On the 28 April 2020, the Sydney Morning Herald reported that the Berejiklian government is considering a $500 million property spending spree to accelerate property development and boost the economy. COVID-19 is resulting in a call for more affordable and social housing and developers are looking out for more projects.
Reportedly, the NSW Government is considering a three staged approach, and lists several projects in Parramatta, Westmead and South Granville, where the government could “negotiate with the developer” to buy dozens of unsold apartments to boost its social housing stock. However, to make this work, the NSW Government would probably need to set up a formal process, such as an Expression of Interest Process, for managing the expenditure involved providing similar opportunities for other developers.
While such stimulus recommendations are seen as positive developments towards economic recovery, the recommendations do present significant challenges for the NSW Government, developers and existing purchasers of these off-the-plan units.
In considering whether to purchase “shovel ready” projects, the NSW Government would need to consider whether to manage multiple social housing tenants in one building or complex or “salt and pepper” their supply of such housing by buying unsold stock comprising individual units within complexes. While both can be done, the preferred legal structure is the purchase of whole complexes as this will allow both the NSW Government and developers to have maximum flexibility and will avoid issues with existing purchasers whether they are owner-occupiers or investors.
Purchasing the whole unit complex
If purchasing all of the units, the NSW Government and developers will need to consider whether to strata title the complex and purchase all individual units, or simply purchase the whole building as one lot, leaving the option of strata titling to later. They will also need to consider whether the NSW Government requires significant amendments to the developer’s plans to suit its social housing needs, requiring amendments of their Development Applications. Further, the NSW Government will likely contemplate the extent to which it will be involved in managing the building and construction process, and choice of builder, to ensure that the units are constructed to an appropriate standard.
Even if developers have already sold a number of units off-the-plan to purchasers in their complexes, they may still wish to withdraw those contracts and sell entire apartment complex to the NSW Government (that is, express interest in the NSW’s offer by promising to withdraw existing purchaser contracts). As it is unlikely that the developer would have an appropriate rescission right in their contracts with these purchasers, this would leave them to negotiate a rescission by agreement, which may include a financial incentive for the purchaser. To avoid providing these financial incentives, it is likely that developers will use the fact that the NSW Government is intending to purchase remaining apartments for social housing as a negotiating tool, giving existing purchasers the “option” of rescinding first. Some purchasers may prefer this option and may feel that they have been given a lifeline during the changed economic conditions. Other purchasers may prefer to rescind, given the perception that the occupation of units in the complex by social housing tenants may de-value their unit.
Presumably the NSW Government would prefer such negotiations to occur by agreement between developers and purchasers, rather than the developer contriving a situation which would result in the developer’s right to unilaterally rescind a purchaser’s contract. For example, a clause to the effect that the developer can rescind due to the inability to obtain finance is often included in off-the-plan contracts. Developers could, under these economic conditions, potentially utilise this right with the real intention of selling the entire complex to the NSW Government.
The NSW Government will need to seriously consider the above implications for developers and purchasers alike, when seeking Expressions of Interest.
Purchasing unsold units in a complex
If the NSW Government purchases remaining unsold units in a complex, this could present numerous issues for all relevant parties, as existing purchasers allege that they did not enter their off-the-plan contracts with the expectation that the complex would include social housing tenants. As mentioned above, the perception by some purchasers that the occupation of other units in the complex by social housing tenants may de-value their own unit, may prompt those purchasers to seek to “get out” of their contracts, and as a consequence there could be settlement risks for developers. While it is unlikely that there is a legal right for a purchaser to rescind their contract on the basis that some of the units have been purchased by social housing tenants, their lawyers could create alternative legal arguments for a rescission or termination, causing practical, financial and legal risks to the development.
The NSW Government and developers may consider using confidentiality provisions in their agreements in an effort to avoid disclosing the NSW Government purchases to existing or future purchasers prior to completion and settlement of the apartment complex. However, this could cause controversy later down the track, after the settlement of the apartments. Developers and agents could suffer reputational risk with such purchasers later, for failing to disclose the existence of such contracts, or for misleading the purchasers. Further, the NSW Government and these purchasers are left to run a functioning body corporate, where the NSW Government may hold significant power, presenting the obvious challenges for all parties concerned. Accordingly, serious consideration will need to be given by developers and the NSW Government as to the level of disclosure of this course of action.
Developers may be asked by the NSW Government to re-design their developments to suit the particular needs of social housing tenants, even if only purchasing some units in the complex, to comply with departmental policies. In such circumstances, it is obviously easier to do this if they purchase the entire complex. However, it can still be done if the NSW Government purchases some of the units as developer’s off-the-plan contracts which usually have fairly broad rights to vary the layout of complexes. In these circumstances, developers will have to proceed with caution to ensure that they provide the requisite notifications to existing purchasers and do not inadvertently give such purchasers the right to rescind.
The purchase of social housing stock can also have various flow on effects for neighbouring developments. I have been asked numerous times by unsuspecting developers and purchasers in relation to their rights when a social housing block has been or is in the process of being erected next door. Some purchasers may seek to use this as an excuse or legitimately seek to get out of their contracts with developers of neighbouring apartment complexes on this basis. Whilst legally, they are unlikely to have a right to do this (similar to the situation where a neighbouring development suddenly blocks their view), practically this can occur and cause significant practical and financing issues.
While the purchase of social housing can present challenges, they can definitely be overcome.
It is likely the demand for affordable housing is likely to increase moving forward, particularly in Western Sydney and this demand is likely to come from both those in the affordable and social housing sectors, and from developers needing more projects to provide employment.
Consequently, calls for such projects to be a part of the fiscal stimulus are likely to continue for the foreseeable future and the NSW Government will need to set up a transparent and considered process in accordance with its departmental processes, for managing the challenges and the expenditure involved.
If you require further assistance, please do not hesitate to contact a member of Coleman Greig’s Commercial Property team or Coleman Greig’s Government team, who would be more than happy to assist you today.