Key Contract Clauses for NSW Property Developers

Introduction

For property developers in NSW, project success hinges on meticulously drafted property contracts. Each contract term must be carefully considered to manage the significant financial and legal risks inherent in development, particularly in an off-the-plan contract where issues like sunset clauses can be critical over a long project timeline.

This guide provides essential information on the critical clauses a developer must secure to protect their interests. It offers practical guidance on structuring agreements, allocating risk, and ensuring legal compliance to safeguard a project’s viability from start to finish.

Foundational Clauses in Your Development Agreement

Structuring the Agreement & Defining the Relationship

A development agreement (DA) is a broad term for a contract between a landowner and a developer that outlines how a property will be developed. Unlike standard construction contracts, there is no single template. Instead, these agreements are tailored to the project’s specific needs and can take several forms.

Common types of DAs include:

Agreement Type	Description
Sale DA	The landowner sells the property to the developer but retains control over the final development outcome.
Services DA	The landowner keeps ownership of the land until the final sale, engaging the developer to manage the project and development risk.
Joint Venture (JV DA)	The landowner and developer collaborate on a single project, typically selling the final product separately rather than sharing profits directly.

To prevent legal complications, it is crucial for a Services DA to clearly define the relationship between the parties. The contract should include a disclaimer stating that the developer is engaged to provide services and that the arrangement does not create a partnership or joint venture. This helps clarify that the landowner retains ownership until the property is sold to a third-party purchaser.

Furthermore, careful drafting is needed to avoid creating an unintended trust over the land, which can trigger duty and tax liabilities. A constructive trust may arise if the agreement gives the developer the power to compel the landowner to transfer the property to a buyer chosen by the developer, with the developer receiving the benefit.

To avoid this, the agreement should not grant the developer such powers, ensuring control over the land transfer remains with the landowner.

Establishing Financial Controls & Project Milestones

Effective DAs must include clauses that give both parties control over project costs and revenue. A key tool for managing expenses is a project budget, which should be attached to the agreement. This document establishes initial cost estimates and outlines a clear approval process for any unforeseen increases, ensuring financial transparency.

The agreement should also establish a formal approval process for the project’s design. Typically, an initial concept design is attached to the contract, and any significant deviations require the landowner’s consent.

Similarly, to control revenue, the parties should agree on a sale price list for the completed lots or units. This clause often allows the developer to sell at or above the agreed prices but requires landowner approval for any reductions.

Agreeing on key timing milestones is essential for keeping the project on track and ensuring its success. Important milestones to include in the contract are:

• Obtaining satisfactory planning approval from the relevant authorities
• Securing finance approval to fund construction
• The official commencement of construction work
• An overall sunset date by which the development must be completed

Critical Clauses for Managing Project Risks

Your Guide to Allocating Key Development Risks

In a DA, risks are typically shared between the parties, and the contract should specifically allocate responsibility for each one. A well-drafted clause ensures both the developer and landowner understand their obligations when faced with common project uncertainties, such as those covered by the NSW Design and Building Practitioners Act.

Key development risks that your property contracts should address include:

Risk Category	Description & Context
Planning Risk	The possibility that a relevant authority rejects the proposed design or approves it with unacceptable conditions. The agreement should define minimum requirements and outline an appeals process.
Construction Risk	Unexpected cost increases or project delays arising from documentation errors, unforeseen site conditions, legislative changes, or issues with adjoining properties.
Market Risk	An adverse change in market conditions between the execution of the agreement and the point of sale. The contract should clarify whether the project will be terminated or paused.
Occupational Health and Safety Risk	Non-delegable duties for landowners under workplace health and safety legislation. The DA should authorise the developer to act as the landowner’s agent and appoint a principal contractor.

Securing Finance & Managing Property Encumbrances

Most developments require the developer to obtain construction finance, making it essential to include clauses that manage all necessary security arrangements. The agreement should clearly state which party is responsible for obtaining security and how competing interests will be handled.

It is crucial for a developer to understand the property’s existing financial situation. The DA should include a warranty from the landowner detailing any current encumbrances, such as:

• Mortgages
• Leases
• Other financial claims

This ensures there is sufficient equity in the land to support construction finance and that any leases can be terminated to allow the project to proceed.

From a landowner’s perspective, the contract should clearly set out:

• Which party is responsible for obtaining finance
• Provisions for the release of security as the construction loan and development fees are paid

If a developer seeks to place a mortgage on the property, the agreement should require them to enter into a priority deed as requested by the primary financier.

Important Special Conditions for Your Property Contracts

Incorporating Due Diligence Provisions

A due diligence clause is a special condition within a property contract that grants the buyer a set period to investigate the property before the sale becomes unconditional. From a developer’s perspective, this introduces uncertainty since the deal isn’t finalised until:

• The buyer is satisfied with their investigations
• The due diligence period expires

During this time, the sale remains conditional, which can potentially delay the developer’s plans and timelines.

To effectively manage this uncertainty, property developers should negotiate the terms of the due diligence clause carefully. This involves:

• Tightly defining the scope of the buyer’s investigations
• Specifying a clear timeframe in which these investigations must be completed

By limiting both the duration and scope of investigations, developers can minimise delays and prevent buyers from withdrawing for reasons not genuinely related to the property’s condition or legal status.

Clauses for Subdivision & Builder Obligations

Property contracts can include special conditions to address specific project requirements, such as subdivision and construction. One common clause makes the contract conditional upon the registration of a plan of subdivision. This provision protects both parties by ensuring the sale cannot proceed until the new land titles are legally created.

This type of clause typically requires the developer to:

• Lodge the plan for registration promptly
• Cover all costs associated with preparing, approving, and registering the subdivision plan
• Use their best efforts to have the plan registered within a specified timeframe

Another important special condition involves builder obligations, a key component of NSW building contracts, particularly when selling a property that is yet to be constructed. This clause ensures that the seller will:

• Complete the dwelling in a professional manner
• Adhere to agreed-upon plans and specifications
• Comply with local government and other statutory authority requirements

These provisions give buyers confidence in the quality of the final build while clearly establishing the developer’s responsibilities throughout the construction process.

Critical Legal & Compliance Issues

Unfair Contract Term Obligations

The Australian Consumer Law 2010 (Cth) applies to standard form property contracts, including off-the-plan contracts, to protect buyers from unfair terms. As of 9 November 2023, developers face significant penalties for including, applying, or relying on an unfair contract term.

A contract term may be considered unfair if it:

• Is not necessary to protect the developer’s legitimate interests
• Creates a significant imbalance in the rights and obligations between the developer and the buyer

Developers using off-the-plan contracts must be cautious, as certain clauses that provide flexibility can risk contravening the unfair contract terms rules. Common examples of potentially unfair clauses include:

Potentially Unfair Clause Type	Reason for Concern
Unilateral Termination Rights	Clauses permitting developers to terminate contracts at their discretion without a specific or reasonable basis can create an unfair imbalance.
Unilateral Variation Clauses	These allow developers to make significant changes to the project or contract terms without buyer consent and may be deemed unfair unless they offer reasonable compensation or termination rights.
Automatic Extension Clauses	Clauses allowing developers to extend due dates or conditions at their sole discretion may be unfair unless the right to extend is limited to specific, valid reasons outside the developer’s control.

The penalties for contravening these obligations are severe. The maximum penalty can be the greater of:

• $50 million
• Three times the value of the benefit gained from the breach
• 30% of the adjusted gross turnover during the breach period

The Dangers of Improper Rebate Clauses

Developers must avoid using non-transparent rebates or incentives in property contracts, as this practice can lead to serious legal consequences. Courts in NSW have warned that such arrangements can be misleading to third parties, particularly financiers and government authorities, who may rely on the contract’s stated purchase price.

The case of Miro v Fu Pty Ltd [2003] NSWSC 1009 involved a contract with a purchase price of $450,000 on the front page but a special condition for a $100,000 rebate, making the actual price $350,000. The court described this type of clause as “quite improper” and stated it could serve no purpose other than to mislead lending authorities.

Similarly, in Commonwealth Bank of Australia v Hilellis [2009] NSWDC 9, a contract showed a “fictitious” price of $550,000 when the true value and amount paid was significantly lower. The court found that the buyers had made misleading representations to their lender, leading to liability for the losses suffered. This case highlights that even unwritten understandings about price reductions can be found to be deceptive.

This conduct can expose the developer, their agents, and solicitors to significant risks, including:

• Civil liability for any losses suffered by misled parties, such as financiers
• Findings of professional misconduct for solicitors who draft such contracts
• Potential criminal liability for the developer and its directors

Your Guide to Effective Dispute Resolution Clauses

Structuring a Multi-Step Resolution Process

Given that a DA can span five to ten years, a carefully drafted dispute resolution clause is essential to prevent disagreements from halting the project. The provisions should be tailored to the parties and designed to foster a continuing relationship where possible.

A well-structured clause outlines a clear, multi-step process for managing conflicts. An effective dispute resolution process often includes several stages, starting with less formal methods before escalating. These steps can be outlined in the property contracts to ensure clarity:

Stage	Description
Initial Mediation	The first step involves a discussion or mediation between the parties to find a mutually agreeable solution.
Expert Determination	If mediation fails, the matter can be referred to an expert. The contract can nominate different experts for specific issues (e.g., a valuer for price disputes, a quantity surveyor for cost disagreements).
Arbitration or Litigation	As a final step, the clause can provide for disputes to be resolved through binding arbitration or litigation.

When drafting this clause, it is important to detail the procedure for each step, including how an expert will be chosen, the process they must follow, and how the costs will be handled.

Additionally, the agreement should also require the developer and landowner to continue performing their obligations, where possible, while the dispute is being resolved.

Conclusion

For property developers in NSW, project success depends on securing meticulously drafted property contracts that cover everything from foundational clauses and risk allocation to special conditions for subdivision and due diligence. Navigating critical compliance issues, such as the unfair contract term regime and improper rebate clauses, and establishing a clear dispute resolution process are equally vital to protect a project’s viability from start to finish.

To ensure your development is built on a solid legal foundation, it is crucial to get every contract term right. Contact the expert property development lawyers at LawBridge today for trusted legal advice and to have your property contracts drafted or reviewed, safeguarding your project’s success.

Frequently Asked Questions