Developers beware: A change less than 5% of the overall area of a lot isn’t a material change, right?
Developers need to tread carefully. Changes to a plan of subdivision creating a nook in a bedroom entrance, a reduction of the size of one room and conversion of common property to a council reserve have just been held by the Victorian Supreme Court to be separate material changes in their own right.
Developers should ensure that proposed plans of subdivision are as advanced as possible before going to market. This will reduce the risk of purchasers successfully claiming that an amendment to a proposed plan of subdivision is a change which materially affects the lot.
What is a “material” change?
The “bundle of rights” in favour of off the plan purchasers is more comprehensive than you may think. Something that may seem like an innocent change must be considered in light of this latest decision, as it may permit your purchasers to terminate their contracts.
A purchaser may rescind an off-the-plan contract of sale where a change to the proposed plan of subdivision will materially affect the lot to be purchased. This right is set out in section 9AC of the Sale of Land Act 1962 (Act) and requires vendors to notify purchasers in writing of amendments to the plan within 14 days of the amendments being made. A purchaser then has 14 days to rescind the contract if the amendments will materially affect the lot to be purchased.
A brief summary of the facts and decisions of the case, Burger & Ors v Longboat Holdings Group2 Pty Ltd [2021] VSC 469 (Burger) is as follows:
- The case dealt with two materially similar off-the-plan contracts for apartments in a West Footscray development.
- The purchasers sought to rescind their contracts upon receiving an amended plan from the developer.
- The claim was made on the basis of five changes that the purchasers considered to be material as described below.
- The developer disagreed that these changes entitled the purchasers to rescind their contracts.
- The Court determined that three of the changes put forward by the purchasers entitled them to rescind their contracts.
Size and shape of the master bedrooms
The size of the lots had been reduced by 4m2, from 95m2 to 91m2, or approximately 4.4%, as a structural wall was required that was not shown in the original plans.
A reduction of this size will not always be considered as materially affecting a lot. A common provision of off-the-plan contracts, including in the contracts here, notes that a change to the plan altering the property by 5% or less will not be regarded as materially affecting the lot. However, the reduction was considered particularly important here because the reduction applied almost exclusively to the size of the master bedrooms. In what was a fairly small property and master bedroom in the first place, the judge considered this to be clearly material.
Size of the light court
The positioning of the structural wall and the creation of an alcove was also considered relevant to the size of the light court through which natural light would come into the master bedroom. The court noted that it may not have been significant by itself, but state that, combined with the reduction in dimensions of the lot, this was sufficient for the judge to again find in favour of the purchasers and entitled them to rescind the contracts.
Creation of council reserve
The council reserve on the amended plan was previously to be common property. The developer contended that as the relevant land was at all times to be subject to an easement in favour of the council, the purchasers’ (and owners corporation’s) rights would have been restricted regardless.
The judge noted that the rights the purchasers have to walk over the land would no longer be proprietary or exclusive and are dependent upon what access the council provides. The distinction between the ability to do something because the council permits it and the right to do something derived from the lot owners’ membership of the common property was considered meaningful and significant.
Exclusion from common property
This related to a relatively small roof terrace being amended in the plan from being part of the common property to instead being common property for a different owners corporation of which the purchasers were not members. At the time the contracts were signed the roof terrace was intended to be inaccessible but the amended plan provided that it would be accessible to the other owners corporation only.
The judge accepted the purchasers’ contention that the roof terrace being excluded from their common property was material because they no longer had any rights to that area, including to any usage should it ever become accessible, which turned out to be the case.
Changes to car parks
The changes to the car parks here amounted to a change for one of the lots from a park at the top level of a car-stacker to the bottom level and to the other lot a reduction in the size of a standalone park by approximately 11%.
This was the only change that did not entitle the purchasers to rescind the contracts.
Conclusion
This case really highlights the ever increasing risks for developers in this area. Developers cannot avoid their obligations under section 9AC of the Act so there is only so much they can do to reduce these risks. Some options to help developers minimise the risks are:
- where time permits, use plans of subdivision that are as developed as possible. By this, we mean that, ideally, they should be based on construction plans or having considered the further requirements that may apply, rather than basing the plan of subdivision on initial plans and documents which are too basic to have considered building features such as fire hydrants and other infrastructure;
- do your best to keep changes to a minimum;
- ensure you are complying with the strict timeframes set out in the Act; and
- notify purchasers of changes and potential changes early in an attempt to manage the impact.
For purchasers, it is important that they carefully review any changes to plans and to seek professional advice if they believe they are entitled to exercise their right to rescind.
How we can help
Russell Kennedy has significant experience acting for developers in off-the-plan developments. If you require assistance please contact Mark McKinley, Kathryn Elleman, Shaun Burmester, or Richard Clark for advice.