The new unfair contract terms (UCT) regime took effect on 9 November 2023. A summary of this regime is set out in our article here.
The new UCT regime applies to contracts which are:
- either consumer contracts or small business contracts; and
- standard form contracts.
This may include off the plan contracts and lease agreements.
Property developers should carefully review and update all of its contracts taking into account the below.
Standard form contracts – negotiation of minor terms irrelevant
A contract is presumed to be a standard form contract unless proven otherwise.
A contract may still be determined as a standard form contract despite the parties being given an opportunity to negotiate minor changes to the contract– for example choices in fixtures and fittings and delayed deposits.
The parties must be given an “effective” opportunity to negotiate the terms other than the subject matter, the price and terms required or permitted by the operation of law.
For example, a reduction in the default rate, extension of the completion date, election in fixtures and fittings and delayed deposits, which are common negotiated points, may be insufficient to render the contract to not be a standard form contract.
The best approach to minimize risks of breaches of the new UCT regime is to review each term to ensure that it is not “unfair”.
What is an “unfair” term?
Pursuant to s24 of the Australian Consumer Law, a term in a standard form contract is considered unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause financial or other detriment to a party if it were to be applied or relied on.
A term must satisfy all the above to be considered as “unfair” under the new UCT regime.
It is a “guilty unless proven innocent” presumption. A term will be presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by it, unless proven otherwise.
What should a property developer look out for?
With limited case law regarding application of the new UCT regime available at the time of this paper, our general view is that:
- contracts should be reviewed to ensure the rights and obligations of the parties under the contracts are fair and reasonable to the extent possible, having regard to the operation of law, the proper management of the project or building and the developer’s obligations in its other agreements such as the loan facility;
- provisions which are included in contracts for convenience or without strong reasoning should be removed or redrafted in such a way that is fair and reasonable; and
- when dealing with the above points and when negotiating terms in a contract, the contracting developer must consider whether the term being negotiated is reasonably necessary in order to protect the legitimate interests of the developer,
whilst always bearing in mind the provisions of s24 above.
Some examples – “off the plan” contracts
Some examples of common terms in off the plan contracts which may potentially be deemed “unfair” under the new UCT regime:
- unilateral rights of termination by the developer due to one or more conditions precedent (such as conditions to obtaining a satisfactory development approval as determined by the developer to be unacceptable in its absolute discretion without having agreed parameters) not being fulfilled; and
- rights of the developer to unilaterally vary the characteristics of the property or to limit performance of the contract, such as by amending the strata or project documents or schedule of finishes without reasonable limitations or without granting consequent rights to a purchaser.
Changes to the property and the contract in off the plan developments are common and unavoidable. Whilst it is important to maintain some flexibility in these contracts to allow these changes, developers should consider introducing reasonable limitations to the above rights or provide proportionate remedies to purchasers as the case requires.
Some examples – lease agreements
Some examples of common terms in leases which may potentially be deemed “unfair” under the new UCT regime:
- right of the landlord to withhold consent to a tenant’s request at the landlord’s absolute discretion (although this would very much depend on the nature of the request);
- right of indemnity in favour of the landlord in wide terms and without any exclusions for negligence, acts or omissions of the landlord; and
- right of landlord to demand the tenant repay any rent free or rent abatement as a result of any breach of the terms of the lease.
Key takeaway
This is a very brief and general discussion paper and is no substitute for legal advice based on specific circumstances. How a party should appropriately deal with the provisions of a contract or lease having regard to the UCT will always depend on the specific circumstances.
Property developers and landlords should consider having their standard form contracts and leases reviewed. If documents containing unfair terms have been entered into post 9 November 2023, property developers/landlords should consider amending those terms.
Breaching the UCT regime may render the contract or lease as unenforceable and may also attract significant monetary penalties.
If you have any concerns about whether you may be impacted by the new UCT regime, you should seek legal advice immediately.
If you would like to discuss this article with us, please contact Mike Ellis, Partner or Yanlie Leung, Senior Associate on (02) 9261 5900.