** Originally published on www.ripehouse.com.au.
From renos to sub-divisions – how property developers can avoid a legal headache
Many parts of Australia have experienced a property boom in recent years and now more than ever home-owners and investors are looking to cash in on the boom by trying their hand at property development.
Property developments range from substantial renovations to subdividing land or constructing high density strata developments. This diversity results in a variety of challenges developers need to consider to ensure a successful project.
Here’s my advice for managing some of the common issues would-be property developers face during a small-scale development, subdivisions or renovation:
- Get your ducks in a row
The first step is to find out if you are actually allowed to do what you have planned. Speak to a town planner or engage with the local authority as soon as possible. Local authorities have planning codes and are likely to have guidelines and requirements for the type of property development you intend to do. It can take months to obtain local authority approval so start the process early.
If you haven’t yet purchased the property you should also ask your lawyer to conduct some due diligence investigations to check there aren’t any problems with the property. Some common risks include: illegal building works, building defects, boundary issues, rights of way and easements, zoning non-compliance, contaminated land and compulsory acquisition.
- Structuring the development
This is one of the most important things to consider in any property development. As a property developer, some of your main objectives will be to reduce funding costs, reduce duties and taxes and minimise risk (asset protection). Getting the right structure in place before you start the project is imperative for these objectives to be realised.
The most common way to structure a property development is by establishing a company or a trust.
Most people are aware of what a company is and how it legally works. There is usually one or more directors and shareholders and liability is limited. Companies are relatively easy and quick to set up.
Trust can take several forms including discretionary trusts, unit trusts or a hybrid of both. The trust needs to have (amongst other things) a trustee, which can be an individual or a company, and beneficiaries. They often enable flexibility with the distribution of income to different beneficiaries and thus minimise tax burdens.
If you are intending to develop a property with someone else, you may also consider a joint venture arrangement or development agreement.
Each structure will have its own benefits for asset protection and tax minimisation so speak to your accountant about the best structure for you. You should consider how each structure will affect your liability for GST, capital gains tax and stamp duty.
- Contract terms
If you haven’t already acquired the property then you should negotiate contract terms that achieve your objectives.
For example, you may need to negotiate for the land contract to be conditional on:
- The local authority approving your development;
- Satisfactory due diligence investigations (e.g. soil tests and surveys); or
- A number of pre-sales for the project to satisfy funding requirements.
Some other factors to consider before going to contract are:
- Do you want to settle quickly or longer term? If you have to wait for approvals then you’d want a longer settlement period to avoid holdings costs (such as rates and land tax).
- Have you sorted out your development structure? If not then an option agreement may be suitable so you can nominate a related entity as the buyer once it is set up. An option agreement may also defer stamp duty liability to a later date.
Depending on the type of project and structure you may also need to enter into joint venture agreements, construction contracts, financing agreements and security deeds.
Speak to your lawyer before you sign any contract because it can be very difficult and expensive to get out of a contract once you have already signed.
If a pre-condition of funding for the project is to obtain a number of pre-sales, then you will need an experienced property lawyer to prepare the sales contracts and disclosures. The lender will often want to review the pre-sales contracts and make sure they are watertight and unconditional before they advance funds.
Pre-sales contracts will also often require disclosures of:
- Detailed plans
- Schedules of finishes if selling a built product
- Strata disclosures such as by-laws and management agreements if selling a strata titled property
Speak to your professional advisors in advance so these are ready when you need them.