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Focus: Developer contracts and unfair terms

12 October 2009

In brief: Developers involved in large-scale projects with multiple sales should carefully review their contracts to ensure that they do not breach the terms of the Trade Practices Amendment (Australian Consumer Law) Bill 2009, which is specifically aimed at unfair terms in standard form contracts (including real estate contracts) and will apply Australia-wide. It is likely to become law on or about 1 January 2010. Partner Tony Davies (view CV) reports.

How does it affect you?

Developers:

  • should audit their contracts to see how the Trade Practices Amendment (Australian Consumer Law) Bill 2009 may impact on contract terms;
  • will need to be particularly careful about including 'one sided' clauses in contracts (for example, any absolute rights to terminate contracts); and
  • be careful not to inadvertently make pre-Bill contracts subject to the Bill (by renewal or variation after the Bill is law).

Overview

Under the Bill, if a consumer contract contains an unfair term, that term is void. The contract continues to apply if it is capable of operating without the unfair term. If, for example, a contractual right of termination in favour of a developer were held to be an unfair term, that term may be declared void while the contract as a whole could stand.

Key concepts

The threshold questions are:

  • is the contract a consumer contract?;
  • if so, is a term unfair?; and
  • if so, is the contract a standard form contract?

Consumer contract

A consumer contract includes a contract for the sale or grant of an interest in land 'to an individual whose acquisition of the ... interest is wholly or predominantly for personal, domestic or household use or consumption'. Accordingly:

  • if a company is the buyer; or
  • the individual did not intend to use the land for his/her use (eg it was an investment acquisition to be rented out),

the contract may not be a consumer contract.

Unfair term

A term is unfair if:

  • it will cause a significant imbalance in the parties' rights and obligations under the contract; and
  • is not reasonably necessary in order to protect the legitimate interests of the advantaged party.

A court may take into account any matters it thinks are relevant in deciding if a term is unfair, but must take into account the following:

  • the detriment suffered by the party adversely affected by the application of the term;
  • the extent to which the term is transparent (ie in reasonably plain language, legible, presented clearly and readily available to any party affected by the term); and
  • the contract as a whole.

Significantly, if a developer sought to rely upon a particular term and maintained it was not unfair, the burden would be on the developer to show that the term was reasonably necessary to protect its legitimate interests (ie the presumption is that the term is not reasonably necessary).

The Bill gives a number of examples of unfair terms. They include terms that:

  • permit a party to avoid or limit the performance of a contract;
  • permit a party to terminate a contract;
  • penalise a party for breach or a termination of a contract;
  • permit one party to unilaterally vary the characteristics of the interest in the land sold or granted; or
  • permit one party to assign the contract to the detriment of another party, without the other party's consent.

There is no indication as to the practical implications of these principles' application but a review of all contracts will be warranted.

Standard form contract

The presumption is that the contract is a standard form contract unless the person using the contract proves that it is not. In determining whether a contract is a standard form contract, the court can take into account any matters it thinks relevant, but must take into account the following:

  • whether one of the parties has all or most of the bargaining power;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred;
  • whether a party was required to accept or reject the terms of the contract in the form presented; and
  • whether a party was given an effective opportunity to negotiate the terms.

An off-the-plan contract would generally be a standard form contract.

Consequences

Action in regard to an alleged unfair term may involve:

  • either a party to a contract or the Australian Competition and Consumer Commission (the ACCC) taking action to seek a declaration that a term is an unfair term and is void;
  • the ACCC seeking an injunction to prevent a party relying upon an unfair term; or
  • the court making remedial orders where a party suffers detriment if it relies on an unfair term.

Developer contract audit

It is recommended that developers conduct a contract audit to consider whether any of the terms in their developer contracts may be unfair.

Some issues that require consideration are:

  • how wide any developer termination rights are;
  • what scope the developer has to change the characteristics of the land as sold;
  • the extent to which terms of the contract are able to be negotiated by the parties;
  • whether the contract restricts the rights of one party to legal redress for breach by another party;
  • the extent to which 'unfair' terms are reasonably necessary to protect the legitimate interests of the party seeking to rely upon the term;
  • ensuring contracts have a provision that allows void terms to be severed;
  • reviewing particularly pro-developer clauses and seeing if they can be 'softened' with limited impact on the developer; and
  • carefully considering the impact of varying or renewing any contracts that were entered into before the Bill becomes law (the Bill will not apply to existing contracts but will apply to variations or renewals of existing contracts). Buyers will frequently ask to replace contracts to allow for an adjustment to buyer details and, unless that request is dealt with carefully, it could expose developers to increased risks.

If you require further information, please contact any of the people below.

For further information, please contact:

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