27 October, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Construction & Real Estate

 

Introduction

 
Australia has a large body of law regulating real estate. This article contains a brief overview of:
 
  • the different types of land ownership in Australia;
  • the investment vehicles and requirements which must be met under Australian law before real estate located in Australia can be acquired, sold or leased or otherwise dealt with;
  • other interests in land (which do not amount to full ownership) and rights in respect of land which are recognised by Australian law; and
  • the more significant responsibilities and liabilities imposed on people who own land in Australia.
 
You should seek specific legal advice in relation to each of these issues before you acquire or develop any real estate in Australia.
 
Land ownership
 
Australian law recognises the following two basic different types of land ownership:
 
  • freehold title; and
  • Crown land.
 
Each of the States and Territories has its own legislation that deals with the ownership of land.
 
Freehold title
 
Freehold title gives the landowner complete and unrestricted ownership of that land and the right to do anything it wishes on that land, subject to complying with the applicable laws, such as planning laws. The majority of ownership of freehold title, and interests in freehold title in Australia is governed by a system of registration known as Torrens title. 
 
Torrens title
 
Torrens title is an effective, relatively simple and secure system that protects the rights of those having a registered interest in land. However, some freehold land in Australia has not yet been converted to Torrens title and is still governed by what is called ‘old system’ title. Old system title is not as simple to deal with as Torrens title but it still provides the owner with secure title.
 
The title to freehold land can be subdivided in various ways. Two examples are strata title and community title. Both strata title and community title are regulated by statute. 
 
Strata title and community title
 
Strata title is most commonly used for multi-level buildings, for example residential apartments. Strata title enables a person to own part of a building and to use the common areas of the building (such as foyers and lifts) in common with the other people who own other areas of the building.
 
Community title is most commonly used for land subdivisions, such as housing estates. Community title enables a person to own an area of land forming part of an estate and to use the common areas of the estate (such as private roads and parks) in common with other persons who own the other land in the estate. 
 
The legislation governing strata title and community title subdivisions establish a body corporate which oversees the common areas and shared facilities and which has the power to make rules which regulate the way you can use property and shared facilities within the building or estate. The owners of land in a strata title or community title subdivision collectively control the body corporate.
 
Crown land
 
The federal and state and territory governments own certain land in Australia. Not all government-owned land has been converted to freehold title and what remains is known as Crown land. Crown land is regulated by statute and certain specific requirements must be met before Crown land can be dealt with by, for example, being leased or sold.
 
Investment Vehicles
 
Overview
 
Foreign investors can use either a private company limited by shares incorporated in Australia or a trust structure to own and operate real estate in Australia.
 
Typically foreign investors acquire and hold real estate through a private unit trust structure because the private unit trust structure normally has benefits from a legal, accounting and tax perspective. For example, subject to a foreign investor complying with certain requirements, rental income from the trust will flow through to the foreign investor for taxation purposes.
 
Foreign Investment Regulation
 
The only potential approval required for a foreign investor to invest in Australian real estate is foreign investment review board approval (FIRB approval) under the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Federal government’s foreign investment policy.
 
Prior approval to the acquisition of Australian real estate by foreign investors is required in the following general circumstances:
 
  • the acquisition of developed commercial real estate where the total value of the real estate being acquired is A$50 
  • million or more (or $5 million if the real estate is heritage listed)
  • the acquisition of non-residential vacant land for development
  • any acquisition of an interest of more than 15% in a listed Australian company or trust which 50% or more of 
  • which assets comprise interests in Australian real estate
  • acquisition of residential real estate – there is an exemption for temporary residents to allow them to acquire one established dwelling and an exemption for foreign investors where the developer has obtained prior FIRB approval to sell newly completely or off-the-plan residential real estate to foreign persons
  • acquisition of rural land used wholly and exclusively for carrying on a business of primary production where the total 
  • value of rural land being acquired is A$231 million (indexed annually or A$1,005 million for US investors) or more
 
Where FIRB approval is required, it is usual for the contract of sale to contain a condition precedent, with settlement under that contract being subject to obtaining satisfactory FIRB approval.
 
FIRB applications are normally decided within 30 days of the lodging of the application and generally, applications for FIRB approval in the real estate sector are approved provided that the application does not raise national interest concerns. There is no definition of “the national interest” and applications are assessed on a case by case basis. In relation to applications for FIRB approval in relation to vacant land or developed residential real estate, FIRB will impose conditions on the development or future sale of the property.
 
Restrictions on developing and leasing real estate
 
An owner of real estate in Australia generally needs to obtain government approval to develop, demolish or rezone real estate. 
 
There are no restrictions on the ability to lease the real estate that it holds provided that that you comply with the terms of the title or the crown lease and applicable planning laws.
 
Exiting the investment
 
There are no restrictions on a foreign investor selling an interest in Australian real estate except where the foreign investor has obtained approval to acquire developed residential real estate, in which case, it is normal that it is a condition of acquisition that the foreign investor must sell the residential real estate to an Australian resident on disposal. There are no restrictions on commercial or industrial real estate.
 
Interests in and rights in respect of land
 
Australian law recognises a number of different types of interests in and rights to land which do not amount to full ownership of the land including:
  • leases;
  • mortgages;
  • easements;
  • native title; and
  • licences.
 
Leases
 
A landowner can lease the land or part of it to another person on terms to be agreed by the parties. A lease gives the person to whom it is granted an interest in the land and a right to exclusively occupy the area leased subject to the terms of the lease. Certain types of lease of Torrens title land are required to be registered under the Torrens title system in some, but not all, states and territories.
 
Typical lease terms for a commercial office building are:
 
  • Length of Lease/Term – 3-5 years from smaller tenancies and 10-15 years for larger tenancies
  • Option to Renew – There is no statutory right to renew leases, therefore any lease renewal is by agreement between the parties
  • Rent – Rent is usually subject to annual increases either by reference to a fixed percentage or increases in the consumer price index for the State in which the property is located. Longer term leases will normally have a market review every 5 years.
  • Rent Review – Rent is usually reviewable to market on renewal of the lease if the tenant has an option for a further term. Rent is usually agreed or determined by reference to prevailing market rent.
  • Break Clauses – Early break clauses will not typically appear in leases unless negotiated between the parties.
 
Mortgages
 
When a landowner borrows money the lender may require that the landowner grant to the lender security over land. This security is known as a mortgage and it generally entitles the lender to sell the land if the borrower does not repay the money borrowed as agreed between the parties. Mortgages of Torrens title land are registered under the Torrens title system.
 
The owner of a leasehold interest in land can also use its leasehold interest as security for borrowed money, subject to the terms of the lease. If the borrower does not repay the money borrowed as agreed between the parties, the mortgage of a leasehold interest gives the lender the right to sell the leasehold interest in the land. Mortgages of leases of Torrens title land are registered under the Torrens title system.
 
Easements and restrictive covenants
 
A landowner can grant rights over its land, in favour of the owner for the time being of other land—for example, a right to travel over the land or to lay pipes through the land. These rights are referred to as easements. 
 
A landowner can also restrict the use of its land, in favour of the owner for the time being of other land — for example agreeing to not using their land for noxious or offensive purposes. These restrictions are referred to as restrictive 
covenants.
 
  • Both easements and restrictive covenants:
  • benefit or restrict the land rather than the landowner who granted the easement or restrictive covenant or the landowner who obtained the benefit of it; and
  • where they affect Torrens title land, are registered under the Torrens title system.

 

Some government bodies and authorities can also obtain easements or place restrictive covenants over land, for example, to lay electricity cables. These easements and restrictions are referred to as easements in gross. Easements in gross do not attach to or benefit land owned by the government body or authority but instead are granted directly to the government body or authority. Like easements and restrictive covenants granted between landowners, easements in gross:

 

  • benefit the land rather than a specific landowner; and
  • where they affect Torrens title land, are registered under the Torrens title system.
 
Native title
 
Native title is the term for the interests in land held by Aboriginal or Torres Strait Islanders (Australia’s indigenous people) under their customary law as recognised by the common law of Australia. Native title is different from a freehold or leasehold interest in that:
 
  • the rights derive from traditional laws and customs acknowledged and observed by indigenous people, they do not derive from statute; and
  • native title rights and interests must relate to land and waters— they may be communal, group or individual, but are not transferable.
 
Licences
 
A landowner (and, subject to the terms of the particular lease, a person who leases land) can grant a licence to occupy that land to other persons. A licence gives the person to whom it is granted a non-exclusive right to occupy the land subject to the terms of the licence. Licences do not give the licence holder an interest in the land and cannot be registered under the Torrens title system. A licence is a personal contract between the landowner (or the lessee) and the person to whom the licence is granted.
 
Responsibilities and liabilities of landowners
 
Australian law imposes certain general responsibilities and liabilities on land owners. A brief overview of some of these responsibilities and liabilities is set out here.
 
You should obtain legal advice as to the specific responsibilities and liabilities which attach to any land you are considering purchasing.

 

Rates and taxes
 
Australian law permits local government authorities to charge levies on land to cover the cost of providing services such as garbage removal, water and sewage removal to the land. These levies are referred to as rates and are assessed yearly.
 
Each state and territory in Australia imposes an annual tax on owning land within the state or territory. This tax is known as land tax. Some properties, usually properties which are the owner’s principal place of residence are exempt from the requirement to pay land tax. An owner domiciled outside Australia is not usually entitled to this exemption.
 
For strata title or community title subdivisions of land, the body corporate also charges levies to meet the cost of administration, repair, maintenance and insurance of common areas and shared facilities.
 
Public liability
 
Australian law imposes liability on a landowner if people who enter onto that land are killed or injured or have their property damaged in certain ways for which the law regards the landowner as being responsible. Public liability insurance is available to cover this risk.
 
Compliance
 
Each state and territory in Australia has detailed laws governing:
 
  • the use of land
  • the development of land and the erection of improvements on land, and
  • the emission of pollutants.
 
These laws often place responsibility for complying with these laws on the landowner as well as on the person occupying the land or carrying out development of land.

 

 

For further information, please contact:

 

David Sinn, Partner, Herbert Smith Freehills 

[email protected]

 

Herbert Smith Freehills Construction & Real Estate Profile – Australia

 

Homegrown Construction & Real Estate Law Firms – Australia

 

 

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