Torrens title and contracts underpin the legal foundations of our property markets
It is soon evident in this discussion with guest Joe David, special counsel in the property and infrastructure group from national law firm Corrs Chambers Westgarth Sydney office, that in his well-exercised view, two key factors underpin the legal foundations of our property market: Torrens title (together with consumer protection legislation) and the quality of contracts.
Firstly 1858 marks the introduction of the ground-breaking Torrens title system of title registration (initially in South Australia), and today its “reputation” continues to build the security of our major residential projects.
According to Joe David, as a result of laws introduced on January 27th, 1858 by Sir Robert Torrens (see notes below), Australia’s internationally regarded property laws and land title system were soon to be the key foundation of the local real estate market.
And that is still so today, and as we will see spreading way beyond the borders of South Australia. However it is Joe’s view “it is the developer’s reputation and the fact that our property industry has kept pace with the expectations of today’s buyers that together so well service the needs of our present-day market.”
With over 35 years’ experience acting for major developers, Joe David talks about some very clear cut and valuable in-sights across the project marketing sector.
Joe is very well qualified to give up his time to take part in this series of posts. Heading up the developer sales group at Corrs, Joe has his focus on what he terms “the money end of the project”. From my point of view that’s a few very simple words that mean a great deal. After all it requires little conjecture to imagine circumstances where as Joe puts it, “if a contract is not watertight when it comes to settlement a developers investment could be at an unacceptable level of risk”.
The progression of quality contracts is one that Joe returned to frequently during our conversation. Throughout his 35 years, Joe has worked with many of Australia’s major developers including Mirvac, a group he labels “as trail blazers”, in particular for the way that it has been at the forefront in selling off-the-plan projects for more than two decades.
A great deal of his experience comes from being involved with a raft of major projects including Quay Grand, Newington (part of Sydney’s Olympic precinct), Jackson’s Landing and Walsh Bay.
“Many of the projects I have been involved with have included a wide range of title structures not only typical freehold and strata title, but also complex community title and leasehold projects and in some projects a mix of titles. Layer upon layer.
“These structures directly reflect in how contracts are drafted. They also imitate I think, the more complex nature of today’s urban environments and so this helps explain why in part contracts have had to become big and complex.”
It is against such a track record easy to understand why Joe David’s faith and understanding of property law in the project marketing arena allows us to observe some valuable and interesting insights.
In the sales and marketing of large developments, they can ‘suffer’ from being very complex for buyers to comprehend, and this is understandable and Joe is correct to highlight that the creation of any large community needs to be well documented as far as possible from the outset.
World-beating property law
Few would argue with his starting point – “It is good property law, the Torrens title system, that ensures title security, title that is guaranteed by a process of registration so that every buyer can have absolute confidence in the title of the property they buy.
“Our title system is paramount and we owe a great deal to Sir Robert Torrens. ‘Title by registration’ and how the title relies upon certified boundaries and registered plans, not only assures title but the exact description of the property is also clear, the registered lot and plan details.”
And with some major projects attracting offshore buyers there are clear benefits flowing from Australia’s title and contract security.
“With projects that are taken offshore Australia’s title system is proven to be popular with overseas buyers. Even where fraud occurs, there is a statutory system of compensation available. When you buy from the registered proprietor of real estate title with very few exceptions is guaranteed by the state.”
When I reflect upon Joe’s remarks, I suspect we should not always take the ‘advantage’ for granted. While fraud is very rare under our system, I feel that we should be re-assured that title does help to underpin major developments taken off-shore. Furthermore, our contracts enhance access to finance and the entire sales and marketing path runs efficiently.
More on pages 2, 3 and 4
Contracts – the size of a telephone book
Joe rightly points out that the marketing of a project that is not yet built presents some hurdles for the developer and buyer. The buyer is looking at the product we are selling that may frequently be on a site where no work at all has yet to be undertaken.
Then under most circumstances the developer will be looking at a commitment of tens of millions of dollars or even much more, naturally while this is a backdrop we are all familiar with it is one that requires a secure and detailed contract. The contract needs to work to meet the needs of everyone involved in each transaction. I think it is also important to remember that some projects can involve hundreds of individual contracts, and this can create extraordinary pressures.
For example in talking to Joe, a major release or launch can bring any number of buyers together, in a limited time, in a competitive sales path, where contracts must run smoothly and result in secure transactions. These pressures need to be addressed early and not surface during the launch day itself.
“Over a number of years contacts have become more complex and this is in response to varied circumstances, like those outlined while many will relate to the title structure of the project.
“This has also resulted in more detailed vendor disclosure – more community rules, management statements, complex strata titles that will have building rules to ensure that as far as possible the strata scheme runs well when the building is complete.”
Joe points to the fact that there can also be a mix of residential, retail and commercial users all within the one project.
“These sometimes very large mixed use developments, all give rise to varied rights and obligations and these need to be fully documented with clear boundaries, and rights between the different parties. After all nobody wants any sort of dispute aggravated by a poor set of management rules.”
However in Joe’s experience it is the reputation of the developer that is central and even the most complex documentation and contract cannot make up for a solid foundation underpinned by a AAA track record.
Over the last few years the developer’s reputation has become more important and even more so now that finance is a complex challenge for many developers.
“There is always the need to achieve ever-more pre-sales levels to gain finance, as banks and other sources of finance are now ever-more anxious that pre-sales contracts are secure.
“Financiers are looking very closely to ensure that results in ‘qualified pre-sales’ so that when the project is complete, as I have said earlier, the buyers will be required to settle. So that the sales will be there and secure at the end of what can be a long lead-time. When the building is complete and the buyer gets what they paid for, so does the developer and the contract has the central role of underpinning this.
“There could be circumstances where a weak or badly drafted contract could see buyers, look for ways not to settle and succeed because of some flaw in the contract.
“It’s I am sure obvious that if you have huge financial exposure at the end of a 2 or 3 year construction period with a lot of cash going out, the contract and the buyers need to be rock-solid.”
However in a complex market, the importance of secure contracts also extends beyond the document itself and the one-off relationship between the Vendor and Purchaser.
There are other factors that Joe cites including for example one person or entity buying several apartments, and there are limits on the ratio of overseas buyers to local buyers, because both these examples might increase risk, and today financiers are very risk sensitive.
“And so returning to the core of what we have been discussing I return again to highlight that at every level the quality of our contracts, financial requirements and security of title help to underpin activity, even in the most complex project.”
More on pages 3 and 4
A fair balance
All contracts involve two parties and so a contact to buy into an off-the-plan project does however clearly need to work for all involved – the developer, the financer and of course the buyer must all have rights and safe guards.
“Because there are risks on behalf of the developer and there are expectations for the buyer, there are rights for all sides and again I have to come back to the importance of reputation, it’s so very important, and a solid brand for a major developer is bankable.”
Clearly the purchaser is making a commitment to a property they cannot see, to a property that they might not have title to for many years and it’s purchase will usually affect their future. Every buyer will also have to make a financial commitment.
Joe, like all of us, is aware that many projects being taken to market are large and complex thus creating a complex task for the project team.
“Until the project is finished the developer will not earn any income, they will not recover any of their costs and nor will they realise any profit. In fact until the project is sold and sales are settled the developers costs and liabilities, are almost open-ended, in a way it’s a like a vacuum.”
The contracts used in this environment, need to be fair and any rights that a buyer might have to cancel or not complete the purchase need to be for substantial departures. And while a definition of substantial can be hard to define unfair contract terms are now covered by legislation. There are some core areas to consider like any size variations of individual apartments, the quality and extent of finishes and the contract sunset clause.
“From a consumer’s perspective there has been some general heightened awareness of contract terms. The spot light given to ‘unfair’ contract terms associated with some industries, like telecoms and gyms has helped make consumers more sensitive.”
Again here we can see the importance of a developer’s reputation so that buyers can have the confidence in the delivery of quality products.
Some of the key issues that may be high on any list of concerns among buyers are according to Joe already addressed because of the more advanced planning criteria when projects go to market, as they have had to meet substantial council planning and other conditions such as heritage.
“Size variation is a major area of concern, and just what is an acceptable variation before any sort of compensation is due or a right to cancel is engaged. However a well-drafted contract will address this and also how any price adjustment is to be made.”
Is a variation of 3% satisfactory or is 5%? When this happens it is important that good will prevail, as the developer’s reputation will come into play.
“Contracts have I think kept pace with the growth of medium density living, and despite the fact that contracts are more complex, I do think that buyers do understand the limitations of what is involved.”
In general it is a remarkable stable environment
Pre-sales are very important, for apartments and also for house and land products. State and federal laws work to safeguard all contracts.
However according to Joe David the last 30 years has seen the experience of the project marketing field gain in quality and lessons have been taken to heart leading to a very stable market.
In addition to size variations in contracts, as we have discussed the sunset clause is in Joe’s experience also important.
In marketing a project there needs to be the assurance and security that it will complete on time, and in Joe’s view where there are circumstances when any increased lead time is needed this needs to be clearly addressed.
More on page 4
Quality marketing information
While not a direct part of any contract, marketing information also plays a role in this topic.
Almost any project marketing sales path now involves the increased use of highly developed artists impressions, computer generated images and extensive display suites.
“In my view these items need to have a good level of accurate and reliable information and the reputable developers and their marketing agents are very experienced in doing this.
I would also absolutely encourage that items like inclusions are covered in detail. I am an advocate of adding more and not less meat – there will always be questions from buyers, – but it is important to ensure equivalent quality is provided and that descriptions and marketing material always avoids any sort of vagueness or uncertainty.
Floor plans and finishes schedules are also key elements, they need to be easy to understand, they need to have focus on the purchaser, and they are key elements in the contract that are always looked at.”
My view is that the marketing suite and core materials that Joe highlights like plans and finishes schedules are the face of the development, they in-turn underpin the developers reputation and so should never be approached in any sort of half-baked manner.
Comparison with auctions
And as we start to wind up this discussion with Joe, I was keen to get his view on a comparison of project contracts and the given popularity of auctions.
“We all appreciate that auction contracts are used for a completed product, they are so popular as the sale is binding ‘at the fall of the hammer’ – the sale is made and the property is sold. The auction aims to flush out the most willing buyers beforehand and can also deliver a much higher than anticipated price.
And while the two areas are very different, vendor disclosure also extends to auction contracts.”
Improvements
Thanks to Sir Robert Torrens and an excellent track record of contract development and professional marketing we look in good shape. In fact we have even exported our land title expertise to many international destinations including the Middle East and Singapore, still there are areas of improvement.
“I think reputation can never be under-valued. I do not think we will ever see a 2-page sales contract. However I think it is track-record, reliability, resources and trust that, alongside quality marketing that will continue to encourage improvements in this area.”
The industry sends out the call via marketing for consumers to come and see our projects and we invite buyers to make the purchase.
“We then need sound contracts to ensure clients receive their money in the end, and buyers receive a quality end property. All underwritten by trust and reputation.”
Note: A little bit af background
Sir Robert Richard Torrens (1814-1884), public servant, politician and land titles law reformer, was born in Cork, Ireland, son of Colonel Robert Torrens. On December 12, 1840 along with his wife he arrived in South Australia.
Years after arriving in South Australia local titles were in an unsatisfactory state and, as he put it, land was no longer “the luxury of the few”, therefore “thorough land reform … [was] essentially the people’s question”.
He stood for Adelaide in the House of Assembly elections of 1857 and, almost entirely because of his espousal of land titles reform, topped the poll. He was Treasurer from October 24, 1856 to August 21, 1857, he published a further draft of his proposed bill on April 14 and 15 and introduced it as a private member’s bill in yet a third form on June 4. He was premier from September 1 to 30, but no action was taken on the bill until November 11, 1857, when the second reading was carried. Despite very strong opposition, mainly from the legal profession, it passed through both Houses and was assented to on January 27, 1858.
Peter Chittenden is managing director for residential of Colliers International