Return of the dodgy developer


Just when we started to believe property developers could be trusted, writes Jimmy Thomson,  the grubbier, greedier figures lurking in the shadows of the industry have been exposed.

When NSW Minister for Innovation and Better regulation Victor Dominello recently closed the loopholes allowing ‘sunset clawbacks’ in off-the-plan sales contracts, he went a long way to restoring faith in an industry that had been dragged back to the bad old days of dodgy developers and cowboy builders.

Loophole closed on off-the-plan rorts

When the Flat Chat strata advice column first appeared in the Sydney Morning Herald’s Domain section more than 11 years ago, property developers, specifically those involved in building apartments, were somewhere below real estate agents, used car salespersons and even journalists in the list of people you would trust with your grandmother.

The very worst developers routinely lied, cheated, bullied, defrauded and divided owners, costing us millions of dollars and, as collateral damage in the disputes they created, destroyed the communities we were trying to build.

The NSW department of Fair Trading, entrusted with consumer protection and strata law, did little or nothing.  It’s no coincidence that some developers were pouring money into political party funds faster than they were pumping concrete on building sites.

The exploitation of people who just wanted to buy a home became blatant. Laws had to be changed, for instance, to prevent developers from forcing owners to hand over their proxy votes as part of their sales contracts, thereby removing our ability to make decisions about our own homes, including pursuing the developer over defects.

The sick joke of self-certification saw badly constructed buildings given a big tick by inspectors who depended on the same developers for their next job. In one extreme case, a council refused to issue an occupation certificate because a building that had been given the OK wasn’t fit for human habitation.

Meanwhile a conga line of Fair Trading ministers from both sides of politics came and went.  The good ones were quickly promoted to more senior ministries; the clots and clowns hung in there until another political newbie was blooded in a training wheel portfolio where, regardless of the harm they did, nobody cared.

The prevailing attitude was, if you insisted on living in unit blocks, you deserved what you got.  Some people still think that.

Even so, attitudes started to change.  More people actively wanted to live in apartments.  The city centres became places to go home to, rather than race away from after working hours.  Flat Chat became a source of friendly advice rather than a repository of angry letters as the world waited for Twitter to be invented.

We even lucked into two ministers who took their jobs seriously: Anthony Roberts, who initiated the strata law changes that are going through parliament this week; and incumbent Victor Dominello who has eschewed the title of Fair Trading minister, possibly rightly suspecting it’s a crown of thorns.

Meanwhile, more developers saw the opportunity to build better product to higher standards, albeit at higher prices, and suddenly property developers were no longer pariahs.  People like John Carfi of Mirvac and Iwan Sunito of Crown were seen as visionaries, rather than vandals, as their most notable developments, Harold Park and Infinity in Green Square respectively, will surely attest.

Of course, it was all too good to be true for everyone in the industry. This sea change in attitudes coincided with a property prices tsunami and in the lucrative business of persuading people to part with the largest sums most of us will ever handle it’s been one step forwards and a rat scuttle back.

For every entrepreneurial innovator in property development, there is a clutch of money-grubbing scumbags looking for quick buck at our expense.

Hence the trickle that became a flood of stories of sunset clawbacks and shape-shifting in off-the plan apartment sales. There would surely be more complaints were it not for the fact that many of the victims don’t have English as their first language and don’t understand what is legal and, more importantly, what is acceptable.  An angry crowd of 160 Asian investors recently met in Parliament to ask how it could be that apartments they thought they had locked in as purchases were suddenly back on the market at inflated prices.

Let’s be clear on this, there are circumstances where the use of the sunset clause in an off-the-plan contract is entirely legal and appropriate, for instance when unforeseen technical difficulties with a build mean the purchaser’s deposit could be tied up indefinitely.  Sunset clauses, in that respect, are supposed to protect the purchaser.

A sunset clawback  is where a developer in a market that has boomed since the purchaser laid down their deposit, sees the building’s completion go past its deadline,  tears up the contracts and puts the nearly finished units back on the market at much higher prices.

And let’s not kid ourselves, until the new laws were brought in there were developers out there watching the progress of their project and the deadline for the sunset clause converge, licking their lips at the prospect of doubling their profits with the stroke of a pen and zip of a shredder.

In some cases revealed recently, investors had already received letters telling them to get their finances sorted out because the property was ready for settlement, only to get another a week later saying their contract had been rescinded.

Imagine how they felt when the unit they thought was theirs went straight back on sale a price 50 percent higher than they had originally agreed. Bear in mind, nothing illegal has occurred.  A date in a contract had been passed and the developer saw the opportunity to make more money, that’s all. That said, you’d think a little decency might have prevailed.

Shape-shifting is when the developer realises they could squeeze more apartments into the same floor space, or turn a planned and ‘sold’ three-bedroom unit into three or four singles. If the demand for small apartments is greater than for larger ones, you’ll make more money that way. If the purchaser declines to take the new, smaller apartment, the developer rescinds the contract.

Somewhere in the off-the-plan sales contract (which can often fill a fat ring binder), there will be a clause that says the developer can change what they like and if you don’t agree, you can have your deposit back.

And what’s wrong with getting your money back?  Well, those off-the-plan purchasers had taken themselves out of the market for a couple of years, believing they had been right to jump in when they did as prices around them rocketed. Now they have the same money to spend on property that is 20-50 percent more expensive.

In most cases, this is all perfectly legal but underpinning it is a grotesque sense of entitlement.  If there is any windfall to be had from booming property prices, it must flow to the developers who got their sums wrong, rather than the savvy investor who sensed the market was going to rise and put their money down in good faith.

It is very difficult, but not impossible, to prove that a developer has deliberately delayed completion of a project to take it over the sunset deadline.  Court cases have been won and lost although it has to be said the crooks rarely suffer as they can hide behind $100 shelf companies which, conveniently, are often asset stripped before compensation can be paid.

This was going to get a lot worse before it got better. Recently we were only seeing the very first examples of people who signed up before a property boom that should have rewarded them for their street smarts and foresight.

Until the government changed the rules we could have expected another year, possibly two, of rescinded contracts as projects neared completion and the dodgiest developers slowed the work to maximize their profits at home buyers’ expense.

Victor Dominello has put paid to that.  Now, if owners object to having the siunset clause invoked,  developers will have to seek a court order at their own expense, a court order before they can go ahead. That should cover existing contracts but won’t help victims who have already had their homes sold from under them.

For the future, however, Parliament could change the law so that sunset clauses can only be invoked by the purchaser, as it is in West Australia.  The government could also institute a public inquiry where developers and builders would face jail time for lying under oath rather than being able to hide behind the financial firewalls of off-the-shelf companies and  phoenix schemes.

Fair Trading could certainly be more active, perhaps demanding to see builders’ employment records to check, as happened in one scam, that the workforce hadn’t been suddenly reduced to two men until the sunset deadline had passed.

And what about the good guys? Where are the big hitters who have spent so much time rehabilitating the reputation of developers to the point where we came perilously close to trusting them as a group? Why are we not hearing from them – if only to distance themselves from the scumbags?

Where are the banks and mortgage lenders who spend millions of dollars telling us that they really care about families and home buyers?  A child of 12 could put together a computer blacklist of dodgy developers who have crossed the line of what is decent and honorable.

Buying a home is the biggest purchase the vast majority of people will make.  Buying apartments off the plan is a gamble at the best of times, without the suspicion that the dice are loaded against you.

Confidence in off-the-plan apartment buying has been shaken – as it needed to be. Let’s hope the new regulations restore our faith by curbing the cowboys.

A shorter version of this article appeared originally in Domain online. Jimmy Thomson writes Flat Chat in Domain, runs the Flat Chat website

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