Crafting Conveyance Ready Sale Contracts for NSW Developers Under Unfair Contract Terms Rules

Introduction

The recent overhaul of the unfair contract terms (UCT) regime under the Australian Consumer Law 2010 (Cth) (ACL), effective from 9 November 2023, presents a new compliance landscape for NSW developers. These changes significantly affect standard form contracts, including those for off-the-plan sales and potentially extend to certain lease agreements, making it essential for developers to ensure each contract clause is fair to avoid potential disputes and substantial penalties.

This guide is tailored for NSW developers and any associated contractor, aiming to clarify these updated obligations. It offers a general overview of how to draft conveyance-ready sale contracts that adhere to the UCT rules, thereby protecting project interests and addressing critical aspects such as security of payment considerations within this new legal framework.

Understanding the Unfair Contract Terms Regime for NSW Developers

What Contracts Are Covered by the Unfair Contract Terms Regime

The UCT regime, effective from 9 November 2023, applies to specific types of contracts relevant to NSW developers. For the UCT rules to be engaged, a contract must be classified as either a consumer contract or a small business contract, and it must also be a standard form contract. This can include off-the-plan sale contracts and lease agreements.

A consumer contract is defined as an agreement for the supply of goods or services, or the sale or grant of an interest in land, to an individual where the acquisition is wholly or predominantly for personal, domestic, or household use or consumption.

A small business contract, under the ACL, involves at least one party that is a business:

• Employing fewer than 100 persons, or
• Having an annual turnover of less than $10 million at the time the contract is made

This definition applies regardless of the monetary value of the contract. It’s important to note that for financial products or services regulated under the Australian Securities and Investments Commission Act 2001 (Cth), a small business contract has an upfront price cap of $5 million.

A standard form contract is typically a contract prepared by one party and offered on a ‘take it or leave it’ basis, with little or no opportunity for the other party to negotiate the terms. The law presumes a contract is a standard form contract unless proven otherwise.

Factors a court will consider include:

• Whether one party had most of the bargaining power
• Whether the contract was prepared by one party before any discussion about the transaction
• Whether the other party was, in effect, required to accept or reject the terms as presented
• Whether the other party was given an effective opportunity to negotiate the terms
• The number of similar contracts the preparing party has entered into

A contract may still be considered standard form even if the other party had an opportunity to negotiate minor or insubstantial changes, select terms from a pre-determined range of options, or if a third party negotiated terms of a different contract.

Key Criteria for Identifying Unfair Contract Terms

For a term in a standard form consumer or small business contract to be deemed unfair under section 24 of the ACL, it must satisfy a three-part test. All three of the following elements must be present:

1. Significant imbalance: The term would cause a significant imbalance in the parties’ rights and obligations arising under the contract. This means the term leans heavily in favour of one party without a corresponding benefit or right for the other.
2. Not reasonably necessary to protect legitimate interests: The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it. There is a presumption that a term is not reasonably necessary, and the onus is on the party relying on the term to prove its necessity.
3. Detriment to a party: The term would cause detriment (whether financial or otherwise, such as delays or distress) to a party if it were to be applied or relied upon. Actual loss does not need to have occurred; the potential for detriment is sufficient.

In determining whether a term is unfair, a court must also consider:

• The extent to which the term is transparent (i.e., expressed in reasonably plain language, legible, presented clearly, and readily available)
• The contract as a whole

Certain terms are exempt, such as those defining the main subject matter of the contract, setting the upfront price, or terms required or permitted by another law.

Presumption and Burden of Proof in Standard Form Contracts

The UCT regime incorporates important presumptions regarding standard form contracts and the fairness of terms, which has significant implications for NSW developers.

Firstly, if a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise. This places the burden on the developer, who typically prepares the contract, to demonstrate that it is not a standard form contract if they wish to avoid the UCT provisions on that basis.

Secondly, when assessing if a term is unfair, there’s a rebuttable presumption that a term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it. The developer relying on such a clause would need to provide evidence to prove that the term is indeed reasonably necessary for the protection of their legitimate business interests.

This “guilty unless proven innocent” approach means developers must proactively ensure their contract terms are justifiable. Minor negotiations on terms, such as choices in fixtures and fittings or slight adjustments to dates, are unlikely to be sufficient to discharge the burden of proving a contract is not standard form or that a particular clause is fair.

Common Unfair Contract Terms in Sale Contracts for NSW Developers

Unilateral Termination Rights and Conditions Precedent

Developers in NSW often include clauses in sale contracts that grant them the sole right to terminate an agreement if certain conditions precedent are not met. These conditions might involve obtaining satisfactory development approval, where the developer alone determines what is ‘satisfactory’ without pre-agreed objective parameters.

Such terms can create a significant imbalance in several ways:

• They often don’t offer corresponding rights to the purchaser
• They typically lack reasonable limitations
• They may allow termination at the developer’s discretion without clear justification

For instance, a contract term allowing a developer to end the contract could be deemed unfair when based on unfulfilled conditions such as:

• Failing to achieve a specific pre-sale target
• Not securing finance on terms entirely at the developer’s discretion

This is particularly problematic if the purchaser has no similar right to terminate, potentially causing significant detriment. The ACL’s ‘grey list’ specifically includes terms that permit one party, but not the other, to terminate the contract, highlighting this as a potential area of concern.

Rights to Unilaterally Vary Property Characteristics or Contract Terms

Another area of potential unfairness involves clauses that permit developers to unilaterally alter significant aspects of the property or the contract itself. This could include changing:

• Plans and specifications
• Schedule of finishes
• Project documents like strata by-laws after contract signing

If these variations can be made without reasonable limitations, or without offering the purchaser adequate remedies such as a right to terminate or compensation, they may be considered unfair.

Consider a scenario where a developer reserves the right to substitute materials or change the layout of a unit in an off-the-plan contract without the purchaser’s consent and without any restriction on the extent of such changes. Such a clause could lead to a significant imbalance in the parties’ rights.

The ACL specifically lists terms that allow one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold, as potentially unfair. Similarly, a term allowing only the developer to change other contract terms without reference to the purchaser can also fall foul of the UCT regime.

Sunset Dates and Extensions Without Transparency

Sunset dates in off-the-plan contracts, which define the latest date by which certain conditions must be met, can also be a source of unfairness. Issues arise when these dates are:

• Open-ended
• Lacking transparency
• Subject to unchecked extension rights by the developer

A clause that allows a developer to unilaterally extend a sunset date for an indefinite period, or for a period solely determined by the developer, could be problematic.

For example, if a contract allows the developer to extend the sunset date multiple times without clear justification or without offering the purchaser a right to rescind and obtain a refund after a certain extended period, this may be deemed unfair. The lack of transparency regarding how or why an extension is invoked can cause significant detriment to purchasers, who may be left in limbo.

Terms allowing only one party to extend or change the timing for the contract, such as the settlement date, are often scrutinised under the UCT laws.

Drafting Conveyance Ready Sale Contracts to Comply with Unfair Contract Terms Rules for NSW Developers

Reviewing Contract Clauses for Fairness and Reasonableness

NSW developers must meticulously review their sale contracts to ensure each clause is fair and reasonable. This involves assessing whether a term creates a significant imbalance in the rights and obligations of the parties.

When examining contract terms, consider:

• Whether the clause is reasonably necessary to protect the legitimate interests of the developer
• If the term would cause financial or other detriment to a purchaser
• The perspective of both the developer and the purchaser

Developers should avoid drafting terms that are overly broad; instead, clauses should be no wider than what is genuinely required to protect their legitimate business interests. This proactive review helps in identifying potential areas of dispute before they arise, ensuring the contract is robust and defensible.

Including Counter-Balancing Terms to Mitigate Unfairness

A crucial strategy for NSW developers to ensure their sale contracts are fair is the inclusion of counter-balancing terms. If a contract grants the developer a unilateral right, such as the ability to change aspects of the property, it should also provide proportionate remedies or rights to the purchaser.

For instance, if a developer needs the flexibility to unilaterally alter the product or service under the contract, the contract should be reviewed to see if it also permits the purchaser to exit the agreement without penalty if such changes are significant. By incorporating these counter-balancing measures, developers can:

• Demonstrate a commitment to fairness
• Reduce the likelihood of a term being challenged
• Minimise potential disputes

This approach is particularly important in off-the-plan contracts where unforeseen changes can occur.

Using Clear and Transparent Language in Contracts

Clarity and transparency in contract drafting are fundamental to complying with the UCT regime. NSW developers should use clear, simple, and plain language in their sale contracts to avoid misinterpretations or misunderstandings.

A term is considered transparent when it is:

• Expressed in reasonably plain language
• Legible and presented clearly
• Readily available to any party affected by it

Vague or ambiguous wording can contribute to a finding that a clause is unfair. Furthermore, it is important that key terms, especially those that might be onerous or unusual, are presented clearly and brought to the purchaser’s attention. Ensuring transparency in all contract documentation can significantly reduce the risk of a term being deemed unfair and can help prevent future disputes.

Removing or Redrafting Terms Included for Convenience Without Strong Reasoning

Developers in NSW should critically assess all clauses in their sale contracts, particularly those included primarily for convenience rather than to protect a legitimate interest. Provisions that lack strong reasoning or justification are prime candidates for being considered unfair.

For example, unilateral rights to vary contract terms without reasonable cause or purely for convenience should be avoided. By eliminating or modifying such clauses, developers can:

• Strengthen their contracts against potential challenges under the UCT rules
• Ensure each clause has a defensible basis
• Minimise legal risks and potential for disputes

If a clause serves only the developer’s convenience without a corresponding legitimate need, it should be removed or redrafted to be fair and reasonable.

Impact of Unfair Contract Terms Regime on Lease Clauses and Security of Payment for NSW Developers

Examples of Potentially Unfair Lease Clauses

The UCT regime extends to lease agreements, meaning NSW developers, as landlords, must scrutinise their standard lease documents. Certain common clauses in a lease may risk being deemed unfair if they create a significant imbalance between the landlord’s and tenant’s rights.

It is important to review each clause to prevent a potential dispute. Examples of potentially unfair lease clauses include:

• Absolute discretion clauses: Terms granting the landlord an unfettered right to withhold consent for a tenant’s request, such as an assignment of lease or alterations, without providing reasonable grounds.
• Wide indemnity clauses: A clause requiring the tenant to indemnify the landlord for losses, even those caused by the landlord’s own negligence or omissions, can be problematic.
• Unilateral variation or termination: A lease clause allowing the landlord to unilaterally vary terms of the lease or terminate it for minor breaches by the tenant without providing a reasonable opportunity to rectify the breach.
• Repayment of incentives: Clauses that demand a tenant repay any rent-free periods or abatements if any breach of the lease occurs, regardless of the severity of the breach.
• Unfettered access rights: A term permitting the landlord to access the leased premises at any time without reasonable notice or a valid basis for entry.

These types of clauses can cause significant detriment to tenants and may not be reasonably necessary to protect the legitimate interests of the landlord.

Security of Payment Act Considerations in Contract Drafting

When NSW developers draft contracts, particularly those involving a contractor for construction work, it is crucial to consider the interplay between the UCT regime and the Building and Construction Industry Security of Payment Act 1999 (NSW).

While the Building and Construction Industry Security of Payment Act 1999 (NSW) provides mechanisms for contractors to claim and recover progress payments, any contract clause dealing with these payment rights must also comply with the UCT rules to avoid a dispute.

Developers must ensure that terms related to payment schedules, claims processing, or dispute resolution under the Building and Construction Industry Security of Payment Act 1999 (NSW) do not create a significant imbalance or impose conditions that are not reasonably necessary to protect their legitimate interests. For instance, a clause that unduly restricts a contractor’s rights under the Building and Construction Industry Security of Payment Act 1999 (NSW), or imposes onerous conditions for making a payment claim, could be challenged as an unfair term.

Careful drafting is required to align the contract with the Building and Construction Industry Security of Payment Act 1999 (NSW) while upholding the fairness principles of the ACL.

Managing Disputes Arising from Unfair Contract Terms in Sale Contracts

Legal Remedies and Court Powers for Unfair Contract Terms

When a dispute arises and a contract term is challenged under the UCT regime, courts in NSW possess significant powers. If a court determines a clause in a standard form sale contract is unfair, that term is considered void and cannot be enforced.

Beyond declaring a term void, courts have a range of other remedies available. These include the ability to:

• Vary the contract to remove or alter the unfair term
• Refuse to enforce some or all of the terms of the contract
• Issue orders for redress to compensate a party for loss or damage suffered, such as directing a refund or the provision of services
• Grant injunctions to prevent a party from relying on an unfair term or including similar terms in future contracts
• Impose substantial financial penalties on businesses that propose, use, or rely on unfair contract terms

It’s important to note that each unfair clause can attract a separate penalty. These powers underscore the importance for NSW developers to ensure their sale contracts comply with the ACL to avoid disputes and potential legal consequences.

Practical Steps for NSW Developers to Avoid Disputes

NSW developers can take several practical steps to manage the risks associated with unfair contract terms and thereby avoid potential disputes. A primary strategy is the proactive and meticulous review of all standard form sale contracts.

Key actions to minimise the risk of a dispute include:

Thorough Contract Review: Regularly examine every clause in your sale contracts to ensure fairness and reasonableness. This involves assessing if a term creates a significant imbalance or is not reasonably necessary to protect legitimate business interests.

Fair Drafting Practices:

• Use clear, simple, and transparent language so that all parties can easily understand their rights and obligations
• Ensure key terms, especially those that might be onerous, are clearly presented and brought to the purchaser’s attention
• Include counter-balancing terms where a clause provides a benefit or right to the developer, ensuring the purchaser has corresponding rights or remedies
• Avoid overly broad clauses; terms should be no wider than genuinely necessary
• Remove or redraft any clause included merely for convenience without strong, justifiable reasoning

Understanding Purchaser Perspective: Consider each term from the purchaser’s viewpoint to assess potential detriment or imbalance.

Effective Negotiation: While many sale contracts are standard form, providing a genuine and effective opportunity for purchasers to negotiate terms (beyond minor or insubstantial changes) can be a factor in assessing fairness. However, this alone may not prevent a contract from being deemed standard form.

Seeking Legal Advice: Engage legal professionals experienced in ACL and the UCT regime to review and draft contracts. Ongoing legal advice can help identify and mitigate risks, ensuring compliance with current legislation and case law.

By implementing these measures, developers can significantly reduce the likelihood of disputes arising from unfair contract terms in their sale agreements. This proactive approach not only helps in compliance but also fosters better relationships with purchasers.

Penalties and Risks for NSW Developers Breaching the Unfair Contract Terms Regime

Maximum Penalties for Corporations and Individuals

NSW developers face substantial financial penalties for including unfair terms in their standard form contracts under the ACL. These penalties vary significantly between corporations and individuals:

For corporations, the maximum penalties for each unfair contract clause are:

• $50 million, or
• Three times the value of the benefit obtained from the conduct (if determinable), or
• 30% of the company’s adjusted turnover during the breach period

Whichever of these amounts is greater will apply.

Individuals involved in proposing, using, or relying on an unfair contract term can face penalties of up to $2.5 million per contravention. It is important for developers in NSW to understand that each unfair clause can attract a separate penalty, significantly increasing the potential financial repercussions of non-compliance and the risk of a serious dispute.

Consequences of Contract or Clause Unenforceability

Beyond financial penalties, NSW developers face several other significant risks:

• Any contract term found to be unfair by a court is void and therefore unenforceable
• The developer cannot rely on that particular clause, which could create a significant imbalance in the contract
• A court has the power to declare the entire contract void in certain circumstances, or vary parts of it

The unenforceability of a critical clause, or the voiding of a contract, can severely impact project timelines, financial projections, and lead to a complex dispute. Additionally, attempting to enforce a term that has been declared unfair can also lead to further legal action and penalties.

Conclusion

NSW developers must navigate the significant changes to the UCT regime under the ACL, which impacts standard form sale contracts and potentially any lease agreements. This involves understanding what constitutes an unfair clause, such as those creating a significant imbalance or affecting security of payment for a contractor, to avoid a dispute and the severe penalties associated with non-compliance.

Therefore, to ensure your development projects are protected by fair and compliant contracts, it is crucial to seek expert legal guidance. Contact LawBridge today for trusted expertise; our conveyancing and property lawyers are ready to assist NSW developers in drafting robust sale contracts and lease agreements, safeguarding your interests under the updated UCT regime and addressing Building and Construction Industry Security of Payment Act 1999 (NSW) considerations.

Frequently Asked Questions for NSW Developers on Unfair Contract Terms in Sale Contracts