Vendor finance + residential property = $1.7 million fine

Due to recent changes in the dynamics of the ACT economy and with anticipated weakness in the first time buyer segment of the market.

Developers are increasingly looking at inventive ways to make their properties more attractive to the market such as enhanced deposit by instalments plans and various forms of vendor finance.

However, where the arrangements constitute the ‘provision of credit’ within the meaning of the National Consumer Credit Protection Act (2009) (‘Act’) unless the developer holds a Consumer Credit Licence the developer can be liable for substantial fines of up to $1.7 million and up to 2 years imprisonment.[1]

In addition, those that that assist in facilitating the arrangements can also suffer penalties. The provisions relating to providing credit assistance and acting as an intermediary are widely defined and could cover accountants and agents that advise consumers in connection with a credit transaction, even where such assistance is limited to a referral.

$1.7 million — You have my attention… So what is the NCC anyway?

The Act and the National Credit Code (‘Code’) regulates the provision of credit to a consumer under a credit contract.[2]

The provisions of the Act and Code apply where:

  • credit is provided. The Code defines the provision of credit as:
    • where payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred or
    • where one person (the debtor) incurs a deferred debt to another (the credit provider)
  • a debtor is a natural person or a strata corporation[3]
  • credit is provided or intended to be provided to purchase, refinance, renovate or improve residential property (it is immaterial whether the property is to be used for personal occupation by the debtor or for investment purposes)[4]
  • a charge or fee (such as interest) is payable by the debtor (or may become payable)[5] and
  • the credit provider provides the credit in the course of a business of providing credit or as part of or incidentally to any other business of the credit provider.

How does this affect you?

Under the usual arrangements for the sale and purchase of property the Act and the Code have no impact. However, where the transaction contemplates the buyer paying any part of the purchase price by way of instalments (regardless of whether such instalments are made before or after settlement) there is potential for the Act or the Code to apply as:

  • incentives to buyers that involve the payment of the purchase price by instalments may constitute the provision of credit that does not come within any of the exceptions to the Act or the Code
  • the beneficiaries of the incentives are usually first time buyers rather than investment corporations therefore the ‘consumer’ element of the Act and Code will usually be satisfied
  • any form of residential property is covered by the Act and the Code
  • it is not necessary that any charge for the arrangement or incentive is made, only that there is potential for a charge to be made and
  • whilst developers will not normally be in the business of providing credit the arrangements will be incidental to their main business of property developers.

Where agents or accountants provide advice to consumers in respect of such arrangements they can be deemed to have provided credit assistance[6] and find themselves liable for penalties up to $340,000.

What should you do?

To take maximum advantage of the opportunities in the current property climate transactions need to be structured to ensure maximum flexibility without incurring the requirement of obtaining a consumer credit licence or penalties for failing to hold such a licence. The majority of incentive arrangements with buyers can be structured so that the exceptions to the Act and the Code apply, but care is needed.

For more information contact:

Christine Murray — Partner — Property, Commercial and Finance
(02) 6279 4402

John Morrissey — Associate — Property, Commercial and Finance
(02) 6279 4439