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HG Alert: The Implication of Unfair Contracts Terms on Property Developers - 13 May 2010

The Federal Government has introduced legislation which may render certain provisions in “off-the-plan” sale contracts and other land sale agreements (such as retirement village contracts and manufactured homes site agreements) void because they are “unfair”.

This latest consumer driven legislation, the Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 201, amends certain provisions of the Trade Practices Act 1974 by inserting new provisions dealing with “standard form contracts”. In short, where a provision of a standard form contract is considered “unfair” to the relevant consumer, that provision will be void.

Summary of the amendments to the Trade Practices Act

The amendments to the Trade Practices Act have been passed by the Senate and await royal assent. It is expected that the provisions will come into effect nationally on 1 July 2010.

For the unfair contract provisions of the Act to apply to a land sale contract, the contract must:

  • be wholly or predominantly for personal, domestic or household use or consumption;
  • be in the form of a standard form contract; and
  • contain a provision that is unfair.

Where a provision of a standard form contract is deemed unfair, that provision will be void. Where the contract is capable of standing without that provision, the remainder of the contract will remain in force. However, if the contract is not capable of standing without the relevant provision (removing the condition renders the contract uncertain) the contract as a whole may be void.

The contract must be wholly or predominantly for personal, domestic or household use or consumption

For the relevant provisions to apply to a standard form contract, the contract must be wholly or predominantly for personal, domestic or household use or consumption. Whether a buyer is purchasing a property for these purposes may depend on the consumer’s subjective intention, which can be difficult for a seller to ascertain at the relevant time.

The contract must be in the form of a standard form contract

While the Act does not provide a definition of “standard form contract”, it states that where one party alleges that a standard form contract exists, the onus is on the other party to prove that it does not exist.

However, the Act provides guidelines on determining whether a contract is a standard form contract. Some examples of the factors to be considered include:

  • whether one party has all the bargaining power in the transaction;
  • whether the contract was prepared by one party to the transaction before any discussions took place; and
  • whether the other party was entitled to reject the terms of the contract and make amendments.

Given that most off-the-plan contracts are drafted to give the developer flexibility in designing and constructing the building, and developers will not normally agree to significant changes, off-the-plan contracts in most instances are likely to be considered standard form contracts.

Provided the other elements are present for the unfair contract provisions to apply, it is likely that in addition to off-the-plan contracts, other contracts will be regulated as standard form contracts, such as contracts for the sale of interests in a retirement village or in a manufactured home park.

If you are unsure as to whether a particular contract is classed as a standard form contract, please contact us and we can provide you with advice.

The contract must not contain a provision that is unfair

A provision will be considered “unfair” if it:

  • causes a significant imbalance in the parties’ rights and obligations;
  • is not reasonably necessary to protect the seller’s legitimate interests; and
  • would cause detriment (financial or otherwise) to a consumer if the term were relied upon.

This means that a number of usual clauses in off-the-plan contracts, which allow flexibility in developing the site, may infringe the restriction on unfair terms. For example, “no objection” clauses, where the buyer cannot object to changes to the building, the lot or the scheme, or unilateral rights to terminate in favour of the developer, may be unfair to buyers and therefore void. Developers need to be careful that including such clauses does not create a “significant imbalance” in the parties’ rights and obligations, that the clauses are reasonably necessary to protect the developer’s interests, and that they do not cause detriment to the buyer if a term was relied upon. Where these types of clauses are to be included, developers will need to include provisions to support the necessity to include such clauses (such as a financier’s requirements or changing council requirements).

Developers need to be careful that they do not enter into one-sided contracts. They will need to be seen to have fairer contracts that protect the interests of consumers, while balancing the need to preserve flexibility in developing the project.

The Act lists a number of examples of unfair terms. Some of the examples include permitting one party, but not the other, to:

  • terminate the contract;
  • vary the terms of the contract;
  • vary the upfront price without the buyer being able to terminate the contract;
  • vary the characteristics of the land being sold;
  • unilaterally interpret whether a contract has been breached;
  • unilaterally interpret the meaning of a contract; and
  • limit the right of one party to sue the other.

Penalising a party for breaching the contract could also be seen as unfair.

A term will not be unfair if it:

  • sets the upfront price under the contract;
  • defines the subject matter of the contract; or
  • is required, or expressly permitted, by a law of the Commonwealth or a State or Territory.

In determining whether a term is unfair, the court may consider:

  • the extent to which the term is transparent (for instance, expressed in plain English, legible, presented clearly, and readily available to any party affected by the term); and
  • the contract as a whole.

The effect of the Act on current contracts

The Act will not apply to any contracts entered into before 1 July 2010. However, the Act will apply where a standard form contract was in existence before 1 July 2010 and is subsequently amended.

Given that a disclosure statement required to be given to a buyer will form part of a contract, this may mean that where a developer gives a further disclosure statement to a buyer after 1 July 2010, the provisions of the Act will apply to the contract, even though the contract was entered into before the Act commenced. Therefore, developers must carefully consider the effect of amending contracts entered into before 1 July 2010 after this date, or issuing a further disclosure statement for those contracts. If amendments or a further disclosure statement is required and developers do not want the Act to apply to these contracts, developers would be advised to consider making the amendments and issuing the statements before 1 July 2010.

What should you do now?

You should urgently identify any likely standard form contracts used in your business now that will continue to be used after 1 July 2010, and consider whether they should be reviewed for compliance with the Act.

For any existing contractual arrangements in place that may be treated as standard form contracts, you should consider bringing forward any proposed amendments or variations (including any further disclosure obligations under relevant legislation) with a view to limiting the application of the unfair contract terms provisions.

For ongoing developments, you should review existing sales practices and consider implementing new systems that put in place detailed reporting practices to record all dealings with potential buyers. This will help to demonstrate that buyers negotiated the terms of their contracts, or at least that the opportunity to negotiate the terms existed.

For more information, please contact HopgoodGanim’s Commercial Property team.