In many ways, the 2012 ACT property law year reflected the difficult market conditions which continue to face land development and investment all over Australia.

In this Property Reporter, we focus on:

• costs and red tape – how landholders fared in terms of property transaction costs and procedures;
• construction – new rights for builders, and for unit buyers as well
• leasing – significant developments in the curious world of ACT land covenants and conditions.

First, costs and red tape

18 months of the LVC – a predicted disaster

Amendments introduced in July 2011 significantly changed how charges are calculated when a Crown lease of land in the ACT is varied. These lease variation charge (or “LVC”) amendments were intended to increase government revenue by more heavily taxing enhanced lease rights for commercial and residential uses permitted under development approvals.

The property industry strongly campaigned against the introduction of the LVC. Many commentators joined in the chorus of disapproval. In a newsletter of July 2011 we said this –  with considerable prescience, as it now turns out:

The amount of revenue which the government wants to collect is a policy consideration, and not a legal one. There seems no doubt that more will be collected than before (unless the LVC system is such a “shock” that it very significantly slows development). We would expect that in the experience of the system, and in the lead up to 2016, there will be a concern to monitor the competitiveness of the ACT as a place to invest, and to decide whether the LVC proportions need to be adjusted.

In a report commissioned by the Property Council of Australia and issued in May 2012 (“the Allen Report”), the Allen Consulting Group reported a 34% drop in development approvals requiring lease variations in FY2012 as compared to the previous year (187 in 2010–11, compared with 64 in 2011–12). The ACT government has tried to deflect attention away from the LVC, saying that the cause of the downturn has been poor economic conditions affecting the property development and construction industry. ACT Treasurer Andrew Barr, in a speech to the Property Council on 21 June 2012 said:

There is no doubt that the Territory economy will face challenges caused by the Federal Government’s contraction in spending and employment, continued global economic uncertainty and the drain of labour and capital to the resource states.

But those of us who are involved in the industry on a day-to-day basis know that the LVC has been a major impediment to new projects since it was introduced. The per square metre GFA fees for commercial expansions, and the per unit fees for residential apartment buildings, are exorbitant. We find that interstate investors are surprised when we advise them about the LVC impost. Developers are not keen to invest in new land stock without guarantees of returns – but pre-sales are simply not available at the prices they must charge to recover the LVC and other costs involved.

The Allen Report highlighted a number of key concerns about the long term consequences of the charge, including higher housing costs and less affordability; an increasing stock of derelict buildings not viable for redevelopment; and the encouragement of “greenfield” development requiring greater public expenditure and creating sub-optimal environmental outcomes.

The new LVC has fallen well short of budgetary revenue expectations. The ACT Treasury’s Consolidated Financial Report for the 2012 June quarter shows budgeted LVC revenue for 2011-12 at $22.4 million. However the actual revenue received was only $8.7 million, leaving a revenue shortfall of $13.7 million. This is a notable drop compared with the amount of revenue received from the 2010-11 financial year, which was $14.1 million (under the former, cheaper, “change of use” charge system). The Property Council is on record as saying that it does not accept the ACT Government’s explanation that the shortfall has been caused in part by timing issues relating to the lodgement of development applications.

Read my lips – no new taxes… just bigger old ones

Continuing on the theme of costs imposed on ACT landholders, you might be pleased to have heard that land tax has been abolished in the ACT. It is true that as part of the ACT Government’s tax reforms, land tax no longer applies to commercial properties from 1 July 2012. However – before you pop the champagne – general rates have risen substantially to make up for the abolition of the tax, and in cases of higher value properties the rates now payable will exceed the combined rates and taxes previously paid.

The ACT Government’s stated aim of this switcheroo is “to simplify the current ACT taxation system and reduce red tape for businesses”. Commercial property owners now pay one bill which effectively “combines” land tax and general rates, and just calls it “rates”.

The new commercial property rates comprise a fixed charge of $1,213 (for FY 2013) plus a valuation charge determined as a percentage of the average unimproved value (“AUV”) of the property concerned. The unimproved value of land is the capital amount that might be expected to have been offered on the relevant date for the lease of the parcel, and is assessed on a rolling basis by the Australian Valuation Office.

The percentages used in assessing the general rates for a commercial property for the period 2012–13 operate in three ranges:

• for that part of the AUV below $150,000 – a 1.9070% rating factor will apply;
• for that part of the AUV between $150,001 and $275,000 – a 2.2670% rating factor will apply;
• for that part of the AUV over $275,001 – a 2.6070% rating factor will apply.

Commercial properties below the average AUV were predicted to see increases ranging from $11 to $299. Marginal tax rates on commercial properties have increased, so some owners can expect to be liable for more tax under the new system.

Not building now costs less

In the ACT, landholders under newly-granted leases are required to accept an obligation to commence and complete construction on their land within specific periods of time. Amendments to the planning and development legislation in 2008 imposed huge costs on developers for extensions of these commence and complete dates via a formula that takes into account a set “multiplier” (which increases in relation to the number of days applied for, the number of days for which the extension is sought, and the rates for the land). Ultimately, this resulted in developers paying exorbitant fees for somewhat minor extensions.

In light of 2012’s building slowdown in the ACT, Treasurer Andrew Barr announced that some of the fees would be reduced, and others abolished altogether. Amendments which subsequently came into effect in June 2012 have indeed drastically reduced these extension fees.  For example, from 22 June 2012, a lower fee is payable for extensions of up to four years (this will be 1 per cent of the annual rates). However, to deter longer extensions of time, such longer extensions will continue to attract fees of about five times the annual rates for the property concerned.

Ban on trustee notations continues to frustrate registration of documents

One thing that didn’t happen in 2012 was that the obstacle to the registration of documents mentioning that a land interest is held in a trustee capacity did not go away.

Under one of the original provisions of the ACT’s 1925 Torrens title legislation, the Registrar-General was commanded not to enter notice of a trust in the Register – whether express, implied or constructive. The meaning and intent of this provision has been long debated, with different Registrar-Generals taking different positions. Over recent years the restriction has been strictly enforced. As a result, trustee landholders have been frustrated in their ability to register leases, and trustee mortgagees have not been able to register mortgages, where those instruments identify them as holding their interests in a trust capacity. The kind of provision that most usually causes this obstacle to be confronted is a trustee limitation of liability clause, which will inevitably declare the trustee capacity of the party seeking the limitation.

As a result, very many documents – some of them of quite significant commercial importance, such as leases in particular – are not being registered, and instead are “banking up” in the offices of clients and their lawyers. We have developed “work-arounds” in order to overcome these obstacles for our clients and to achieve registration, however they can be costly in terms of the re-drafting and re-execution of documents. In many cases parties do not agree to the “work-arounds” and instead will instruct us to wait until the impasse is resolved by the ACT Government.

The Registrar-General has assured landholders that the relevant provisions of the Land Titles Act 1925 will be amended – however the wait continues. The latest informal advice from the Registrar-General’s staff is that the amendments can be expected to proceed in the first half of this year.

Second, construction

Building contractor payments get a policeman

Amendments to the Building and Construction Industry (Security of Payment) Act 2009 have established a new compulsory adjudication process for late-payments to contractors in the building industry, and contractors now have powerful new rights in cases of contractual breach by principals. The amendments – which apply only to contracts entered into on or after 1 July 2012 – allow construction companies and builders carrying out construction work or supplying goods and services to request that an adjudicator be appointed to hear disputes about payments.

The new process is intended to be informal, inexpensive and fast. Under the new arrangements, a builder may apply to an authorised nominating authority for adjudication of a payment claim if the person receiving the goods or services fails to pay the whole or any part of the scheduled amount by the due date. If the contract does not set a due date, the time allowed is 10 business days after a payment claim is made. Certain listed adjudication authorities can receive adjudication applications, nominate adjudicators, and issue adjudication certificates. An adjudicator has the right to determine the amount of any progress payment which the recipient of the goods or services must pay to the claimant; the date on which the amount is payable; the rate of interest payable; and the proportion of adjudication fees payable by each party.

The jurisdiction of the adjudication system is wide in scope, as it applies to any person who carries out construction work under a construction contract or supplies related goods or services under a construction contract. In this respect, contractors may claim against principals and developers; subcontractors against contractors; suppliers against customers; plant and equipment hirers against clients; and consultants against clients.

Unpaid contractors are granted extensive rights under the new laws. A claimant may provide notice of intention to suspend work, and thereafter suspend work, or exercise a lien over unfixed plants or materials.

Any clause in a construction contract which attempts to exclude the operation of the new laws, or to discourage adjudications, is void.

The provisions of the Act are quite technical, and implementing them may attract some transactional and advisor costs. However they do provide a useful low cost avenue for builders to seek moneys owed to them – without the stress and hassle of going to court.

Building standards – power to the apartment people

The ACT Civil and Administrative Tribunal, or “ACAT”, is an adjudicative body in the ACT which has jurisdiction to hear planning and building disputes. It is a quasi-judicial body which “stands in the shoes” of the original decision maker in such matters, and substitutes its own decision for that original decision. One of its 2012 planning decisions is of significant moment for the construction industry, as we now explain.

Enforcing representations made by builders to “off-the-plan” purchasers as to the standards that will be achieved in apartment construction can be very difficult. Contracts are drafted ambiguously, and individual purchasers often later find that what they thought they were getting was not guaranteed under the contract because of “subjective” wording, or no wording at all. The building contract is invariably between the developer (the original registered proprietor) as principal and the builder. These parties are often related to each other. Even when they are not, the principal will not prosecute its rights because it no longer has an interest in the property concerned – to put it crudely, the principal has taken the money and run away. Deficiencies in the common parts of apartment buildings need to be chased up by the body corporate, whose focus on such adversarial “recovery” tasks, and appetite for cost and risk, is often lacking.

In B&T Development (ACT) Pty Ltd and Ors v The Owners Units Plan 3324 and Ors, ACAT heard evidence that ACTPLA had approved a unit development (“Empire Apartments”) on condition that the redevelopment be carried out in accordance with certain approved plans. On moving into their new apartments, buyers identified certain aspects of construction which did not conform with those approved plans. One of the non-conformities was the substitution of aluminium stone and polished stone on external elements of the building’s façade with fibre/cement board or a rendered painted finish. The other was a penthouse balustrade which was also alleged not to have been constructed in accordance with the approved plans. In evidence, the builder claimed not to be aware of the existence or whereabouts of the detailed approved plans, saying they must have been kept in a“junk room”.

The apartment owners had successfully applied to ACTPLA for “controlled activity” orders, compelling the builder to rectify the identified non-conformities. In these ACAT proceedings, the builder challenged those orders.

In its ruling, ACAT found that there had been a breach of Building Act 2004, because the building work had not been carried out in accordance with approved plans. The non-conformities – ACAT said – would cause reduced value of the apartments. In the case of the cheaper wall finishes, there would be an increased likelihood of deterioration, and increased maintenance costs.

ACAT rejected the builder’s complaints that the rectification orders improperly entered into an area of law which should be left for private contractual enforcement, and that they were impermissibly in the nature of consumer protection. ACAT firmly endorsed the proposition that the authorities have a public duty to ensure that buildings are constructed in accordance with development approvals and approved building plans. ACAT concluded that the external finishes, although not structural defects, were“substantial” cosmetic defects – so substantial as to justify the orders made by ACTPLA.

The cost of rectifying just the panelling concerned was estimated at $484,926 – half a million good reasons for developers and builders not to short-change apartment buyers.

Third, leasing

Removal of GFA restrictions in leases – the elephant in the room

A fundamental aspect of the economic theory underlying the LVC (see “costs and red tape” above) was that the value of increased development rights should accrue to the people of the ACT in some agreed proportion. Indeed, the Final Report of the Change of Use Charges System in the ACT issued by the ACT Treasury to herald the introduction of the LVC laws in November 2010 said this:

The system should return an appropriate proportion of economic benefits to the community from the grant of development rights.

In that context we are confounded and confused by the willingness of ACTPLA to remove GFA restrictions from leases at the request of development applicants. This practice, it seems to us, will deny the public the future economic benefits that the laws were supposed to deliver. A lease variation charge (“LVC”) is only payable by reason of the increased rights granted – as the name suggests – when a Crown lease is varied. In leases without a GFA limitation, there will be no future need to increase the GFA to exploit an existing use right– and therefore no LVC will be payable.

These observations should not be taken to imply a value judgement on our part as to the desirability of having an LVC, or of the amounts at which the LVC has been set for various uses in different locations. However the approval of no-GFA Crown leases is an elephant, which ought to be recognised as such. Only when the elephant has been explained, and justified, can it be ushered out of the room.

The framers of the LVC were concerned by the fact that previous generations of administrators had created different classes of lessees, due to the way in which Crown leases had been drafted. The LVC legislation attempted to create a level playing field, however lease administration – in this context at least – does not appear to reflecting that policy. As a result, we now have a newclass of different lessees in the ACT.

Are Crown leases “enforceable” by third parties?

In a notable ruling in 2012 the ACT Civil and Administrative Tribunal (“ACAT”) accepted that a leaseholder was in breach of the conditions of its Crown lease by reason of the fact that its major tenant, Woolworths, was trading in an area which exceeded the gross floor area (“GFA”) permitted for its supermarket – but took no action.

In Haridemos and Ors v ACT Planning and Land Authority two local independent grocers (“the applicants”) sought review of a decision by ACTPLA not to order that Woolworths reduce its actual GFA from approximately 1900m2 to the maximum of 1,500m2 permitted under the Crown lease of the property concerned. ACTPLA had ordered Woolworths to comply with certain other terms of the approved plans – to reinstate direct access to a plant room, and to erect a wall between its liquor store and supermarket to prevent direct access between the shops – but did not order any GFA reduction. ACAT found the breach of the GFA clause had been established, but did not order any GFA reduction either.

In deciding not to order that the Crown lease be complied with – meaning that Woolworths would not have to reduce its supermarket footprint – ACAT referred to a “public interest” test, and a “planning purpose” test. ACAT observed that if the order was made, Woolworths would have to relocate staff and facilities serving the supermarket business to within the smaller 1500m2 area, and that this would cause “considerable disruption”. In ACAT’s opinion, relocating the offices and staff amenities would not be proportionate to the breach. ACAT decided that having a supermarket the size of Woolworths would not have an effect on the economic viability of supermarkets in nearby suburbs. ACAT also said that no evidence of public concern about the over-sized supermarket was presented.

Accordingly, ACAT found there was no significant planning purpose that would be served by making the order, nor was there an overriding public interest to be served by doing so. Thus, despite a breach of the Crown lease being established, no orders were made against the supermarket.

In our opinion, ACAT’s decision in the Haridemos case is unsatisfactory from a number of perspectives. ACAT said there was no evidence of “public concern” – however we would have thought that the concerns of the two local grocers in bringing the case was evidence enough of concern by members of the public. Despite their private interests they are also members of a community that the ACT Government has itself tried to “protect”, in a price and competition sense, from the dominance of large supermarket operators. Whether or not one agrees with that policy, it has been much-vaunted and strongly supported by the ACT Government.

The ruling also does not account for the fact that the Crown lease embodies the planning purposes for the land. A breach of the Crown lease must therefore be assumed to have planning implications. Planning purposes are connected with the public interest, which include key planning values such as the preservation of the environmental, historical, recreational, tourism, natural resource, social and cultural significance of land. One must necessarily question whether undermining the terms of the Crown lease is therefore in the “public interest”. ACAT considered two planning purposes in its judgement:

One planning purpose that could be served by such a decision would be to uphold the integrity of the leasehold system through requiring strict compliance with the purpose clauses in Crown leases… Another possible planning purpose could be maintaining the integrity of the hierarchy of centres as identified in the National Capital Plan and reflected in the zoning system of the Territory Plan.

Neither planning purpose was considered to be “significant” or in the overriding public interest. This is a curious outcome. ACAT’s decision undid the terms of the Crown lease, on grounds which were entirely opposed to it. As a result, we feel that the public’s confidence in the “sanctity” of the Territory Plan, in the leasehold system, and in the development approval process has been eroded, and that investment decisions by competing leaseholders and tenants are on shakier ground than before.

For more information, please contact Daniel Moulis on +61 2 6163 1000 or daniel.moulis@moulislegal.com.