Inspecting your Dream

One of the much-maligned “creatures” of the property industry, are “off the plan” sales.  Some people refer to it as project marketing, but what it comes down to is a sale of propertybased on representations; a set of drawings/plans.  In fact, it’s a “dream” that has been bought, that will come to fruition, at some future point in time.  At law however, this dream cannot become a fantasy.

Developers are required to sell a large percentage of a development before they even beginconstruction.  Banks refuse to loan to developers unless they have “sold the value of their debt”.  As such, the most logical thing a developer can do, is to create a set of architectural drawings that set out the building, the floors, the unit layouts, the finishes and inclusions.  What a purchaser is then doing, is buying a property from a “catalogue”, published for a particular building.

At the time of sale, the yet-to-be-built (future building), is not a reality.  If any person goes to view the site of the new development, you might see the original home; a paddock; a hole in the ground or maybe just bushland.  The present appearance of the site is nothing like the expected future.

Section 55 of the Property Stock and Business Agents 2002 (PSBAA) states that an agent is not entitled to their commission unless they comply with the regulations.  One of the key requirements contained in the regulations, is that an inspection report must be attached to the agency agreement.  Therefore, there is a requirement that every agent must undertake a physical inspection of the property and provide an inspection report.  

In a case of Ryde Developments -v- Property Investment Alliance (2017), the Court of Appeal was asked to consider whether the lack of an inspection report, was a minor mistake in regard to the validity of the agency agreement.  This case was essentially fought on the basis of the interpretation of Section 55 and Section 55A of the PSBAA.

Although Section 55 says that an agent is not entitled to their commission if they don’t comply with the regulations, Section 55A provides relief whereby the failure to comply with the regulations can be ignored by a court or tribunal, as long as the error is minor, no-one has suffered loss and it would be unfair in the circumstances for the agent not to be paid.  

The court’s view was that the last of these two criteria were clearly made out by the agent. The reason being that because the property was sold by the agent, the Vendor was not suffering any loss and it would be unfair for the agent not to be paid. The only criteria that needed to be clarified was the issue of it being a “minor” error.

The error in question, was the failure of defendant (Property Investment Alliance) to provide an inspection report.  In conversations with the defendant (ie. the agent), Leverage ascertained that it was the view of the agent’s listing team, that an inspection report would be impossible for an “off the plan” property sale.  Everyone would have sympathy with thisview point, being that if something doesn’t exist, you can’t undertake an inspection of it !

This is not the way the court saw it.  The court was of the opinion that the PSBAA has two distinct regimes:

• A “agent disciplinary regime”, whereby agents can be punished for breaches of the Act; and• A “consumer protection regime”, whereby consumers are protected from sub-standardconduct.

The court felt that where the regulation related to any issue of consumer protection, it could not be considered minor.  

As such, the court’s decision held that an inspection report was a fundamental part of consumer protection.  The purpose of the inspection report was to ensure that the agent knew what they were selling.  Therefore, failure to undertake a proper inspection report, meant that the advertising, marketing and representations of the agent, to the purchaser (consumer)could be misleading and deceptive.  

The court ultimately considered the failure to have an inspection report, meant that the agency would not be paid their commission.

For what its worth, Leverage has always trained to the effect that “off the plan” sales do not abrogate an agent’s responsibility to do an inspection report.  Equally as importantly, there is indeed a way of meeting the requirement of providing an inspection report, for an “off the plan” transaction.  

Because it is “off the plan,” the obvious answer is found in the documentation provided.  An agency agreement for an “off the plan” sale, should have the following attached: –

• Draft Strata Plan or Deposited Plan;• Draft floor plans (strata or community complex);• Draft Lot plans;• Finishes and inclusions for each lot; and• Draft By-laws and/or community management statements.

Therefore, an “inspection report” can effectively be provided, by attaching to the agency agreement the documents set out above.  You may even decide to attach the Contract for Sale to the agency agreement.  If attached to the agency agreement, you can use the words, where you have to set out the inspection report, “set out in the following documents in the Contract…..”.

The legislation also requires a physical inspection.  Additional to the documentation detailed above, the agent still needs to visit the site, whether it be a hole in the ground or a paddock.  Yes, it is onerous, but in the case of Ryde Developments -v- Property Investment Alliance, the agent forfeited in excess of 1.8 million dollars.  If you are selling “off the plan”, it’s worth it.  Remember, even if the agency (ie. the company) doesn’t get paid by the developer, the agency still needs to pay its consultants/sales team.  

Failure to do an inspection report could be death to an organisation.

This article was written by Bailey Compton, Principal Solicitor & Director at Leverage Group.

Get in touch with Bailey:

 ✉️ info@leveragegroup.com.au – ☎️ 1300 438 538