Developer, solicitor and buyer beware

Developers giving rebates or incentives to property buyers within a development is a common practice to secure sales. Historically developers and their agents have structured the giving of buyers’ rebates and discounts in ways that protect the asset value of their remaining stock, which is of benefit to other current owners and future buyers in the development. In doing so, developers considered the process to be risk free, however, this view is in stark contrast to the direction taken by the courts and state law societies. Courts in Queensland and New South Wales have given a clear message to developers and their solicitors to beware of the practice.

Case law

There are two key cases that provide guidance to any developer considering the use of the rebates:

1. Miro v Fu Pty Ltd [2003] NSWSC 1009: In this case the Court considered certain sale transactions where a substantial discount was given to the buyer. In one transaction, the land sale agreement provided:
   • on the front page of the contract, a purchase price of $450,000; and
   • in special condition that on settlement the vendor will allow the purchaser a rebate of $100,000 off the sale price so that the balance of moneys payable on settlement is $350,000.

Windeyer J made the following cautionary statement at paragraph [15]:

I have said before and say again that this type of clause is quite improper. It can be inserted for no purpose other than to mislead persons such as lending authorities and purchasers of other units in that development. In my view it is likely that solicitors who purposely prepare contracts with contradictory clauses such as this may be guilty of professional misconduct. It is more serious when the solicitor is a party to the contract as vendor. Unreal stated consideration for reduction, although that is not the case here, does not improve the position. Instructions of clients cannot excuse such conduct.

2. Commonwealth Bank of Australia v Hilellis [2009] NSWDC 9: This claim was brought by a lender/mortgagee seeking to recover monies from the borrowers/purchasers as well as the vendors and an employee of the mortgage broker. In this case two parties who were not at arms length entered into a land sale agreement which showed a purchase price of $550,000 when in fact the amount paid at settlement was only $440,000 less legal fees and stamp duty (refer paragraph [70]), and the true value of property was found to be only $370,000 (refer paragraph [74]). The borrowers/purchasers were found to have made three misleading and deceptive representations to their lender: that the parties were at arms length, that the market value of the property was $550,000, and that the borrowers/purchasers were paying the full $550,000 for the property. Unlike Miro, there was no special condition, or a side letter (like in other cases) which reflected an agreed price reduction, instead the vendors simply accepted a lower amount and paid the purchasers’ legal fees and stamp duty. The court was satisfied that the price nominated in the contract was “fictitious” (refer paragraph [71]) and that the lender acted in reliance on those representations and as a consequence suffered loss (refer paragraph [103]). The mortgage broker was found to have had accessorial liability under the Trade Practices Act 1974 (Cth) (superseded now by Australian Consumer Law).

In summary, where rebates have been incorporated into land sale agreements in a way that is not transparent, or where land sale agreements reflect inflated or fictitious prices that are not ultimately paid, and where full disclosure has not been provided to a buyer, a financier acting for the buyer, or the relevant government authorities, the Courts have found that:

1. The vendors, purchasers, and their agents and advisors are at risk that they are misleading other parties involved in the transaction. This especially includes any current or future financier of a developer or its related entities, or of a buyer or future buyers who may rely on the contract value to their detriment (or to the developer’s benefit);
2. The buyer, the seller and even agents and advisors can be liable for losses suffered by the financier, where the conduct is found to be misleading and deceptive;
3. Complete and positive disclosure is a minimum requirement to all relevant parties, including the developer’s financier, the buyer’s financier and all relevant authorities, including revenue and titles offices;
4. Even in situations where the land sale agreement is presented to third parties in circumstances outside of the developer’s control, such that the developer has no part to play in the way the agreement is disclosed, the developer may still be liable in these circumstances given that it was a party to and the architect of the sale structure. Such an action may be commenced by an incoming mortgagee or potentially by any other mortgagee or buyer of property who relies on the public register to determine its security; and
5. Apart from civil liability for damages incurred by any party who has been misled by the documents and suffered loss, criminal liability is a potential punishment for the unwary developer and its directors.

In Miro v Fu Pty Ltd, the actual rebate was included in the sale and purchase agreement, albeit in a schedule, and this was still found to be misleading. This structure was described by the Court as “improper” and “for no purpose other than to mislead” [Miro v Fu Pty Ltd [2003] NSWSC 1009, 15]. A similar finding was made in CBA v Hilellis where there was simply an unwritten understanding between the parties as to what was truly expected and payable.

Law society action

As it stands, the Queensland Law Society and the Law Society of New South Wales have issued warnings and directions to lawyers against facilitating rebates or incentives of this nature. Law Societies in the Northern Territory and the other jurisdictions have not issued any specific directions or warnings. However, the concerns expressed interstate by courts and regulators mean that solicitors nation-wide should not assist in documenting and structuring a transaction that does not transparently disclose a rebate or the true amount payable by the buyer, or where a true value is not disclosed to authorities. In light of the comments raised above, we would urge any solicitor advising a developer (and the developer itself) in such circumstances to reconsider the use of rebates.

Key messages

These are the key messages for any party to a transaction where a rebate is being considered:

1. Use of a rebate whether by a special condition or any other formal or informal arrangement that is not plain and obvious in the sale agreement and is not fully disclosed to financiers and other third parties and on relevant government records puts the developer, their agents and advisors at risk;
2. A failure to fully and properly disclose to financiers, other third parties and relevant government agencies may have criminal as well as civil consequences for the developer, its directors, agents and advisers;
3. Buyers who participate in such arrangements should disclose the full extent of the rebate and the actual amount being paid to third parties, such as financiers and government agencies, for example by recording the correct price in the transfer lodged for registration;
4. If a buyer relies on the higher recorded purchase price to obtain finance or some other benefit, the buyer may be subject to not only a claim for damages but also criminal proceedings and penalties. In addition, the developer, its agents and advisers may also be exposed to civil liability or potentially a criminal penalty;
5. The parties should assess the deal and determine whether it has the appearance of an uncommercial scheme or design with an ulterior purpose and if in any doubt, seek legal advice; and
6. Finally, solicitors can be exposed to adverse findings of unsatisfactory professional conduct or professional misconduct if they assist in an arrangement that may mislead third parties as to the true value of a transaction.

This article was written by Cassandra Emmett, Partner, and Andrew Giles, Senior Associate.