Residential property law in Victoria: 2018 year in review and 2019 outlook - Real Estate

After a year that has seen residential sales ease, financiers tighten lending practices and housing affordability remain firmly on the political agenda, what can we expect for Victorian property law in 2019?

Below, we explore some of the key developments in residential property law in Victoria in 2018, and look ahead to further changes on the horizon in 2019.

2018 – YEAR IN REVIEW

Below are three of the key developments that occurred during 2018:

Sale of Land Act amendment

On 21 August 2018, the Sale of Land Amendment Bill 2018 (Bill) was introduced into the Legislative Assembly and seeks to make a number of key changes to the Sale of Land Act 1962 (Vic) (Act). Following the lead of the NSW changes in 2015, the Bill restricts a developer's ability to exercise termination rights under a sunset clause (even if the developer has not caused or contributed to the delay). The Bill also widens disclosure obligations, prohibits certain terms contracts and rent-to-buy arrangements, and introduces new protections in land banking schemes. Our article exploring these issues can be accessed here.

As the Bill was not passed by both houses of Parliament before the State election, the Bill lapsed. The Bill was reintroduced into the Legislative Assembly on 20 March 2019. We expect the Bill to pass both houses and become law later this year at which point off-the-plan contracts may need to be amended. Stay tuned.

Short-stay accommodation legislation

Airbnb (and others!) are here to stay. During the second half of 2018, both Victoria and NSW passed legislation legitimising the spread of short-stay accommodation arrangements, such as Airbnb, to previously residential-only homes.

As of 1 February 2019, the Owners Corporations Act 2006 (Vic) (OC Act)¹ now contains a prescribed complaints regime under which lots owners, lot occupiers and OC managers may lodge a formal complaint regarding short-stay occupants.² The grounds on which a complaint may be lodged include:

creating noise likely to substantially interfere with an occupier of another lot;
substantially interfering with the peaceful enjoyment of an occupier of another lot; and
substantially damaging or altering a lot or the common property.

In an effort to encourage appropriate screening of short-stay accommodation occupants, VCAT is now empowered to prohibit an apartment from being used for short-stay accommodation where a 'notice to rectify breach' has been served on the apartment owner on at least three separate occasions within 24 months.

On a practical level, the amendments impose a significant burden on owners corporations, requiring them to:

assess all complaints received;
determine whether to take action in response to a complaint; and
report annually on all complaints received.

It will be interesting to see how owners corporations as a whole handle these increased responsibilities and how outcomes vary between different owners corporations, particularly when specific OC Rules regulating short-stay accommodation are unlikely to be enforceable.

Long-stay accommodation legislation

The Residential Tenancies Act 1997 (Vic) (Act) was amended on 28 August 2018 and now applies (subject to defined exceptions) to all residential tenancy agreements, regardless of duration.³ Prior to the amendments coming into effect on 1 February 2019, the Act did not apply (subject to limited exceptions) to tenancy agreements for a fixed term of more than five years (Long Term Tenancy).

In addition to bringing Long Term Tenancies under the general ambit of the Act, the Act now provides that Long Term Tenancy agreements must be in writing, must be in the prescribed standard form and must not contain a prescribed prohibited term.⁴ These amendments are expected to be utilised in Build-to-Rent developments.

The amendments provide greater certainty for landlords and security for tenants of fixed-term leases of more than five years by bringing the parties under the operation of the Act. It is worth noting that, as there is no cap on the length of a tenancy, all residential tenancy agreements (regardless of length or the characteristics of the tenant) will now be subject to the Act (subject to some limited exceptions).

It is important to note that:

the standard form agreement for a Long Term Tenancy differs to the prescribed form of agreement for tenancy agreements for less than 5 years;
a failure to adopt the standard form agreement does not make the tenancy agreement illegal, invalid or unenforceable, however it may result in the parties to the agreement incurring a penalty of 10 penalty units;
the maximum amount that a landlord may claim from a tenant for early termination of a Long Term Tenancy by the tenant is one month's rent for each unexpired full year of the term (i.e. if the tenant terminates the lease at the start of the third year of a five year lease the maximum amount the landlord can claim is two months' rent); and
Long Term Tenancies may include terms which are additional to the terms contained in the standard form agreement, however those terms must not exclude, restrict or modify a provision of the standard form agreement. A failure to comply with this requirement may also result in the parties incurring a penalty of 10 penalty units.

2019 – WHAT TO EXPECT

Over the course of 2019, we expect to see the following issues develop further:

Don't keep rebates or commissions a secret

As the residential market softens (particularly for high-rise apartments), developers are increasingly finding innovative ways to secure purchasers. Unsurprisingly, this is resulting in increased incentives being offered to potential purchasers. Such incentives can take the form of anything from a stamp duty rebate, European kitchen upgrade or overseas holiday.

While offering incentives has been common practice amongst developers for many years, rarely have they been prominently disclosed. Particularly in light of the tightening of lending practices following the Banking Royal Commission, developers would be wise to ensure that all incentives offered to purchasers (regardless of the form they take) are clearly and prominently disclosed. This is necessary to ensure financiers (and other purchasers) are in no way misled regarding the true value of a property or the actual price being paid by the purchaser.

Developers sometimes offer incentives to third parties to help secure potential purchasers. For example, a common scenario in greenfield developments is a residential developer offering a cash incentive to a builder or agent for any purchaser they introduce. Such arrangements are not uncommon and are in no way illegal provided that they are clearly disclosed to the purchaser.

What many people are not aware of is that if:

the builder is providing 'advice' which is intended to influence or induce the person advised;
the arrangement is not disclosed; and
the purchaser is not aware that the builder is the agent of the developer,

both the party receiving the incentive (i.e. the builder) and the party providing the incentive (i.e. the developer) are guilty of an indictable offence under s179 of the Crimes Act 1958 (Vic), which carries a penalty of $193,428 (a level 5 fine) or a maximum of 10 years imprisonment.

Please proceed with caution and seek legal advice from someone who is familiar with the secret commissions' legislation before offering incentives of this kind.

PEXA in full swing

In accordance with the 1 October 2018 deadline, all Victorian instruments or combinations of instruments available in PEXA must now be lodged electronically. This includes any transfer, discharge of mortgage, withdrawal of caveat, and all Duties Online transactions. While there is increased market understanding and acceptance, we're still some way from achieving the potential 'efficiencies' often promoted by PEXA but 2019 should see this area develop further.

If a transaction is considered a 'complex transaction' by the State Revenue Office (SRO), the transaction cannot be settled on PEXA and a duty determination lodgement needs to be made before registration. A common example of a complex transaction is the purchase of multiple properties that are considered substantially one arrangement (also known as aggregation) or where the purchase price is over $100 million.⁵ The State Revenue Office is planning for electronic completion of complex transactions but likely timing has not been confirmed.

As of 4 March 2019, applications to record section 173 agreements can be lodged electronically via PEXA. A release schedule for other remaining residual instruments is being developed by the Land Titles Office, but PEXA has set 1 August 2019 as the mandate date, on and from which all Victorian property transactions must be lodged electronically. It remains to be seen whether PEXA will have the functionality sufficiently advanced to enable compliance with this date. Watch this space.

Competition for PEXA

The NSW state regulator has set new competition rules for PEXA to ease concerns that the service will become a monopoly once the mandated electronic settlement deadline is reached in NSW in June this year.

NSW will require PEXA to:

cap its prices;
provide a guarantee to consumers to reimburse vendors for fraud suffered due to the system; and
operate in a way that does not prevent competition.

We haven't seen the same Government intervention in Victoria, but 'Sympli' has recently been released to the market by InfoTrack, and another competitor is slated to join the fray later this year. It will be fascinating to see how PEXA responds to this, particularly as the focus on inter-operability intensifies.

Clarity on OTP duty concession

The SRO issued an updated version of revenue ruling DA-048 on 27 March 2019. This ruling relates to calculating the off-the-plan duty concession using either the fixed percentage method or the alternative method.

The changes in the updated ruling generally seek to provide additional information about the alternative method (which is typically a more complicated calculation than the fixed percentage method) by incorporating relevant information currently contained in Duties Form 4A (being the OTP Sales Statutory Declaration required to be completed by the developer / vendor).

By capturing all relevant information regarding calculating this duty concession using the alternative method in the updated ruling, this may lead to an increased adoption of this method of calculation – and, potentially, reduce (or increase!) the amount of duty payable by a purchaser.

Cladding and the Lacrosse case

The use of cladding in apartment buildings remains a live issue and the seriousness of the problem was highlighted this year when the Neo 200 complex in Spencer Street, Melbourne caught fire.

In the recent Lacrosse proceeding,⁶ J Woodward ordered the defendants (including the builder, the building surveyor, the architect and the fire engineer) to pay the owners a total of $5,748,233. Our article exploring these issues can be accessed here. No doubt this decision will lead to more litigation involving owners, builders, developers and consultants involved in other buildings known to have been constructed with aluminium composite panels.

We expect that 'cladding rectification agreements' may start to gain traction this year as owners of existing buildings look for more immediate solutions to the rectification works required.

Financier's approach

While we continue to see Australian trading banks supporting residential projects (particularly land subdivisions), the marked slowdown in presales and the lower number of quality residential projects as developers pivot to commercial projects will likely result in a decline in the overall number of residential deals funded by banks.

Whilst local non-bank lenders may have more flexibility around leverage and presale criteria, like banks, they will typically require presales coverage, meaning they are also likely to complete less residential transactions in 2019. More speculative residential projects without presale coverage are still being funded by some local private capital providers and Asian non-bank funds.

A recent tightening in lending to Self-Managed Superannuation Funds (SMSFs) could see an increased default rate or, alternatively, a rise in the number of nominations as these purchasers look to complete the transaction in their own name.

A new environmental regulatory regime

By establishing a new prevention-focussed and risk-based regulatory regime, the Environment Protection Amendment Act 2018 (EP Act) represents the most significant reform to the environmental regulatory regime in over 50 years.

A number of new environmental duties are now proposed, including:

the general environmental duty;
a transitional environmental duty;
duty to restore;
duty to report a notifiable incident;
duty to manage contaminated land; and
duty to notify the EPA of contaminated land.

There is also a new development and operational approval regime, new offences and notices, new enforcement powers, a new waste framework, the introduction of a civil penalty regime and third party appeal rights. Our publication on the EP Act can be accessed here.

We anticipate much work and consultation will take place during 2019 in relation to the new regulations, guidance and compliance codes (noting the regulations are due for draft release in July 2019 with the legislation to commence from 1 July 2020).

Anti-money laundering

Amendments may this year be made to the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth) (AML Act) to extend its application to lawyers and conveyancers.⁷

The AML Act applies to 'Designated Services', which may be amended to include a number of transactions commonly carried out by lawyers such as buying and selling of real estate, managing of client money and creation, operation or management of companies.

If this occurs, lawyers will be required to comply with obligations under the AML Act including collecting and verifying client identification information and identification of information related to beneficial owners of clients. There could also be an ongoing due diligence requirement that involves monitoring transactions covered by the AML Act throughout the course of the transaction.

Lawyers may also be subject to reporting obligations in respect of these transactions and would have to provide a report to AUSTRAC where, for example, a transaction involves a transfer of more than $10,000 in cash or if instructions are sent to or received from a foreign country to transfer money or property.

Whilst the reforms are targeted at lawyers they have the potential to impact developers in the form of increased disclosure obligations as well as potentially increased legal fees.

Footnotes

¹Owners Corporations Act 2006 (Vic) as amended by Owners Corporations Amendments (Short stay Accommodation) Act 2018 (Vic).

² "Short-stay occupant" means a person who occupies a lot or part of a lot under a short-stay accommodation arrangement (being a lease or licence for a maximum period of 7 days and 6 nights).

³ Residential Tenancies Amendment (Long-term Tenancy Agreements) Act 2018 (Vic).

⁴ Residential Tenancies Amendment (Long-term Tenancy Agreements) Act 2018 (Vic) s 26(1), 26(1A) and 26A(1).

⁵ Whilst the monetary threshold for transactions in PEXA is $9 billion, the SRO cannot current process transactions via its Duties Online platform where the consideration is greater than $100 million.

⁶ Owners Corporation No 1 of PS613436T v L U Simon Builders Pty Ltd [2019] VCAT 286.

⁷ The amendments were recommended in the Attorney-General's Report on the Statutory Review of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (2013) and are expected to follow amendments implemented in the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.