Real estate: 5 Minute Fix 11

Proposed reforms to the FIRB legislation

Major reforms to the Foreign Acquisitions and Takeovers Act 1975 have been announced, including measures to address national security risks, strengthen compliance and enforcement powers and streamline investment in non-sensitive businesses.

The details of the draft bill, Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, were released on 31 July 2020, with the details of the second bill due later in September.

All amendments are set to commence on 1 January 2021 (after the current changes due to COVID19 expire on 31 December 2020) and are not set to be retrospective.

The proposed changes include the following:

• the Treasurer will have new powers to extend the application approval period by up to 90 days (currently the power to extend has to come from the applicant and could be extended by the Treasurer by up to only 60 days);
• in addition to a new Call-in Power (allowing the Treasurer to call-in applications which are of national security interest for a final approval) and a last resort power (allowing a final review in exceptional circumstances), acquisitions of, or commencement in, a security interest business will require approval and will have a zero monetary threshold. A Security interest business has been broadly defined and will include critical infrastructure, telecoms, defence and intelligence industries and any business that would have access to classified information;
• Foreign persons will need to record their actions relating to their interests on a register of foreign assets and there are penalties for non-compliance;
• currently information shared with FIRB is confidential but under the new powers, FIRB would be able to share the information provided with other relevant government bodies (including foreign governments); and
• the quantum of the financial sanctions/penalties has been increased dramatically in an attempt to deter breaches.

Further information will be released in the draft Regulations in September.

HomeBuilder grant announced by the Commonwealth

In an effort to assist the residential construction market, the Commonwealth Government has announced HomeBuilder. Under HomeBuilder, eligible owner-occupiers (including first home buyers) may receive a grant of $25,000 (tax free) to build or renovate their home.

The key features of HomeBuilder are:

• Who can apply? Applicants must be a natural person (not a company or trust), be an Australian citizen and meet the following income thresholds:
  • in the case of an individual – earn less than $125,000 per annum based on 2018-19 taxable income or later; and 
  • in the case of a couple – earn less than $200,000 per annum both 2018-19 taxable income or later.
• Requirement to enter into a building contract – Applicants must enter into a building contract at arm's length with a registered builder at fair market price and terms between 4 June 2020 and 31 December 2020 to either:
  • build a new home as a principal place of residence, where the property value does not exceed $750,000; or
  • substantially renovate an existing home as a principal place of residence, where the renovation contract is between $150,000 and $750,000, and where the value of your existing property (house and land) does not exceed $1.5 million (pre-renovation)
• When is construction to commence? Construction must commence on or after 4 June and within three months of the contract date; and
• What can Homebuilder be used for? Homebuilder cannot be used on an investment property and must improve accessibility or safety or liveability of the dwelling (ie. cannot be for ancillary structures such as pools, granny flats or tennis courts).

NSW: Successful adverse possession claim to "dunny lane"

The opening words of Justice Kunc in Hardy v Sidoti [2020] NSWSC 1057 say it all:

"These proceedings concern two very Australian phenomena: the “dunny” and dedication to home improvement. At issue is the ownership of a 3.35 square metre remnant of a “dunny lane” in Redfern, a suburb of historic significance for First Australians and in the development of Sydney as a city.

At the end of the 19th century, Redfern suffered from typhoid epidemics “directly attributable to the lack of drainage, airless tenements, and the use of the cesspit system”. Today, according to one writer, the suburb “has succumbed to a tsunami of smashed avocado and man buns”. Whatever the truth of that latter statement, those parts of Redfern which feature exquisitely renovated terrace houses are now highly prized Sydney real estate. The vestigial remains of “dunny lanes” are a reminder of a less sanitary past…"

This successful adverse possession case involves two adjoining landowners and a disused right of access, previously a "dunny lane". The plaintiff lives in a townhouse and used a portion of the dunny lane as a garden tool shed for many years and in 2002 took down the fence that divided his yard from the dunny lane and began to make improvements to the land.

The defendants purchased an adjoining townhouse in 2018 with the dunny lane included on the title. As part of a renovation, the defendants removed the old fence along the dunny lane and built a new fence and a BBQ area, purporting to reclaim the dunny lane, including the area used by the plaintiff. The plaintiffs' case was that he acquired legal title to this land by adverse possession.

The court held that the plaintiff was entitled to possessory title to a portion of the dunny lane and ordered the defendants to cease trespass upon the land, remove the structures and relocate the fence.

Key takeaways

As a general comment, successful adverse possession claims are not common and involve a highly technical process, however this decision is a reminder of the importance of pre-purchase inquiries.

NSW: New land tax reductions set to boost the build-to-rent sector

The NSW Government has recently passed the State Revenue Legislation Amendment (COVID-19 Housing Response) Act 2020 that will provide developers who invest in new build-to-rent schemes with a 50% land tax discount. It is hoped that these tax cuts will provide a boost to the build-to-rent sector as well as increase the supply of new and affordable housing in NSW.

The new 50% land tax discount will apply to build-to-rent projects commenced after 1 July 2020 and be available for eligible land until the 2040 tax year. In order to be eligible for a 50% land tax discount, the legislation requires new build-to-rent projects to be built in accordance with guidelines that aim to promote the development of new affordable housing and social housing. Therefore, the legislation appears to limit the tax concessions to projects that contain affordable and social housing.

The NSW Government is also updating its planning policies governing the build-to-rent sector, starting with the proposed introduction of a new Housing Diversity State Environment Planning Policy, which will hopefully result in more certainty over the approval process for development, as well as the context and character of a new build-to-rent project.

Hopefully these new land tax reductions and the proposed planning reform will lead to faster development in the NSW build-to-rent sector and provide a greater business case for developers looking to invest in the sector.

NSW: Additional stamp duty concessions for first home buyers

As part of COVID-19 stimulus measures, the NSW Government has announced additional stamp duty concessions for buyers looking to purchase their first home from 1 August 2020 to 31 July 2021 in the State Revenue Legislation Amendment (COVID-19 Housing Response) Act 2020.

To support housing construction and housing affordability in NSW, the most generous concessions will be afforded to buyers of new homes, with full stamp duty exemptions for new homes valued at up to $800,000 and a concessional rate of stamp duty available for new homes valued between $800,000 and $1 million.

Buyers of vacant land will not be required to pay any stamp duty on land valued at less than $400,000, and a concessional rate of duty will apply to land valued between $400,000 and $500,000.

Meanwhile, the thresholds for buyers of existing homes will remain at $650,000 for a full exemption and $800,000 for a concessional rate of duty, however the concessional rate will be calculated differently during this period and will result in further savings for eligible first home buyers.

Victoria: Impact of death of the Original Covenantee on a Restrictive Covenant

The decision in 196 Hawthorn Road Pty Ltd v Duszniak & Ors [2020] VSC 235 concerned a covenant which prohibited the landowner (as covenantor) from building anything on the property except a single dwelling house of a specified minimum cost. However, the original named covenantee (but not her successors in title) had the power to make an exception to the restriction and allow the covenantor to build something else.

The question was, did the restrictions in the covenant lapse with the death of the named covenantee or did they become absolute?

Having regard to the terms, factual context and purpose of the covenant, the Victorian Supreme Court held that the covenant became absolute once the named covenantor was no longer able to dispense with the restriction contained in it. Therefore, the restriction contained in the covenant continued to apply, however, there was now no prospect of consent being given to the construction of a building other than a single dwelling as described in the covenant.

For the covenantor who was a property developer, this meant that unless the developer was able to obtain a court order for the discharge or modification of the covenant under section 84(1) of the Property Law Act 1958 (Vic), the developer could not progress with its plans for the construction of apartments on the property.

Key takeaways

A purchaser or developer should carefully consider any covenants in relation to prospective land acquisitions and be cautious of relying on dispensing provisions, especially where the parties to whom dispensing powers are granted are named individuals and not the registered proprietors from time to time of identified land.

Victoria: Cooling off notice cannot be given conditionally or withdrawn

The decision of the Victorian Supreme Court in Stewart v White [2020] VSC 116 concerned a contract of sale of land between Mr & Mrs White as vendor to Mr & Mrs Stewart as purchaser. Less than 24 hours after the contract had been signed both parties, a water pipe burst on the property, causing significant water damage.

On 30 August 2018, Mr Stewart delivered a letter to the vendors' real estate agent, citing the significant damage to the property and providing notice to withdraw from the contract under the cooling off provisions in the Sale of Land Act 1962 (Vic). Mr Stewart asked the real estate agent to hold the letter 'in escrow', but the letter was passed on to the vendors' solicitor that same day. Mr & Mrs Stewart subsequently decided to proceed with the contract, but later changed their mind and sought to rely on the cooling off notice.

The question for the court was, did Mr Stewart's letter on 30 August 2018 terminate the contract?

The purchasers maintained that the letter was an exercise of the "cooling off" rights under section 31 of the Act, resulting in immediate termination of the contract. The vendors submitted that the contract had not been terminated as the letter had been delivered with the instruction to be held "in escrow", followed the next day by an explicit request by the purchasers that the letter be disregarded.

The court found that:

• the contract was terminated by Mr Stewart giving the cooling off letter; and
• ·once given, a cooling off notice cannot be deferred or suspended, even when accompanied by words expressing an intention to deliver the notice conditionally.

Key takeaways

• A validly exercised "cooling off" notice under section 31 of the Act cannot be held "in escrow", deferred or suspended conditionally, or withdrawn.
• Subsequent conduct fulfilling the notice giver's obligations under the original contract after a "cooling off" notice has been given will not reinstate the contract.

Queensland: Land tax foreign surcharge relief

As many readers will know the Queensland Government has imposed a broad land tax surcharge of an additional 2% on foreign landholders from 30 June 2020. Previously the surcharge only applied in more limited circumstances.

Queensland Treasury has now released a public ruling outlining the ex gratia relief guidelines which form the basis for foreign landholders obtaining relief from the surcharge.

The guidelines outline the factors that may be taken into consideration by the Treasurer when determining whether a foreign landholder will be exempt.

These factors include whether the foreign entity:

• is Australian-based;
• has complied with any existing FIRB approval requirements;
• meets regulatory requirements; and
• conducts commercial activities that make a significant contribution to the Queensland economy and community.

The Queensland Government will assess each application on a case-by-case basis, aimed at providing relief to entities whose commercial activities make a significant contribution to the Queensland economy and community.

Applicants can either apply for the exemption for land already held or obtain in principle approval for land that they are acquiring.

A copy of the ruling with further information is here.

ACT: VOI & E-conveyancing: Changes to ACT property transactions are coming, so get ready

After a delayed start, Verification of Identity (VOI) requirements have come into force in the ACT. The Land Titles (Verification of Identity) Rules 2020, which came into effect on 1 June, apply to any dealing under the Land Titles Act 1925 (ACT) which is lodged in person at the ACT Land Titles Office (LTO).

In practice, this means that for any transaction which requires in-person lodgment, parties will need to conduct a VOI process – which normally requires an in-person interview with a legal practitioner during which identity documents are presented and verified – and a Client Authorisation Form (CAF) will need to be prepared. Legal practitioners are required to retain evidence for at least seven years that a VOI has been conducted, and that a CAF has been completed.

The introduction of VOI rules has resulted in the release of a new suite of LTO forms. While the VOI rules have been in place since June, parties had until the end of August to register any dealings using the old forms. There is a further grace period for large financial institutions.

What this means is that all transactions must now be completed using new forms which account for a lawyer's certification that a VOI has been conducted, and any transactions using old forms that were awaiting completion will need to be prepared using the new forms.

These changes to dealings in the ACT were introduced in readiness for e-conveyancing for transfers and mortgage dealings. The Electronic Conveyancing National Law (ACT) Act 2020 (ACT) allows (but does not require) parties to conduct transactions via e-conveyancing. E-conveyancing platforms are expected to become available for ACT transactions in late 2020.

WA: A blueprint for re-development clauses in Retail Shops Act leases

A retail tenant is entitled to a minimum 5 year term pursuant to section 13(1) of the Commercial Tenancy (Retail Shops) Agreement Act 1985. A landlord must obtain the State Administrative Tribunal's (SAT) approval for the inclusion of a clause which entitles the landlord to terminate earlier than the statutory 5 year term.

In the recent decision of 480 Hay Street Pty Ltd v Irwin St Lower Pty Ltd [2020] WASC 59, the early termination clause stated that:

• the Landlord intends to build an office tower on the land in the future;
• if the Landlord builds an office tower, the Landlord will have the right to terminate by giving 6 months' written notice to the Tenant and retaking possession of the Premises; and
• in consideration of the Landlord's right to terminate, the Landlord has agreed to only charge half of the market rent for the premises and contribute $250,000 to the Tenant's fitout of the premises.

In overturning SAT's decision to reject the landlord's application for approval at first instance, the Supreme Court of Western Australia held that:

• section 14A(3) of the Act is concerned with forced relocation, is silent with respect to the issue of redevelopment or demolition, and does not deal with early termination of the lease;
• as such, section 14A(3) did not apply to the early termination clause because it did not deal with relocation of the Tenant (only with early termination for redevelopment into an office tower); and
• SAT should have considered whether "special circumstances" existed for approving the Landlord's application for approval of Clause 14 under section 13(7) of the Act.

Significantly, the Court clarified that "special circumstances" means "circumstances that are out of the ordinary, but without having to be extraordinary or exceptional". In applying this test, the Court found that the Tenant's compensation by way of significantly reduced rent and favourable terms were "special circumstances" enabling the Court to approve the early termination clause under section 13(7) of the Act.

Key takeaways

Developers should look to 480 Hay Street as a blueprint on the "circumstances" in which an early termination right for development may be approved for inclusion in a retail lease under the Act. In doing so, developers can activate retail spaces in the short term without compromising their ability to redevelop the land in the long term.