Sometimes a property developer will allow the purchaser to settle without receiving the full balance of the purchase price because the purchaser is unable to obtain adequate financing to complete a settlement. The shortfall amount may be payable by the purchaser to the property developer at a later date. However, care should be exercised when taking this approach and varying the payment terms under a contract of sale for land for purchasers of residential property.
The Australian Securities and Investments Commission (ASIC) is currently reviewing the practices of property developers that allow purchasers to postpone part payment of the purchase price until after settlement. ASIC is concerned that the practice of delaying part payment may in some cases involve the 'provision of credit', which is regulated by the National Credit Code (NCC). In those cases, the property developer would need an Australian credit licence to engage in such practices.
Engaging in credit activities without an Australian credit licence is an offence under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act). Penalties include a fine of up to AUD1.7 million and up to two years imprisonment.
If you are engaging in such practices, extreme care should be exercised.
Application of the National Credit Code
The NCC and the NCCP Act will apply to an arrangement if:
credit is provided under a contract either where payment of a debt owed by one person to another is deferred or where one person incurs a deferred debt to another (section 3(1) of the NCC)
the debtor is a natural person (s 5(1)(a) of the NCC)
the credit is provided or intended to be provided wholly or pre-dominantly for household, domestic or personal use; or to purchase, renovate or improve residential property or investment property (s 5(1)(b) of the NCC)
a charge is or may be made for providing the credit (s 5(1)(c) of the NCC) – note this can be fees (including legal fees) and/or interest charged in respect of the shortfall loan
the credit provider provides the credit in the course of business of providing credit carried on in Australia or as part of or incidentally to any other business of the credit provider carried on in Australia.
Traps for Property Developers
A shortfall arrangement between the property developer and the purchaser may satisfy the above requirements and may be categorised as a ‘credit contract’. If so, the property developer will need to be licensed under the NCCP Act as a 'credit provider'. Further, if an intermediary, such as a real estate agent or solicitor, negotiated or assisted in proposing the shortfall arrangement, that intermediary may also be engaging in a credit activity and will either need to be licensed or appointed as a credit representative.
Since 2010, the NCCP Act applies to credit provided to purchase a residential property by an individual, including purchase of an investment property. If you are entering into arrangements for payment of a shortfall amount with an individual purchaser, then this may be a credit activity even if you are not in the business of lending money.
Property Development Industry Review
Property developers should undertake a review of their practices to ensure that they are not inadvertently engaging in credit activities. We have assisted a number of property developers that offer a shortfall payment arrangement on an ad hoc basis. We consider that it is possible to structure the shortfall arrangement whereby it is not regulated by the NCC and the NCCP Act – however, extreme care must be exercised.