13 Dec 2007
From The Ground Up - Legal updates for the NSW built environment
Welcome to the first edition of From the Ground Up - NSW.
This bulletin will be provided on a quarterly basis and will report on a range of legal issues, recent cases and legislative changes affecting those working across the built environment. From assessment of land, to its development and sale, this bulletin will regularly address the legal issues for today's environment, construction, infrastructure and property industries.
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Proposed changes to infrastructure contributions
In a newly released circular, the NSW Government Department of Planning has proposed amendments to limit the types of community infrastructure for which councils can levy developers.
The State Government had previously announced its intention to overhaul infrastructure charges for new land release areas, but circular No. PS 07-018 (Circular) refers to proposed changes that will affect section 94 and 94A infrastructure contributions for all development.
The Circular states that councils will only be able to impose levies under section 94 and 94A for:
- Local infrastructure costs.
- Local bus infrastructure.
- Local parks that service a development site or precinct.
- Drainage and water management expenses.
- Land and facilities for local community infrastructure that services a development site or precinct.
- Land for other community infrastructure and recreation facilities.
The Circular states that 'all other costs, such as facilities benefiting existing communities (including council or district-wide community and recreation facilities) will no longer be permitted to be recovered through [section 94 or 94A] contributions'.
The Circular also states that section 94 and 94A contributions will no longer be permitted to fund land acquisition for riparian corridors.
It would appear that the State Government will attempt to make these changes by requiring all contributions plans to be formally approved, possibly by the Minister or the Director-General and by requiring contributions plans to be made in accordance with new Ministerial Guidelines. It is possible that these changes could be made without amending the Environmental Planning and Assessment Act 1979.
Although the Circular does not go into detail, it appears that, if the changes are made, councils will no longer be able to use sections 94 or 94A to levy for:
- Local community facilities such as libraries and child care centres, other than in relation to the land on which they are constructed.
- Improvements to existing parks.
- Facilities that service more than just one development site or development precinct - that is, facilities that meet demand generated by multiple small developments across a wider area.
These changes may have significant impacts on those local councils that are experiencing a great deal of infill development, as they may not be able to levy for many of the facilities and services required to meet the demand generated by such development, particularly if those facilities have 'district' or 'regional' catchments.
Other changes are also proposed in relation to the way in which section 94 or 94A infrastructure contributions are collected and held.
The Circular proposes that any local environmental plan, planning agreement or section 94 or 94A contributions plan made before 12 November 2007 will continue to operate as if the proposed changes were not made. Once the mechanisms to implement the measures set out in the Circular have been finalised, additional transitional measures will also be put in place.
The full impact of these proposed changes will not be known until we see the detail as to how they will be implemented and what exactly will be affected. We will report further on any progress on the proposed changes.
For further information, please contact:
Chris Drury, Partner
+61 2 9286 8126
chris.drury@dlaphillpsfox.com
Jennifer Hughes, Senior Associate
+61 2 9286 8020
jennifer.hughes@dlaphillipsfox.com
Termination traps
Terminating contracts can be just as tricky as drafting the contract itself. This article looks at what you need to consider when bringing a contract to a close.
Commercial contracts will generally set out the circumstances in which a party may unilaterally bring the contract to an end. Even if they do not, the common law has developed rules on when and how a party may safely do so.
However, if a relationship breaks down and the aggrieved party wants nothing more than to end it quickly, terminate the contract and move on, mistakes can be made easily in the rush to terminate. At worst, the party terminating may be held to have repudiated the contract itself by terminating incorrectly. In doing so, an 'innocent' terminating party may end up paying out large sums in damages instead of recovering amounts from the other party.
We set out below three common misconceptions regarding termination, and what you can do to avoid them.
1. 'The other party has fundamentally breached the contract, so the contract is now at an end and I can walk away'
Even where Party A might have a right to consider that Party B's actions are sufficient to justify termination, either at common law or under the contract terms, a further step is still required. Party A must choose, or 'elect', whether to continue with the contract anyway, or to take action to terminate it. The act of election required will normally at the very least involve giving written notice to Party B that Party A is terminating the contract because of Party B's breach, but depending on the contract terms more than this may be required. For example, it may be necessary to invoke and properly complete a 'show cause' procedure (see No 3 below).
In short, it takes two to terminate.
2. 'I have the evidence that there has been a fundamental breach of the contract, but I can carry on for a while before I decide whether to terminate or not'
This is a tempting position to take, where for example there is some slight hope that the position may improve, or perhaps the aggrieved party does not feel ready to make the hard decision.
If another fundamental breach occurs, the aggrieved party will have another chance to make that hard decision, but if no further fundamental breach occurs, can the aggrieved party go back and rely on that initial evidence? The problem here is that in the meantime, the aggrieved party may have 'affirmed' the contract, whether he or she is aware of it or not. An affirmation does not require a formal statement that a party considers the contract is still 'on foot'. It can occur by conduct, where the aggrieved party continues to fulfil its own part of the bargain and generally to behave as though it does not consider that anything has occurred to bring the contract to an end.
If the 'affirming' party then tries to rely on that earlier conduct as grounds for terminating the contract, it may well be accused of repudiating the contract itself.
3. 'I know the contract says that I'm supposed to give a "show cause" notice and an opportunity to fix the breach, but the performance is so bad that I'm just going to terminate at common law for fundamental breach instead'
The temptation to go straight to the common law remedy when the situation seems hopeless is understandable. However, in the 1988 case of Amann Aviation Pty Ltd v Commonwealth of Australia, the Federal Court held that where the parties have inserted a clause in the contract which appears to fully regulate the parties' rights to terminate in various circumstances, it may be viewed as showing that the parties intended common law remedies to be excluded. As the case demonstrates, it all depends on the terms of the particular contract. It is therefore wise to re read the contract carefully before choosing this course of action.
It should also be kept in mind that in recent years courts have been strict in insisting that parties act in good faith in issuing and responding to 'show cause' notices. Where a party is entitled to be given time to 'show cause' why some particular sanction should not be applied, for example the contract terminated or work taken out of the hands of the contractor and performed by others, it is entitled to have this process dealt with in good faith. In other words, the enforcing party cannot merely issue a 'show cause' notice then disregard the response from the other party or treat it in a cavalier fashion.
Lessons learned
The conclusion to be drawn from these examples is that as much care needs to be put into terminating a contract as needs to be put into forming it. An aggrieved party cannot assume that because the other party has treated the contract with disrespect, he or she can act in a similar fashion in bringing the contract to an end. Following procedures for a 'show cause' notice may also help in avoiding headaches.
For further information, please contact:
Alex Hartmann, Partner
+61 2 9286 8562
alex.hartmann@dlaphillipsfox.com
David Jury, Senior Associate
+61 2 9286 8225
david.jury@phillipsfox.com
The danger lurking between exchange and completion
The recent decision in Black v Garnock [2007] HCA 31 demonstrates the important practical issues for purchasers in safeguarding their purchase between the period from exchange of contracts and settlement.
The Black v Garnock case changes standard conveyancing practice in settlements, by making it necessary for legal practitioners acting for purchasers to lodge a caveat on title immediately following exchange of contracts and also to carry out a final search of the subject property as close to settlement (if not, on settlement) as possible. The case may even go so far as to suggest that it be 'salutary practice' to conduct settlement at the Department of Lands so that a final search can be carried out there immediately prior to settlement.
Background
On 15 July 2005, contracts were exchanged for the sale of a rural property for $1 million. The purchasers paid a 10% deposit, with the balance of the purchase price to be provided by its mortgagee. Settlement was the standard six week period.
The vendor owed approximately $228,000 to a firm of accountants. The creditors had been chasing payment of this outstanding debt. It was decided that the monies owed would be paid out of the settlement proceeds from the sale of the property. However, the day before scheduled settlement, 23 August 2005, the firm of accountants obtained a writ for the levy of the property against the vendor in order to settle the outstanding debt.
On the morning of settlement, 24 August 2005, the purchasers' solicitor had conducted a final search of the property. The search disclosed no further encumbrances beyond those already known to the purchasers, in particular, no writ. The firm of accountants contacted the purchasers' solicitor stating their interest in the property and advising that settlement should not proceed. Accordingly, settlement was postponed until the afternoon. In the meantime, the accountant's solicitor registered the writ over the property at the Department of Lands but did not notify the purchasers of registration. No updated search was ordered by the purchasers' solicitor and settlement occurred, with the balance of the purchase price being paid to the vendor.
The transfer was rejected for registration at the Department of Lands as a result of the existence of the prior writ now on the title. An attempt on behalf of the purchasers to lodge a caveat also failed. Accordingly, the purchasers had paid the full purchase price to the vendor but could not register the legal transfer of the property to them. The vendor had not used any of the proceeds of sale to repay the accountants so the writ could be released.
The case
The purchasers commenced proceedings seeking an injunction preventing execution of the writ amongst other things on 28 September 2005. On 7 October 2006, the purchasers obtained an interlocutory injunction, however on final hearing the proceedings were dismissed as it was held that the purchasers did not have legal title, as they were not registered on title. The purchasers were then granted an interlocutory injunction by the Court of Appeal, which declared that as holders of equitable interests in land, the purchasers were entitled to priority over any rights to the land that might be held by the judgment creditors and restrained execution of the writ.
On appeal to the High Court, the majority of the High Court upheld the vendor's appeal. The Real Property Act 1900 (NSW), in particular the provisions relating to the recording of writs, was analysed and it was held in the majority that the Torrens land system, being a system of title by registration, meant that registration of a transfer under a writ vests in the transferee a particular kind of title by registration. The purchasers' attempt to rely on their equitable interests to claim priority over any rights to the property was not accepted, as the writ was registered first on the title.
Issues and practical implications
In light of the decision of the High Court, it appears purchasers and legal practitioners acting for purchasers would be advised to lodge a caveat immediately following exchange of contracts which would include exchange of contracts on exercising an option. This will assist in protecting the purchaser's interest between exchange and completion, even for contracts with a standard six week settlement period. Failure to do so potentially exposes the purchaser to risks such as that presented in the Black v Garnock case.
The Real Property Act 1900 (NSW) permits various dealings, including writs, to be registered even if a caveat is on title unless the caveat is specifically worded to exclude those particular dealings. So it is vital that the wording of the caveat is precise and specifically excludes those dealings from registration that the purchaser would not want registered on title prior to settlement. The caveat should also be drafted so that it does not need to be withdrawn prior to settlement, in order to save costs and time for the purchaser. This will involve educating banks as to the appropriate wording on caveats so that they will not require the caveat to be withdrawn as a settlement requirement for lending.
Final searches of the property being purchased need to be conducted by the legal practitioner as close to settlement as possible. Callinan J in the Black v Garnock case suggested that settlements should occur at the Department of Lands for extra caution. However, the practicalities of doing so (for example, no settlement rooms) do not appear to support such practice. Accordingly, the transfer and related documents should be lodged as soon as possible immediately following settlement.
Conclusion
The Black v Garnock case has and will continue to alter conveyancing practice in NSW unless it is subsequently overturned. As a result, education of purchasers, legal practitioners and banks on the new style caveats is required. The changes will also result in more costs for the purchaser where the cost of buying property is already very high.
For further information, please contact:
Carrie Follas, Partner
+61 2 9286 8175
carrie.follas@dlaphillipsfox.com
Amy Robinson, Solicitor
Tel +61 2 9286 8341
amy.robinson@dlaphillipsfox.com
Release of Voluntary Carbon Standard 2007*
There has been increasing media attention on the quality and reliability of voluntary carbon offset products.
One of the problems with choosing offset providers has been the lack of a rigorous universal standard by which to judge offset products. The much-anticipated release of the Voluntary Carbon Standard 2007 (VCS) on 19 November has helped however to boost confidence in the booming offset industry.
The VCS is a global standard for voluntary greenhouse gas (GHG) emission reduction or removal projects and their validation and verification. It is likely to become the voluntary carbon market’s most popular standard for the regulation of offsets. The VCS was developed over the last two years by the Climate Group, the International Emissions Trading Association and the World Business Council for Sustainable Development, in consultation with industry, NGOs and market specialists.
The standard, if properly applied and administrated, should provide much-needed comfort and certainty for buyers and developers of voluntary carbon offset products. Rules for certification under the VCS will be as robust as those of the Kyoto Protocol’s Clean Development Mechanism (CDM), but should be less expensive to implement due to lower transaction costs and more flexible methodologies.
Accredited validators and verifiers will provide an independent assessment of projects seeking approval under the VCS. Approved projects will be eligible to create Voluntary Carbon Units (VCUs), each of which will represent 1 tonne of CO2 equivalent GHG emission reduction or removal. VCUs will be issued, held and, if necessary, cancelled, in VCS registries. The public will be able to access information on every offset project approved under the VCS.
VCUs will only be granted for emission reductions or removals that have already occurred and been verified. This means that forestry projects will not be able to generate VCUs for emissions captured in trees until the emissions have actually been sequestered.
Forestry-based offset projects have recently been attracting controversy. This is largely due to the difficulties associated with quantifying the carbon stored and assuring longevity of the carbon storage, as well as a lack of consistent, credible standards by which to judge the projects. However, given that forestry projects account for between 35-50% of all voluntary offsets being sold, the VCS drafters did not want to exclude forestry projects from the approved methodologies. The VCS therefore includes a range of Agriculture, Forestry and Other Land Uses (AFOLU) in its eligible project activities. AFOLU projects are divided into four categories
- Afforestation, Reforestation and Revegetation (ARR) – establishing, increasing or restoring tree species in forests.
- Agricultural Land Management (ALM) – increasing carbon stocks in soils and trees; decreasing CO2, N2O and/or CH4 emissions from soils through improved cropland and grassland management or land-use change.
- Improved Forest Management (IFM) – such as conversion from conventional logging to reduced impact logging (RIL), conversion of logged forests to protected forests, and improving the capacity of poorly stocked forests.
- Reducing Emissions from Deforestation (RED) – activities that reduce the conversion of forests to cropland, grassland, wetland, peat land, settled areas and/or other land uses.
More categories (such as avoided devegetation) may be introduced when appropriate methodologies become available. AFOLU projects must have a project length of at least 20 years to be eligible to create VCUs. Shorter-term projects are not eligible since they have too high a non-permanence risk.
The VCS requires all AFOLU projects to identify potential negative environmental and/or socio-economic impacts and take steps to mitigate them prior to generating VCUs. Proponents will also be encouraged to meet the Climate, Community and Biodiversity Project Design Standards and/or obtain Forest Stewardship Council certification to ensure that projects are managed sustainably. Such holistic management strategies can lower the risks associated with forestry projects such as non-permanence and leakage of carbon.
The VCS approach for addressing non-permanence is to require that projects maintain an adequate buffer of non-tradable VCUs in reserve to cover unforeseen losses in carbon. The buffer VCUs from all projects are held in a special account. The buffer VCUs will be credited back to each project over time as it demonstrates longevity, sustainability and appropriate risk minimisation strategies.
Some of the risks that will be faced by offset providers, especially for AFOLU projects include:
- Risk of unclear land tenure and potential for disputes over land.
- Risk of financial failure.
- Risk of technical failure.
- Risk of management failure. Risk of rising land opportunity costs that endanger the future viability of the project (i.e. alternative land uses that are more immediately profitable).
- Risk of political instability.
- Risk of social instability.
- Devastating fire risk.
- Risk of pest and disease attacks.
- Risk of extreme climatic events (floods, drought, etc).
- Geological risk (volcanoes, earthquakes, landslides etc).
VCUs from the buffer pool will be cancelled when carbon is lost due to one or more of these risks eventuating. The buffer pool will provide security and confidence to purchasers of VCUs, and ensure the atmospheric integrity of each project, since the buffer pool will always maintain an adequate surplus to cover losses from individual offset project failures. All VCUs in circulation will therefore remain valid, regardless of the status of individual projects.
Aside from the methodologies included in the VCS Program, other GHG emission reduction scheme methodologies will be given pre-approval if they are accepted by the VCS Board. At present, only the CDM methodologies have been approved, but methodologies from the Californian Climate Action Registry are also being considered. Australian programs such as the Australian Greenhouse Office’s "Greenhouse Friendly" initiative and the NSW Greenhouse Gas Reduction Scheme (GGAS) are not being included at this stage, but may be in the future.
If you would like more advice about the VCS, purchasing offsets in general, or are interested in becoming an offset provider, and want to know more about how to minimise your risk exposure, please contact:
Louise Hicks, Partner
Tel +61 3 9274 5459
louise.hicks@dlaphillipsfox.com
Anne McCasland-Pexton, Solicitor
Tel +61 3 9274 5070
anne.mccasland-pexton@dlaphillipsfox.com
*First published as DLA Phillips Fox Climate Change Update 29 November 2007.