                            ADRIATIC COAST

 

 

Sessions will be conducted in the first and third week of each month.  Tuesday sessions include 3 hours of COMPULSORY (ethics related) TOPICS and sessions on Thursday relate to Property/Probate topics.  You can undertake Tuesday in one city and Thursday in a different city.

 

$1,100 PER REGISTRANT for 10 hours CPD

(no charge for accompanying persons)

A FAMILY LAW STREAM is being conducted by an Accredited Family Law Specialist in PARIS, BARCELONA & LONDON.  This will comprise 5 hours of FAMILY LAW presented on the WEDNESDAY in each location as an alternative to the PROPERTY LAW sessions conducted on the THURSDAY.

Expressions of interest:

Please email:       russell@russellcocks.com.au

and further information will be provided

ARTICLES

 

from the Law Institute Journal PROPERTY column

 

 

LANDLORDS BEWARE

 

 

Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent.  Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent.  It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact.  However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis [2006] VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”

 

That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises.  Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion.  The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.

 

The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was over-holding in accordance with the terms of the ‘standard’ lease.  The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks.  Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.

 

This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546.  This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods.  The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.

The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant.  The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.

 

The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods.  The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods.  Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies.  This argument was accepted.

 

The landlord relied upon two clauses in the lease to justify its actions.  Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘re-entry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant.  The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’.  It followed that such a clause is contrary to public policy and therefore void.  It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.

 

The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.”  The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.

 

This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods AFTER termination of the lease.  It simply means that such clauses must be VERY carefully drawn.

 

 

 

 

 

 

 

 

 

 

 

OFF the PLAN SALES

 

 

 

Many properties are sold ‘off the plan’.  This is the phrase used to describe a property that is a lot on a PROPOSED plan of subdivision, meaning that the plan of subdivision creating the lot has been drawn but it is not yet registered at the Land Titles Office.

 

Historically, it was not permissible to sell ‘off the plan’.  Until amendments to the Sale of Land Act 1962 it was basically illegal to enter into a contract for the sale of a piece of land unless that land had its own title.  Unfortunately the subdivision process can be very time consuming as the infrastructure required for the plan to get to a stage where responsible authorities are satisfied that the plan can be registered and separate titles issued is often substantial.  In the case of land subdivision, this involves the provision of roads and services and in the case of building subdivision, it involves construction of the building.  However the market consisted of vendors who were keen to secure purchasers for these separate lots and purchasers who were keen to secure their ‘little piece of heaven’ and so the restriction on sale that was a dampener on economic activity was eased.

 

However, in recognition that such contracts generally involve a developer and a consumer and therefore are conducted in an uneven bargaining environment, some restrictions still apply to such sales.  These restrictions also recognise that there is likely to be a substantial delay between contract and settlement.  Indeed, this very month, an obligation to include a conspicuous Notice to that effect in every off the plan contract has come into force.  Other statutory provisions relating to such sale include limitation on the amount of the deposit and an obligation that it be held on trust, an obligation to include information about land surface works, a default period for registration (sunset clause) after which time the purchaser may avoid the contract and protection against changes to the proposed plan.  These obligations require the inclusion of various provisions in the contract and these are included in the General Conditions.

 

Despite the fact that off the plan sales form a substantial part of the market, there have been relatively few decisions that have considered the meaning of these statutory protections.  In the apartment market, there were some proceedings involving dissatisfied purchasers in the early days of the Docklands project, but those complaints tended to relate to price rather than off the plan issues.  In the land subdivision market, the lack of cases probably reflects the fact that it is just too expensive for John Citizen to consider taking a land developer to Court in relation to such matters.

 

In recent years off the plan sales have become popular in an area that is something of a combination of the other two areas.  Urban renewal and infill housing has created a market for small land subdivisions that involve the subdivider either constructing a home on the subdivided land or arranging for that construction.  This scenario produced the recent case of Joseph Street P/L v Tan discussed in the September 2012 column and has now produced Besser v Alma Homes P/L [2012] VSC 460.

 

This case involved a 4 lot plan of subdivision of a large block on a main road in Caulfield and the purchaser entered into an off the plan contract for a ‘front’ unit for $1,250,000.  The contract included a copy of the proposed plan of subdivision which included a plan showing a common driveway between the two front blocks giving road access for the two rear units and revealed that an owners corporation would be created with each unit having a 25% entitlement and liability.  After registration of the plan the purchaser became aware that the lot entitlement and liability had changed so that each front unit had an entitlement and liability of 1 out of 202 – less than 0.5%.  This unilateral decision by the developer had apparently been made on the basis that the front units would not use the common property and, on a liability basis, could be seen to advantage the front units.

 

However this proposal had not been communicated to the purchaser, who took the view that the change amounted to “an amendment to the plan of subdivision which will materially affect the lot” thereby entitling the purchaser to avoid the contract pursuant to s.9AC of the Sale of Land Act 1962.  The vendor argued that the change to the lot entitlement and liability schedule was not a change to the plan, but that argument was rejected.  Similarly, the vendor’s argument that the amendment did not “materially affect” the lot was, not surprisingly, rejected.  Pagone J. alluded to the loss of voting rights consequent upon the amendment, but the affect on insurance entitlement in the case of a combined building policy would also be a powerful reason to find material affectation.

 

Interestingly, the fact that the notification of the amendment and the purchaser’s avoidance was made after registration of the plan was not an issue.  Section 9AC(1) does include the words ‘before the registration of the plan’ but presumably the vendor accepted that as notification came after registration of the plan, an attempt to limit the purchaser’s avoidance right to prior to registration would be doomed to fail.  The interaction between s9AC and s.10, which also creates an avoidance right but is limited to exercise prior to registration, is uncertain and legislative clarification of the purchaser’s rights in this regard is needed.

 

 

 

 

 

 

 

 

 

 

SECTION 32 REVIEW

 

 

 

The Victorian government is conducting a review of the operation of s.32 of the Sale of Land Act 1962 through Consumer Affairs Victoria.  The aim of the review is to “reduce the burden of ‘red tape’ on business and the community”.  It might therefore be expected that the review will lead to a reduction in the disclosure obligations.

 

This is likely to disappoint consumer groups who would prefer a widening of those disclosure obligations in relation to matters affecting the quality of land, such as to require disclosure of the existence of asbestos or petroleum products on the land.

 

The review acknowledges that the purpose of the s.32 requirements was to reverse the onus for obtaining information from the purchaser to the vendor.  Prior to the legislation (first introduced in 1982) the principle of caveat emptor meant that the vendor had limited disclosure obligations and the purchaser was obliged to obtain all relevant information relating to the property either before contract or, at the purchaser’s risk, after contract.  Requiring the vendor to provide this information in the form of a Disclosure Statement before contract was essentially a consumer protection device.

 

There have been piecemeal amendments to the Act over the years and it would appear that one motivation for the review is to generally ‘clean up’ the requirements and perhaps transfer the requirements to Regulations rather than being specified in the Act so as to make review a simpler process.

 

One simple amendment would be to do away with the requirement that there be a separate Disclosure Statement and that a copy be included in the contract.  This obligation is honoured in the breach and failure to comply would never be grounds to avoid.  There might have been an argument that having a separate Statement somehow brought home to a prospective purchaser the significance of its content but the fact is, this does not happen and provision of a Statement in the contract should be sufficient.

 

The terms of reference of the review appear to flirt with the possibility of relieving the vendor of the disclosure obligation on the basis that the information is conveniently available to the purchaser.  Apart from the fact that much of the information is not available to the purchaser, it would not be a good use of resources to require a number of prospective purchasers to duplicate the inquiries when a vendor can produce the Statement by one such inquiry.

The review also raises the issue of the timing of disclosure.  At present the Statement must be provided pre-contract and is generally provided with the contract.  In NSW an agent must not place a property on the market unless the equivalent Statement is available.  There seems little virtue in adopting this requirement in Victoria, especially if the aim is to reduce ‘red tape’. A purchaser is not obliged to sign a contract when it is produced and has the right to seek advice in relation to the contract and Disclosure Statement when provided.

 

The disclosure of outgoings might be an area for reform.  All properties attract rates and prospective purchasers might be expected to be aware of that fact.  There seems little value in disclosure unless the purchaser is going to become liable for what might be described as an exceptional charge and that could only happen if the rating authority had followed a regime of giving notice to the vendor and such a notice would be required to be disclosed by the ‘notice’ provisions.  Most vendors now adopt the ‘not more than’ formula for rate disclosure and removal of the obligation is not likely to undermine purchaser protection.

 

The review raises the question of the warnings that are required by s.32 and questions whether they might not be better located in the contract of sale, as are cooling off warnings and the new off the plan warning.  The standard contract already specifically incorporates the Disclosure Statement, thereby including the warnings contained in that Statement and requiring such provisions to be included in the contract rather than the Disclosure Statement simply moves the red tape, rather than reducing it.  That said, there would be some virtue in bundling all of the statutory warning in one place, whether that be in the contract or the Disclosure Statement.

 

Disclosure of services and service providers to the property has long been a contentious issue.  For those 95% of properties sold in serviced areas, it is a non-event.  For that small number of properties that are not serviced, a beefed up warning to prospective purchasers might be sufficient to alert them to the need to make inquiries in this regard.

 

The title documents to be disclosed are usually brief but a lot on a large plan presently technically requires the whole plan.  This could be relieved by just requiring copies of relevant parts of the plan. Lots affected by such things as building envelopes and design guidelines seem destined to continue to consume trees but this aspect may at least be minimized when the long promised electronic conveyancing environment arrives.  Developers’ off the plan contracts are the worst offenders in this regard and no doubt the primary aim of the review, but one would expect them to be the first to adopt an electronic environment.

 

 

 

 

 

SUPERANNUATION

 

 

Auto-reversionary pensions after MYEFO

By Daniel Butler (dbutler@dbalawyers.com.au), Director, and Bryce Figot (bfigot@dbalawyers.com.au), Director, DBA Lawyers

 

 

Introduction

 

The Federal Government’s October 2012 Mid-Year Economic and Fiscal Outlook (‘MYEFO’) included an important announcement that provided a great boost of confidence to the SMSF industry. Namely, with effect from 1 July 2012, a tax exemption will apply following the death of an SMSF member in receipt of a pension until that pension has been paid out of the fund.

In light of this announcement, this article considers whether it is still important that pensions be made ‘auto-reversionary’.

Background

 

In draft taxation ruling TR 2011/D3 the ATO stated:

A [pension] ceases as soon as the member in receipt of the [pension] dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the [pension], to receive [a pension] on the death of the member.

 

This caused considerable concern. To illustrate, consider an SMSF with one member where that member has been receiving a pension for many years. Due to the pension (income tax) exemption in subdiv 295‑F of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’), the SMSF probably has not paid any income tax, including capital gains tax (‘CGT’), for a number of years. Now assume the member dies. The SMSF assets might be carrying a large, unrealised capital gain. The Superannuation Industry (Supervision) Regulations 1994 (Cth) require the deceased member’s benefits be cashed as soon as practicable after death. Accordingly, the assets might either be transferred out of the SMSF in specie or alternatively the assets might be sold and the proceeds used to pay out the death benefit. Either way, the SMSF will have a CGT event. According to the view in TR 2011/D3, there is no longer any pension and thus there is no longer any pension exemption. Accordingly, the CGT event could result in a significant tax bill to the fund.

TR 2011/D3 acknowledged that, with the correct documentation in place, it is possible for the member’s pension, upon death, to automatically continue. In this instance the pension exemption continues and no tax bill would arise to the fund. A pension structured like this is often referred to as a pension that automatically reverts, or an auto-reversionary pension (‘ARP’).

Change announced by the MYEFO

 

The MYEFO announced that:

The Government will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. This change will have effect from 1 July 2012. This measure is estimated to have a small but unquantifiable cost to revenue over the forward estimates period.

 

The superannuation law requires the benefits of a deceased member to be paid out of the fund as soon as practicable following the member’s death. The continuation of the earnings tax exemption beyond the death of a member will be subject to this existing requirement.

 

This change will benefit the beneficiaries of deceased estates by allowing superannuation fund trustees to dispose of pension assets on a tax-free basis to fund the payment of death benefits.

 

As noted above, the extension of the pension exemption following death will apply from 1 July 2012. However, TR 2011/D3 applies from 1 July 2007. This means that for pensioners who died on or prior to 30 June 2012, unless they had an ARP, the ATO consider the pension exemption ceased on the person’s death. We note the ATO view is reflected only in a draft ruling which is not law nor is it a binding ruling. Nevertheless it is consistent with the ATO’s view reflected in ATO ID 2004/688 where the pension exemption ceased upon the member’s death. Thus, if taxpayers do not follow the ATO’s view they may be at risk and should seek expert advice on how to manage such risk.

How to set up an ARP

 

Most reversionary nominations are mere wishes and are not binding. Thus to effect an ARP a ‘locked in’ reversionary nomination must exist. Typically, in an SMSF this requires a special deed that facilitates a nomination that binds a trustee’s discretion (ie, an effective fetter binds a trustee’s discretion based on a specific power in the deed).

Our experience over many years has shown that under most SMSF deeds we have reviewed, the binding death benefit nomination (‘BDBN’) would prevail over a reversionary nomination. BDBNs are more specific as to death and are binding. A reversionary nomination, on the other hand, is typically discretionary and is effected at the time of commencement of a pension.

Alternatively, the ARP can also be facilitated by a BDBN that directs not just to whom the death benefit is to be paid (eg, to spouse) but also how (eg, as a pension). Naturally, the SMSF deed should also authorise this.

Thus, an ARP typically needs to be ‘locked into’ the SMSF governing rules to be effective and often this is via a specially drafted SMSF deed with a reversionary nomination and/or by a suitably drafted BDBN.

Are ARPs still required?

 

The next question is, once the MYEFO extended pension exemption announcement becomes law, will an ARP ‘locked in’ reversion still be required?

Interestingly, an ARP will, following the proposed change, not be required for the pension exemption to continue beyond a pensioner’s death . However, the ATO consider that an ARP was required for pensioners who died on or before 30 June 2012 to ensure the pension exemption continues beyond death.

Therefore strictly speaking there appears to be no need for ARPs after 30 June 2012. However, considering the proportioning rule in s 307-125 of the ITAA 1997, there can be significant advantages in ensuring each pension has a ‘locked in’ ARP as it provides better protection against adverse tax and succession risks.

Broadly, the proportioning rule results in each benefit reflecting the applicable proportion of tax free and taxable components. In other words, one cannot ‘cherry pick’ the tax free money; a benefit paid must reflect a proportion of each (tax free and taxable) component.

 

In an SMSF environment, a member is generally required to have one or more separate pensions to have more than one superannuation interest. This is because, an SMSF member only has one interest unless they have one or more pensions: Income Tax Assessment Regulations 1997 (Cth) regulation 307-200.05. Indeed, a lot of planning has been directed at ensuring the tax free component of each pension has been maximised in recent years and this has generally resulted in members having numerous pensions (aka superannuation interests) in the same SMSF.

 

In some cases, taxpayers may have certain pensions that are 100% or predominantly tax free and others that are predominantly taxable. In this situation, the death of the pensioner may, given the ATO’s views in TR 2011/D3, result in a member ceasing his or her pensions unless an ARP is in place for each pension. If the pension ceases, it reverts back to accumulation mode and if there are several pensions involved, the different pension interests are merged together. This results in mixed taxable and tax free components, which cannot be separated or untangled again. Thus, ensuring ARPs exist in respect of each pension will overcome this risk. Naturally, to achieve an effective ARP requires an appropriate SMSF deed, pension documents or BDBN. These documents are generally available from SMSF lawyers.

Conclusion

 

The announcement in MYEFO is great news for the SMSF industry and the government should be commended for its foresight and practical approach. However, there are still reasons to ensure a pension is an ARP to protect against adverse tax consequences. Quality SMSF documentation here is a key factor in achieving an effective strategy.

PREDOMINANT USE

Section 4(1)(a) of the Retail Leases Act 2033 provides that the Act applies to premises:

wholly or predominantly for –

(a)     the sale or hire of goods by retail or the retail provision of services

 

The Act was designed to protect retail tenants, specifically tenants of large shopping complexes where there was a perception of disproportionate bargaining power.  However the Act is not limited to large complexes, although some of the provisions apply to a ‘retail shopping centre’, which is defined as five premises owned by the one landlord, and additional restrictions apply to such premises.

 

As the Act applies to retail premises generally, it may apply to shops and offices in strip shopping centres and even to stand alone premises in residential or industrial areas that have a retail use.  Thus a solicitor who provides services to the public from a suburban office and a panel beater in an industrial estate may be entitled to the benefit of the protections provided by the Act.

 

It is important to understand that it is the use of the particular premises that determines the applicability of the Act, not the character of the tenant.  Thus a solicitor is no doubt engaging in retail services and the solicitor’s office will be subject to the Act, but a separate storage facility rented by the solicitor as part of the legal practice will not be covered by the Act as those premises are not used for the provision of retail services to the public.

 

This distinction between retail and non-retail premises is simple when separate premises are used, but the distinction is less clear when the same premises are used for both retail and non-retail purposes.  Such a situation might arise, for instance, where a business rents a large warehouse facility to manufacture furniture but also has a ‘front of house’ retail sales component.  Determining whether the premises are ‘retail’ will depend upon whether the ‘predominant use’ of premises is retail and two obvious tests for determining the predominant use in such a situation are the comparative area occupied by the various uses and the proportion of income derived by each use.  In the present example it is likely that the manufacturing facility would occupy the majority of the area and the income derived from retail sales would be a small proportion of total income and thus the predominant use is manufacturing and so the Act will not apply.

 

The dictionary meaning of ‘predominant’ is ‘greatest’ or ‘most important, powerful or influential’.  However the question is not so much what is ‘predominant’ but rather ‘predominant’ what?  Consideration of whether the retail component of the business occupies the ‘greatest’ amount of the area of the premises or generates the ‘greatest’ proportion of income would appear to be relevant tests, but they are not the only factors to be taken account (Elmer v Minute Wit Enterprises P/L [2002] VCAT 1101).

 

That case concerned a shop in a strip shopping centre that was rented by a tenant who sold antique furniture, a scenario that would ordinarily be retail premises.  However the tenant’s principal business was conducted from nearby premises and the shop was used only for display and storage, only being opened when an inquiry was directed to the principal place of business.   This, in addition to other reasons, justified a finding that the premises were not retail premises within the meaning of the Act and introduced a ‘time’ test into the mix.

 

A similar ‘time’ test was adopted in Evans v Thurau P/L [2011] VCC 1354.  The subject property was an apartment in a ski lodge which was subject to a requirement in the head lease that the apartment be available for rental through the head tenant to members of the public when not in use by the sub-tenant.  It was argued that this meant that the property was ‘holiday accommodation’ and therefore ‘retail premises’ and that the dispute should therefore be before VCAT.  Judge Anderson concluded that the fact that the snow season was limited and that the sub-tenant could, if they choose, occupy the premises for the whole of that season to the exclusion of the public meant that the predominant use was NOT retail.  The fact that a retail use was one of the possible uses was not enough.

 

It can been seen from these cases that the determination of whether the ‘predominant use’ of premises is retail will depend upon a number of possible factors, some or all of which may play a greater or lesser role in the determination in each case.  Apart from what the lease itself may provide, the courts may consider the area occupied by the retail component, the income earned by that component and the time that the retail component is utilised.

 

It will be interesting to see how these factors will come into play when an inevitable question comes up for determination.  That will be a dispute arising from premises used for retail sales conducted entirely by phone, fax or internet, a typical call centre environment. Such premises do not include physical access to the premises by members of the public, but certainly involve retail sales.  No doubt one party will argue that public access is an integral part of retail sales within the meaning of the Act, an argument that appears to have some merit when the purposes of the Act are considered.

 

Russell Cocks

 

This article is also available in our Key Articles publication at www.smokeball.com.au

LAWYERS SELLING REAL ESTATE

Legal practitioners are licenced to provide legal advice.  Estate agents are licenced to sell real estate.  Both professions operate, in part, in the real estate industry and at times the distinction between their respective roles may become blurred.  Indeed, the 1990’s saw a push in Victoria for lawyers to take a more active role in the industry, along the lines of the Scottish model where lawyers are actively involved in the marketing of real estate.  This desire to broaden their area of influence may well have been a response by lawyers to the perceived contraction of their work base resulting from the rise of conveyancers.  The fact that an agent’s commission will usually be between 10 and 20 times the average legal bill for a transaction might also have played some part.

 

A lawyer wishing to gain an estate agent’s licence could reasonably expect to be able to satisfy the various formality requirements and so it is possible to hold both a licence to practice law and a licence to sell real estate.  Not many lawyers choose to do so, but it is possible.  Anecdotal evidence suggests that most lawyers prefer to practice in an environment that recognises the different skills associated with the provision of legal advice, as opposed to the marketing skills associated with a sales environment.  This may be described as a collaborative method of practice, with the lawyer developing a working relationship with one or more estate agents designed to deliver the two separate skill sets to the client from two distinct sources.  However this method of practice is susceptible to allegations of conflict of interest and the lawyer must take care to ensure that the client is aware that the lawyer’s loyalties lie with the client, notwithstanding a close working relationship between lawyer and agent.  The dark side of this collaborative model is inappropriate referral by one participant to the other, sometimes involving payment for that referral, but such situations are rare.

 

However a lawyer might also be involved in the sale of real estate on behalf of a client without holding an estate agent’s licence.  Section 5(2)(e) Estate Agents Act (Vic.) 1980 recognises an exception to the obligation to hold an estate agents licence for:

 

“any Australian legal practitioner (within the meaning of the Legal Profession Act 2004) for the purpose only of carrying out the ordinary functions of an Australian legal practitioner”

 

The breadth of this exception was tested in Noone v Mericka [2012] VSC 101.

 

Peter Mericka is an Australian legal practitioner and has for a number of years conducted a legal practice known as Lawyers Real Estate.  This practice ‘combined’ the role of lawyer and real estate agent and offered vendors a ‘one stop shop’ with a fixed fee for both the sale of the vendor’s property and the legal work associated with that sale.  This is akin to the Scottish model and the costs for this ‘combined’ service were more than a lawyer’s standard conveyancing fee but considerably less than a standard estate agent’s commission.  Mericka gained an estate agent’s licence in 2010 but had conducted his business prior to that time on the basis of the exception in s.5(2)(e).  This drew the attention of Consumer Affairs Victoria, which is the regulatory authority pursuant to the Estate Agent’s Act, and alleged that Mericka had contravened the Act by selling real estate without holding an estate agent’s licence.

 

Sifris J. concluded that whilst the ordinary functions of an Australian legal practitioner might include the selling of real estate on behalf of a client “where it is required or is incidental to the provision of legal services to a particular client” the activities of Mericka did not come within the exception.  These activities involved “ongoing and systematic marketing and advertising in connection with the sale of clients’ properties”.  It was the repetitive nature of the services offered which lead to the conclusion that the activities took the work outside of the “ordinary functions” of a lawyer.  Indeed the Judge described this work as “engaging in the business of a real estate agent”.

 

The consequence was that Mericka had contravened the Estate Agents Act for that period of time during which he was unlicenced and had also engaged in misleading and deceptive conduct by advertising that he was entitled to sell real estate on behalf of clients without having an estate agent’s licence.  Imposition of a penalty was adjourned to another day.

 

Sifris J. also decided that the exception could NEVER apply to an Incorporated Legal Practice as it is limited to an Australian legal practitioner and this, by definition, must be an individual, albeit an individual practising alone or in partnership.  This anomaly should be addressed as there is no reason why a practitioner who has adopted the perfectly acceptable practising method of utilising an Incorporated Legal Practice should be discriminated against.  The same may be said for a practitioner practising in a Multi-Disciplinary Practice, another mode of practice recognised by the Legal Profession Act.  Indeed the motivation for establishing a Multi-Disciplinary Practice is to encourage lawyers to expand their areas of practice into ‘non-traditional’ areas and a Multi-Disciplinary Practice that involved the occasional sale of client’s property is a logical area for expansion.

 

Russell Cocks

 

This article is also available in our Key Articles publication at www.smokeball.com.au

Run your firm using Step by Step Guides

Do you sometimes come across matters which seem overwhelmingly intricate? Do you need guidance on where to find forms and precedents and knowledge about certain matters so that you don’t land yourself in hot water with your clients?

Then you’re invited to attend our Sydney Lunch and Learn! This is a workshop to help you eradicate your fears and lower your stress levels. At the free workshop, we will discuss how you can use Step-by-Step Guides to run your small law firm and in turn reduce risk and increase your efficiency and profitability.

The workshop will take place in Sydney on Wednesday 23^rd January in the Sydney CBD. It will be run by LEAP as well as Guy Dawson, the CEO and Editorial Director at By Lawyers For Lawyers. The interactive workshop provides an opportunity for you to ask questions and receive invaluable advice to benefit your firm.

Date: Wednesday 23^rd January, 2013
Time: 12:00pm – 2:00pm
Location: Sydney CBD (exact location TBC)

Please note that this workshop is not suitable for current LEAP Office clients. Please click here (LINK: http://www.leap.com.au/usergroups/index.htm) to find a training session near you.

Otherwise, please register online to save a place at this workshop for you and your colleagues.

Mentor

Stuck with a legal problem and need confidential help?

Have you ever come across a legal problem you cannot find an answer to through books or the internet? Do you wish there was someone you could talk to directly and receive confidential and valuable advice? Now available is ‘Mentor’, an online service brought to you through Smokeball. For only $55 (plus GST) per month everyone in your firm can have access to qualified and experienced solicitors and lawyers to discuss any legal problems you may encounter in your day to day matters.

Responses to your questions are provided by lawyers in the By Lawyers for Lawyers collective – authors of the Step-by-Step Guides and other precedent suites. Access to these authors is unlimited when you start using the Mentor service, every conversation is confidential and you will receive a response within approximately 24 hours.

Mentor covers all the common areas of law and getting started is easy. Simply sign up, or sign in to Smokeball. To find out more click here or visit www.smokeball.com.au.

Lexcursions – Bangkwang Prison