Changes to the regime of unreasonable contractual terms increase sanctions for developers – Construction & Planning

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Developers (as vendors) should be aware that any “off schedule“the purchase contract they prepare or negotiate may be subject to Australian Consumer Law (LCD) “regime of unfair contract terms”, also called “regime of unfair contracts”.

Recent amendments to the ACL begin in November 2023 and impose significantly higher penalties for non-compliance with the ACL.

WHICH CONTRACTS WILL THE ADVERSE CONTRACT TERMS REGIME APPLY TO?

The scheme will apply to a contract that meets the following criteria:

  1. “Standard Form Contracts”

In our opinion, most developersoff schedule“contracts will be considered “standard contracts” under the ACL.

The definition of “standard contract” is not prescribed in the ACL. However, if a party claims that a contract is in standard form, it is presumed to be in standard form unless the other party proves otherwise.

The ACL considers several factors in determining what constitutes a standard form contract. These steps include whether one of the parties has prepared the document and whether one of the parties has entered into other contracts with the same or substantially similar terms. In the situation they have, ACL will consider the number of such contracts they have entered into with similar terms.

Importantly, the new regime provides that a contract can be determined to be a “standard contract” even if there has been an opportunity to:

  • for the seller or buyer to negotiate minor or minor changes to the contract;

  • for the seller or buyer to choose a date from a number of offered options; gold

  • a party to another contract or proposed contract to negotiate the terms of another contract or proposed contract.

  1. “Small Business Contracts”,

A “small business contract” is a contract in which at least one party (which may be the seller or the buyer) to the contract either:

  • concludes the contract in the course of business and at a time when the party has fewer than 100 employees; gold

  • had an annual turnover of less than 10 million dollars.

WHEN IS A CONTRACT CONSIDERED “UNFAIR”?

Generally speaking, a contractual term governed by the regime will be unfair if:

  • it would cause a significant imbalance in the rights and obligations of the parties under the contract;

  • it is not reasonably necessary to protect the legitimate interests of the party that would benefit from the term (seller);

  • it would cause harm (whether financial or otherwise) to the party (buyer) if it should be invoked or relied upon (by the other party (seller).

EXAMPLES OF UNENFORCEABLE CONTRACTUAL TERMS

A few examples of common “off schedule’ Terms of the purchase agreement that may conflict with the regime in the ACL include:

  1. “Termination for Convenience” Clause.

    • What is it?

      • A termination for convenience clause allows the seller to terminate the contract at its option and without any specific reason.


    • Changes to consider:

      • These termination clauses could be amended to apply only when specific criteria are met (eg due to a quantifiable increase in construction costs incurred during the project).

  1. The right to withdraw from the contract belongs to the seller, not the buyer

    • What is it?

      • It gives the right to terminate the contract provided to the seller (only) due to non-fulfillment of the condition or in case of delay.


    • Changes to consider:

      • Such termination provisions could be amended so that each party has the right to terminate the contract for non-performance or in the event of non-performance (unless there is a legitimate reason for only one party to have the right to terminate the contract).

  1. Extension of time clauses

    • What is it?

      • a clause that allows the seller (but not the buyer) to extend the maturity of the terms in the contract (e.g. the termination date) at the seller’s discretion.


    • Changes to consider:

      • Such time clauses could be amended so that any right to an extension of time would only be exercised for specific and justified reasons (eg inclement weather delays, staff shortages).

  1. Dispute Resolution Clauses – Developer appointed to resolve dispute

    • What is it?

      • A provision that gives the seller’s adviser (eg, his architect) the right to make a final decision on disputes under the contract (eg, regarding defects in the contract).


    • Changes to consider:

      • Such dispute resolution provisions could be amended to appoint an independent third party to arbitrate any disputes under the Agreement.

WHAT IF THE PARTIES USED THE PUBLISHED MODEL CONTRACT FORM?

Developers sometimes use a model purchase agreement form published by the State Law Society or Real Estate Institute (eg REIQ Agreement for Residential Land in a Community Ownership Scheme). Although the developer does not create this document, if changes or additions are made, the ACL rules may apply if the changes or different terms are unfair.

WHAT ARE THE PENALTIES FOR VIOLATING THE REGIME OF UNFAIR CONTRACT TERMS?

The table below summarizes the significantly increased civil penalties that will apply for breaches of the regime in the ACL.








Maximum civil penalty
corporation Greater of:

  • 50 million AUD; gold

  • 3 times the value of the benefit (if the court can determine the value of the benefit); gold

  • 30% of the corporation adjusted turnoverDuring exceeding the turnaround time (if the court cannot determine the value of the benefit).


Individuals

2.5 million AUD

WHAT SHOULD I DO NEXT?

  1. New regime start date

The changes in the regime of unreasonable contractual terms will not apply to contracts concluded before November 9, 2023.

  1. Check current’off schedule’ contract models

Developers should have an experienced property development lawyer review all contract templates currently in use (where the regime applies) to ensure that the contracts do not contain clauses that could be considered unreasonable terms under the ACL regime.

This revision should include any amendments or additional terms to the standard published form of the model contract used by developers.

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