Two recent cases in which our firm has been involved highlight the need for Purchasers of commercial property to be alert to the range of searches available and prudent to obtain.
In both cases, the clients purchased the freehold title to new motel developments, only to find, some years later, that there were substantial unpaid Infrastructure Charges owing to Council. When a development approval is granted the local authority (Council) is entitled to impose Infrastructure charges on the development, the quantum of which depends on the type and intensity of the development. The development approval conditions will be accompanied by an Infrastructure Charges Notice which states a lump sum amount to be paid "before the use commences" . The ICN will provide a breakdown of the lump sum but that is only of relevance to the developer's consultant in considering if correctly calculated and is not of any relevance to this memo. By virtue of the Planning Act 2016, the charge, on commencement of the use, 'attaches to the land' and thus becomes the obligation of the registered proprietor whoever that may be from time to time.
Now, one would be forgiven for assuming that the local authority would ensure that it protected its revenue by requiring payment of the ICN 'before the use commences' by means of withholding any required Certificates eg the usual 'Certificate of Occupancy' or 'Certificate of Classification' unless and until payment is made by the developer. But, remarkably, there are many instances of the use commencing before the ICN is paid and even remaining unpaid, as was the case in our two recent matters. In both instances, the ICN did not appear on the quarterly rates notices and was left unpaid and apparently unnoticed by the Council for several years before an internal audit in Council picked up the unpaid amounts. That's somewhat surprising given that the ICN amounts were respectively circa $215,000 and $165,000 (!)
There is a wide variety of Council and State Government searches available to the purchaser as part of the usual 'due diligence' process. With regards Councils, there is invariably a range of searches beyond the very basic rates and building searches. With those basic searches, an unpaid ICN will not normally be detected and in any case would be entirely inadequate for a purchase of a commercial property. The more complex searches viz a Limited, a Standard, or a Full Town Planning Certificate are more expensive and can take up to 4 weeks to obtain. However, it is inappropriate for the purchaser's lawyer to simply advise the client that these searches are expensive and can take too long to obtain and it's reasonable to expect that a new development would be 'a safe bet' – which is what both purchasers' conveyancing solicitors advised, with potential dire consequences.
On our engagement, the relevant Council officer advised:
- A standard rates search would not have shown the infrastructure charges at that point in time (as the infrastructure debt was unknown to the Rates and Revenue Section at that time).
- Following a discussion today with Council's Development Compliance Section, in representing a client purchasing a newly constructed motel, it would have been reasonable for a solicitor representing a purchaser to undertake:-
- An Internal and External Building Compliance Report.
- Depending on the circumstances or preferences, consideration of (a) a Limited Planning and Development Certificate or (b) a Standard Planning and Development Certificate or (c) Full Planning and Development Certificate and Inspection. The ICN would have been discoverable with (b).
A Standard Planning and Development Certificate would have been quickly and relatively cheaply obtained and well within any standard 'due diligence' period.
On issuing the demand to the current owners (ie the purchasers) for payment of the ICN, Council proceeded to register a Charge over the titles, thus causing the registered owners to be in breach of their finance obligations giving the respective financiers the right to call hold the owners in breach of their mortgage obligations and, for one, in breach of their obligations as Trustees of their Superannuation Deed (having purchased the motel business in their Superannuation Fund name). So, major calamities were looming for both buyers. Think of those dire consequences that were facing the buyers as well as their stress levels. To compound the problems, the conveyancing solicitors had not ensured that the respective purchase contracts gave their clients the best protection possible. The first contract at least contained a clause which gave an arguable right of recovery and even indemnity as against the vendor. The second contract contained no such clause and thus 'implied rights' were likely to have to be relied on.
Fortunately for all parties, the developers were both still in business and locatable. Although we were forced to issue Court proceedings for recovery in the first matter, we managed to keep Council at bay in not pursuing its rights under the Registered Charges, and kept the financiers at bay by virtue of our speedy actions, both developers/vendors ultimately paid the full amounts of the ICNs.
Our attention then turned to the conveyancing solicitors and we managed to obtain full indemnity from them for all the legal expenses incurred. For the first matter, the solicitors' indemnity has meant payment of all costs of the Court proceedings (less a small amount we obtained on a Court costs order according to scale, against the defendant).
So, be ever vigilant to the risks and always fully ask for all the relevant 'due diligence' enquiries to be made within the allowed time frames.
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.