By Mitchell Spurge, Senior Associate, and Andrew Logan, Partner

The current position:  You cannot sell land you don’t own yet

Currently, section 13 of the Sale of Land Act 1970 (WA) (Act) prohibits a person from selling:

1. five or more lots in a subdivision or proposed subdivision; or
2. two or more lots in a strata subdivision or proposed strata subdivision,

unless that person is the registered owner of the land.

A person who enters into an off the plan strata sales contract or green title contract when it is not the registered owner of the development parcel in contravention of section 13 of the Act will be liable for a $750 fine.  In addition, the off the plan contract will be unenforceable by the developer but enforceable by the buyer because of the Court of Appeal’s decision in Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75.

How will the Act change?

The State Government recently announced that on 31 March 2017, the Act will be amended (pursuant to the now assented Sale of Land Amendment Bill 2016 (WA)) by expanding the application of section 13 of the Act to the sale of one or more lots in a subdivision or proposed subdivision, rather than the existing five lots or more (green title) or two lots or more (strata title).  These changes will therefore affect both off the plan strata developments and green title developments where the developer is not the owner of the development parcel as at the date of individual lot sales.

However, the Act will also be amended to give developers the ability to sell lots where the developer is not the registered owner of the development parcel provided that the sales contract includes the following:

1. First, the sales contract must be conditional on the developer becoming the registered owner of the development parcel within 6 months after the date of the contract, or such later date as agreed to in the contract or by variation of the contract (section 13B of the Act).
2. Second, the sales contract must contain a mandatory disclosure which warns the buyer that the developer does not own the development parcel (section 13C of the Act).  The mandatory disclosure will be by way of an approved form (similar to a strata Form 28), but unfortunately this form has not yet been finalised.
3. Third, the sales contract must provide that all deposit monies received by the developer must be deposited into a nominated and eligible trust account within two business days of receipt from the buyer and held in trust until the developer becomes the registered owner of the development parcel (section 13D & 13E of the Act).

If a developer fails to comply with these conditions then the sale contract will be illegal and void, the buyer will be entitled to recover their deposit and the developer will commit an offence and be liable for a $100,000 fine.

The Act will also be amended to increase the current $750 fine for the offences contained in Part IV of the Act to the new $100,000 fine.

The amendments will only apply to contracts that are entered into after the commencement date of the amendment (being after 31 March 2017).

Mills Oakley observations

While the amendments will give developers the flexibility to enter into sales contracts before becoming the registered owner of the development parcel, the consequences of failing to comply with the requirements of section 13 of the Act are severe.

1. First, the $100,000 penalty is now an offence, which will mean that a breach of section 13, section 16, section 17 and section 18 of the Act by a corporation will result in an actual penalty of $500,000 by reason of section 40(5) of the Sentencing Act 1995 (WA).
2. Second, a developer will have a statutory obligation to make “all reasonable endeavours” (including obtaining the necessary regulatory approvals and create and lodge the necessary plans for the subdivision or proposed subdivision) to ensure that the developer can become the registered owner of the development parcel within 6 months after the date of the contract or such later date as agreed between the parties (section 13G(1) of the Act).  The Act does not provide exhaustive guidance on what constitutes reasonable endeavours so there is a question as to what extent a developer will need to act for the developer to have made all reasonable endeavours.
3. Third, a developer must give the buyer “reasonable information” about the steps taken by the developer to become the registered owner of the land.  Again, it is unclear what the developer will actually need to do to satisfy this obligation.
4. Fourth, the Act is unclear on how a failure by a developer to make all reasonable endeavours and give the buyer reasonable information will affect the sales contract (e.g. will a failure result in the buyer being entitled to terminate the contract?).
5. Fifth, the Act is unclear on whether a vendor will be able to unilaterally extend the time for registration as the owner of the development parcel due to unforeseen events.  Considering the decision of the Supreme Court of Western Australia in Harman Nominees Pty Ltd v Leighton Shores Pty Ltd [2012] WASCA 189), we doubt that such a right will exist without contravention of the Act.

It is therefore of vital importance for developers to ensure that their sales contracts properly comply with the new provisions and ensure that there are no accidental or inadvertent contraventions of the Act.

How Mills Oakley can assist

Mills Oakley Lawyers is a leading Australian law firm.  Our Real Estate Team can assist on all aspects of residential and commercial strata lot sales, including preparation of off the plan strata contracts, advising on notifiable variations during construction and attending to settlements.  Please feel free to contact one of our lawyers for more information on how Mills Oakley can assist you.