Property Developers Beware: Tougher Penalties for Unfair Contract Terms

Commercial

minutes reading time

DATE PUBLISHED: November 10, 2023

key takeaways

  • It is a contravention of the Australian Consumer Law (ACL) to include, apply or rely on an unfair contract term (UCT) in a standard form consumer business contract - as of 9 November 2023, what constitutes a UCT has been broadened, and the penalties for any such contravention have been increased.
  • The maximum penalty will be the greater $50 million, 3x the value of the benefit obtained due to the breach, and 30% of adjusted gross turnover during the period of the breach – per contravention!
  • Some property contracts including off the plan contracts, house and plan sale contracts, and put and call agreements may be exposed to this new regime.
  • Clients should immediately review the documents they use and consider if the new UCT regime applies and, if so, ensure they comply with the updated UCT regime.
  • Property developers are encouraged reach out to us today and take advantage of our free offering to review their contracts and provide a property industry specific report.

How does the uCT regime apply to Property Contracts?

For those who are interested in an update on the new UCT regime, which commenced on 9 November 2023, some general guidelines can be found in the link here.

Although at this stage there are no definitive guidelines or case law that we can draw from, in our view, an example of a ‘standard form contract’ to which the UCT regime would apply is an ‘off the plan’ contract. Additionally, given the expansion of the meaning of ‘standard form contract’ and ‘small business’, there is an increasing risk that any number of property developers’ documents (for example: house and land contracts, option agreements, and various service and building contracts) could be subject to the new UCT regime.

It is important for property developers who reply on standard form contracts to consider:

  • which clauses are critical, and which are not required to protect the developer’s legitimate interests – as the latter may be deemed to be an unfair term; and
  • whether the approach when any documents were originally drafted was to include potentially offending clauses (because the contracting party was willing to accept the risk of the court subsequently declaring them void) – as such an approach may no longer be advisable, as clauses which contravene the UCT regime continue to be void, but also attract significant penalties.

Case study: off the plan contracts

There are many clauses a developer may seek to rely upon in their ‘off the plan’ contracts that operate in favour of a developer to provide flexibility in completing a project, but in order to fall within the UCT regime, the imbalance must be necessary to protect the developer’s legitimate interest. The following examples are common clauses that may be found in ‘off the plan’ contracts that may contravene the new UCT regime:

Clause

Matters to Consider*

Unequal Right of Termination

These are clauses that may create an imbalance between the parties which give unilateral termination rights to a developer. For example, a clause that allows a developer but not a buyer to terminate the contract.

A developer should consider whether their unilateral termination rights go beyond what is reasonably necessary to protect the legitimate interests of a developer to the detriment of the Buyer. A termination clause which permits a developer to terminate a contract at its election or without specific basis should be avoided. Instead, a developer should limit their termination rights to be permitted if specific criteria is met. A developer could also consider implementing ‘sunrise’ dates on project milestones to balance the rights between the parties.  

Unilateral Variation Clauses

These are clauses that allow a developer to alter the terms of the contract without the consent of the buyer. These can be unfair if they allow the developer to make significant changes to the project without the buyer’s agreement.  

It is necessary for a developer to have flexibility to make variations to a development. However, it could be considered as unfair where a developer seeks to implement such variations which are likely to be to the detriment to the buyer without compensation from a developer or giving a buyer an opportunity to terminate the contract. Such clauses should limit the extent of a variation permitted by a developer and/or have a mechanism which reasonably compensates the buyer as a result of a variation.

Automatic Extension Clauses

These are clauses that extend due dates or conditions at the discretion of a developer.

Unforeseeable delays are common during the lifespan of a project. A developer should limit any rights to extend conditions or due dates to specific and valid reasons. For example: events which fall outside the control of a developer, weather delays, shortage of  building materials or workers.

* the above examples are illustrative only and do not constitute legal advice as to whether such clauses are unfair contract terms. Such determination is to be made on a case-by-case basis, based on the full context of the document in question.

how can MCW assist?

Developers who are entering into new contracts or renewing existing ‘standard form contracts’ for consumers and small businesses (which can include ‘off the plan’ contracts, and option agreements) should consider reviewing their standard terms and conditions to ensure they avoid the significant pecuniary penalties which will come into effect from 9 November 2023.

conclusion

McInnes Wilson Lawyers can assist by:

  • offering to review contracts to provide an industry-specific report as to UCT regime risks for their existing or proposed contracts;
  • providing the advantage of our UCT focussed suite of contract templates and advice templates to allow businesses to have confidence in their contracting;
  • confirming whether a contract is subject to the UCT regime under the ACL;
  • reviewing the terms of a contract and determining whether any of its terms are unfair or likely to be unfair if raised by a counterpart to a transaction; and
  • amending or redrafting the terms of contracts to minimise exposure to the UCT regime and its significant penalties. 

For more information about how McInnes Wilson Lawyers can assist with the above, please contact either Chris Davis or George Londy from our Commercial team, or Brian Schech or Alex Fung from our Real Estates & Projects team. 

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