Managing Pre-Sale Contracts And Ensuring Enforceability

Background

The amendments to the Strata Titles Act 1985 (WA) (amended Act), introduced by the Strata Titles Amendment Act 2018 (WA), and the Strata Titles (General) Regulations 2019 (WA) (Regulations) came into effect on 1 May 2020.  The strata reform, brought about by the amended Act and Regulations, represents a significant step forward for Western Australia and it’s evolving housing market. 

Part of the reforms have seen the overhaul of the disclosure obligations of sellers to buyers of notifiable variations after their off the plan pre-sale contract is signed.  Whilst the principles behind these obligations are not new, there are important changes to what constitutes notifiable variations and the effect on pre-sale contracts if the disclosure regime in relation to notifiable variations is not complied with in the amended Act.

Whilst the commentary contained in this article is focussed on the notifiable variation regime in the amended Act as it affects pre-sale contracts for lots where the strata plan has not been registered, sellers and developers should note that it also applies to contracts where the strata plan has been registered, when existing lots are no longer being sold “off the plan”.

The commentary in this article is provided in the context of freehold schemes and is general in nature.  Whilst we identify many of the key changes to the Act, this article is not a substitute to reading the amended Act and Regulations or seeking legal advice where appropriate.

The Pre-Sale Contract is Signed - What Next?

A seller’s obligations do not end once a pre-sale contract is signed.  It is essential that they properly understand their on-going disclosure obligations under the amended Act and put in place good systems and procedures to manage changes during the course of a development to ensure that pre-sales remain binding and enforceable against buyers so these ultimately proceed to settlement once the strata scheme is registered. 

Pre-sale contracts are a critical part of the seller’s ability to secure construction finance. In what has now been, for a number of years in Western Australia, a weak “new residential” property market, coupled with the tightening by APRA of commercial real estate lending requirements, lenders are scrutinising both the quality of pre-sale contracts, and the processes and procedures borrowers have in place for their on-going management when assessing a seller (or developer) loan application.  This will continue to be the case for some time in the emerging, post COVID-19, environment.

Managing Change - Notifiable Variations 

Every seller will be familiar with former Part V of the Act which required notice be given to buyers of “notifiable variations” that occur after a pre-sale contract is entered into but before settlement. The amended Act includes a notifiable variations regime, but with the aim of clarifying:

1. when a notifiable variation occurs;
2. what information is required to be provided to a buyer in order to discharge a seller's obligation to provide notice of notifiable variations; and 
3. what are the buyer's rights and remedies where the seller fails to provide notice of notifiable variations, or the buyer is materially prejudiced by the variation. 

It is important that sellers (and developers) properly understand the revised notifiable variation regime to ensure they comply with the amended Act and minimise the risk of any pre-sale contracts being terminated by buyers due to non-compliance with the new regime.

When does the Notifiable Variation regime apply?

A seller is required to provide a buyer with notice of variations that occur after a contract has been entered into but before the settlement date for the contract, being the date the buyer is entitled to be registered as the owner of the lot, or for a terms contract, when the buyer becomes entitled to possession or occupation of the lot. 

What is a Notifiable Variation and when does it occur?

The most important distinction arising out of the strata reform process is the introduction of categories of notifiable variations.  Notifiable variations are now separated into:

1. Type 1 Notifiable Variations; and 
2. Type 2 Notifiable Variations.

These distinctions are important when assessing the buyer’s rights if a seller either fails to provide notice of a notifiable variation, or provides notice of a notifiable variation which is materially prejudicial to a buyer.

Type 1 Notifiable Variations 

• Lot size - The area or size of a lot is reduced by 5% or more from the area or size notified to the buyer before the buyer entered into the contract. 

• Unit Entitlement - The proportion that the unit entitlement of a lot bears to the total unit entitlement is increased or decreased by 5% or more (our emphasis).Interestingly, the amended Act makes it clear that even an increase in unit entitlement can also be a matter that materially prejudices a buyer despite this giving a buyer a greater interest in the scheme common property.

• Termination proposal - Anything relating to a proposal for the termination of the strata titles scheme is served on the seller by the strata company.

• Regulations - Any other event classified by the regulations as a type 1 notifiable variation. There are currently no prescribed regulations.

Type 2 Notifiable Variations (to the extent they are not a type 1 notifiable variation)

• Scheme plan - The scheme plan (or proposed scheme plan) is modified in a way that affects the lot or the common property (our emphasis).  Section 3(7) of the amended Act defines when an amendment “affects a lot or the common property” and includes:
  • modifications to common property or lot boundaries;
  • creating or discharging easements or restrictive covenants affecting lots or the common property.
• Unit Entitlement - The schedule of unit entitlements (or proposed schedule of unit entitlement) is modified in a way that affects the lot.

• Scheme By- Laws -The scheme by-laws (or proposed scheme by-laws) are modified.

• Contracts - The strata company or a scheme developer:
  
  • enters into a contract for the provision of services or amenities to the strata company or to its members, or a contract that is otherwise likely to affect the rights of the buyer; or
  • ovaries an existing contract of that kind in a way that is likely to affect the rights of the buyer.
• Leases and Licences - A lease, licence, right or privilege over the common property is granted or varied.

• Regulations - Any other event classified by the regulations as a type 2 notifiable variation. There are currently no prescribed regulations.

The Regulations prescribe when some of the above type 1 and type 2 notifiable variations are deemed to have “occurred”.

What information must  be given?

Where a notifiable variation occurs, a seller must give the buyer notice in writing; and the notice must:

1. include “particulars of the notifiable variation that a reasonable person would consider sufficient to enable the buyer to make an adequately informed assessment as to whether the buyer is materially prejudiced by the notifiable variation (our emphasis)” (s157(1));
   
   
2. identify the type of notifiable variation (i.e. Type 1 or Type 2) (Regulation 105(1)); and
   
   
3. inform the buyer of their rights under the Act to avoid the contract when the specified type of notifiable variation occurs (Regulation 105(1)).

The  language change in section 157(1), from the requirement to provide “full particulars” under former section 69C of the Act, to “particulars that a reasonable person would consider sufficient…” under the amended Act should be noted.

Regulation 105 provides clarity in relation to the particulars that are required in relation to the entry into, or variation of, a contract for the provision of services to the strata company (or members) or a contract that is otherwise likely to affect the rights of the buyer.  A notice will be presumed to contain the particulars required by section 157(1) if, in addition to the matters required by proposed Regulation 105(1), it includes a summary of the relevant contract or variation.  What constitutes a summary is set out in Regulation 105(4) and, as expected, it canvasses the key commercial terms of the agreement, the rights and obligations of the parties and remuneration details.

Common practice has evolved under the former regime that to satisfy the “full particulars” requirement, it is best practice to provide a full copy of the relevant agreement.  Given the length of some agreements, providing a full copy can be unwieldy and overwhelming for a buyer, albeit, Regulations 105(2) and (3) allows sellers to provide a copy of the agreement or variation of an existing agreement, if preferred.  Sellers availing themselves of the ability to provide summaries of agreements under the amended Act should, however, exercise a high degree of care when preparing summaries to ensure that essential terms are not missing from the summary.  It is also essential that the summary contain details addressing all of the matters in Regulation 105(4), otherwise, the seller is at risk of not properly discharging its obligations under section 157(1) of the amended Act.

What notice must be given?

Section 157(3) provides that a seller must comply with its obligations:

1. if the seller becomes aware of the notifiable variation less than 15 working days before the settlement date, as soon as practicable; and
2. in any other case, not later than 10 working days after the seller becomes aware of the notifiable variation.

The combination of section 157(3) and Regulation 106 makes it much clearer for a seller as to when notice must be provided, depending on the nature of the notifiable variation.  As section 157(1) is not enlivened until a notifiable variation occurs, a seller can’t be deemed to have become aware of a notifiable variation that is still in the planning stage.  Under the previous regime which simply obliged sellers to given notice “as soon as they become aware” of the notifiable variation without any clarity on when a notifiable variation occurs. 

To use a common example – changes to the size of a lot by more than 5% – this is a Type 1 notifiable variation, and under the amended Act it occurs when the scheme plan that gives effect to this variation is lodged with the Registrar of Titles.  At that point, the requirement to issue notice is triggered.  Under the previous regime, the seller was required to issue a notifiable variation notice “as soon as it became aware” of this change.  This was less clear, and may have had the effect of the seller having to inform buyers promptly once the survey of the scheme plan was finalised (which would identify the change), and not when the scheme plan is actually lodged.

It will, however, be important for sellers to play close regard to the nature of the notifiable variation and comply with the timing requirements that apply by operation of the definitions of Type 1 notifiable variation, Type 2 notifiable variation, sections 157 and Regulation 106. 

What about pre-planned courses of action?

The previous regime had always allowed for the provision of advanced notice of a proposed act or actions, with the result that giving effect to that proposed act or actions is not deemed to be a notifiable event.

Under section 157(4) of the amended Act, there are some important distinctions:

1. a seller can include, in a contract, advance notice of a proposed course of action.This differs from the previous regime which provided that a seller may by notice in writing inform a buyer of a proposed action.In the latter case, this had allowed sellers to give buyers progressive notices of intent, throughout the course of a development when changes become known (not simply via the contract).

Under the amended Act, it appears that the seller can only avail itself of this advanced notice in the contract, meaning that other changes will only be notified when they actually occur. As this will, in most cases, be at the point in time where the strata plan is lodged for registration, it means that sellers have less ability to manage and mitigate their risks arising from notifiable variations over the course of the development. 

Like the former regime, under the amended Act the action or matter when completed, must not differ from that as described in the contract; and

2. the seller is required to give notice of completion of the action so that the buyer has an opportunity to form a view that the seller has not departed from the proposed course of action described in the contract.

The timing for giving this notice is the same as set out in section 157(3) for notifiable variations generally.  This requirement adds to the administrative burden on sellers at a time that it is gearing up for registration of the strata scheme and settlement of pre-sale contracts as this is the time that most proposed courses of action will be carried into effect.

It is important to note that if a court or tribunal proceeding arises in relation to a notifiable variation which happens after the contract is signed, it is the seller who has to prove that the proper notice was given to the buyer (s157(6)).

Transitional Arrangements for Notifiable Variations

Sellers should be aware of the transitional provisions set out in Schedule 5 of the amended Act.

Importantly, the transitional provisions contemplate that former Part V of the Act will continue to apply to pre-sale contracts entered into prior to the commencement of the amended Act (1 May 2020), and Part 10 of the amended Act will apply to contracts entered into after the commencement of the amended Act. 

Accordingly, this means that where the sale of lots straddles 1 May 2020, sellers will need to manage two different notification regimes, with potentially different consequences if a seller fails to fully discharge its applicable notification obligations.  For example, failure to provide notice of a notifiable variation under the previous regime resulted in an absolute right of termination (within prescribed timeframes) on the part of the buyer.  The same notifiable variation under the amended Act may not result in a right of termination if it is a type 2 notifiable variation.

Rights and Remedies Arising from the Notifiable Variation Regime

The table below sets out the timing and circumstances under which a buyer may delay settlement and / or terminate a contract for failure to provide notice of notifiable variations, or where those notifiable variations are materially prejudicial to a buyer.  These are substantially similar to the previous regime, but with some amendments that operate predominantly for the benefit of the seller / developer for variations that are not of a material nature (i.e. type 2 notifiable variations).

The concept of a buyer being “materially prejudiced” by a notifiable variation remains consistent between the previous and amended Act, with the buyer having the onus of proving it is materially prejudiced by the relevant notifiable variation for the purposes of exercising a termination right.

Buyer's notice of avoidance 

Section 164(1) of the amended Act also now details the requirements for a buyer's notice of avoidance and requires that the buyer must:

1. be given in writing by the buyer to the seller; and
2. specify the grounds on which the contract is avoided, including details of the material prejudice to the buyer if required as grounds for avoidance.

Closing 

As with the previous regime, sellers and developers need to put in place solid contract management practices and procedures to ensure that pre-sale contracts are properly managed during the course of a development.  This includes:

1. thorough and advanced forward planning to ensure that the development is, so far as possible, fully designed and specified , and that all relevant agreements and interests are identified in advance to minimise variations during the course of development;
2. putting in place rigorous procedures for identifying and documenting variations which may constitute notifiable variations;
3. good contract management, including identification of key dates and application of the correct notifiable variation regime; and
4. good buyer communication.