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The Legal Consideration
PRESENTATION
BY NORMAN MINOTT
OF MYERS, FLETCHER, GORDON
Housing
Development: The Legal Considerations
The aspects of the housing
development process that I have been asked to address from a legal
perspective are wide ranging, and indeed each could be the subject
of a separate half hour presentation, but as I am not allowed that
much liberty I have selected a few considerations, and will ex amine
each in the order in which they usually occur.
Let us assume that you want to be a
Real Estate Developer; you have been introduced to a number of
development properties and have settled on an ideal location. You
have done your market survey so you know what price of lot and/or
price and type of housing unit you wish to construct to satisfy the
identified market.
A. ACQUIRING
LAND FOR DEVELOPMENT
The process of getting started is not
a simple matter of signing an agreement for sale and paying a
deposit. The prudent developer would be advised to consider the
following:
1. The Vehicle
One may be excused for assuming
that it is always advisable to incorporate a company to take title
to the land and to carry out the development, but that is not
necessarily so. There are obvious advantages to going that route
rather than undertaking the development in one’s own name. These
include the protection of limited liability and the convenience of
being able to divide profits and losses in accordance with
shareholding. But we should not forget that companies pay tax on
their profits at the higher rate of 33%, as against 25% for
individuals. The whole issue of tax planning should be one of the
early considerations. In the final analysis the decision as to which
route is appropriate will depend on the circumstances.
2. The Vendor
Where the project is to be developed
on land in the name of the Minister of Housing, it is advisable to
seek legal advice during the negotiations to settle the terms of the
land Sale Agreement and any Joint Venture Agreement. These
Agreements should set out the obligations of each party and the time
frame within they are to be performed. One should at that time
ensure that the lands have been declared under the Housing Act, and
if not agree when this is to be done. The Stamp Duty, Transfer Tax
and other exemptions that are only available to developments under
the Act may only be claimed if a Gazetted declaration is in place.
3. The Location
Whether the intended project can be
developed in that location will depend in part on compliance with:-
The planning requirements
The Town and Country Planning Act
defines the areas in which residential and commercial development
may take place. Similarly the Land Development and Utilization
Commission Act prohibits the unauthorized development of
agricultural land for residential purposes.
The Local Improvements Act prohibits
the sub-division of land without approval.
The environmental requirements
The Natural Resources Conservation
Authority Act provides for the environmental assessment of the
project before approval is granted.
One should consider the density and
other similar requirements of the proposed development before
committing to purchase.
4. The Vendor’s
Title
We move next to title considerations.
We are now at the point where we have carried out the necessary due
diligence enquiries, and have requested the Vendor to send us an
Agreement for sale and a copy of his title. These should be examined
closely:-
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To
establish that the Vendor does in fact own the land. A leasehold
interest will not suffice as it is not marketable. In any event
Jamaican mortgage institutions will not lend on leasehold security.
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To
see what restrictive covenants, easements and other encumbrances
affect the land. It is common to find covenants prohibiting
sub-division into smaller lots, which would require modification or
discharge. This court procedure could take as many as six (6)
months.
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To
ensure that the title is by plan rather than description. If the
latter is the case an application to re-register by plan will be
necessary, and this too could take several months. Title by plan
(which is what the market and mortgagees demand) may not be issued
from a parent title by description.
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To
ensure that there are no encroachments or breaches of restrictive
covenants. The services of a land surveyor should be engaged to
visit the premises for this purpose.
B. The Lot Sale Agreement
The form of agreement for sale of lots in the
project will vary depending on the circumstances. In the event that the land
is the subject of an agreement with the Ministry of Housing it is usual to
invite lot purchasers to sign a Nomination Agreement, in pursuance of which
the lot will be transferred directly by the Ministry of Housing to the
nominated lot purchaser. In that event no stamp duty or transfer tax is
payable on the Transfer Instrument.
Split contracts have also become the
norm, although the Stamp Duty Act has been recently amended to
discourage this. The practice has developed of placing the sale of
land in one agreement and having the purchaser contract in a
separate agreement for the construction of a house on the land. As a
matter of law this devise, if not executed carefully, has always
been doubtful as a means of avoiding stamp duty and transfer tax.
The amendment puts the matter beyond doubt, as the Construction
Contract is now specifically taxable.
There is no longer any point in
preparing split contracts where the Vendor of the land and the
contractor are the same person. Note that the developer is still
entitled under the Transfer Tax Exemption Order 1974 to a rebate of
three-quarters of the amount that would otherwise be levied for
transfer tax. There is also a discounted flat rate of Stamp Duty
($150) on residential mortgages, not exceeding $450,000, created at
the time of transfer of the land.
C. DURING THE DEVELOPMENT
While the project is progressing numerous
issues will arise. I have selected two:-
1. Security for Interim Financing
Like many lenders to developers the JMB
requires a first mortgage over the property, and where the barrower is a
company, a debenture over its other assets. These will be supported by the
personal guarantees of the directors and the assignment of a policy on the
life of the “keyman”. Where the land is owned by the Minister of Housing
the Bank will accept an assignment of the Land Sale and Joint Agreement in
lieu of a mortgage, as the Minister is not entitled in law to mortgage Crown
property.
It is essential that the returns of the company
to the Registrar of Companies are filed up to date, to avoid any threat of the
company being struck off. It is standard practice for the security documents
to be prepared by the Lenders’ Attorney and the provision of these documents
will involve the payment by the Developer of Stamp Duty and Attorney’s fees.
2. The Real Estate (Dealers and
Developers) Act
One should be particularly careful to ensure
that the provisions of the Act have been complied with. In particular the Act
stipulates that where a developer has entered into a prepayment contract:-
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He is
obliged to register with the Real Estate Board so long as the project
comprises more than five (5) units: Section 26(i)(a).
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That
all requisite approvals should have been obtained: Section 25(i)(c).
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Copies
of all planning approvals should be deposited with the Board: Section 26(i)(d).
One should also be careful to observe:-
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The often ignored requirements re
advertisements in the regulations under the Act (location map. etc.).
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The
often ignored requirements re advertisements in the regulations under the Act
(location map. etc.).
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That
all payments received from purchasers should be placed in a trust account
pending closing: Section 29.
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That a
maximum of 90% of those funds may be accessed as work progresses, in
accordance with a certificate for work already done and materials already
supplied:- section 31(3).
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So
long as any part of these funds are used the developer is obliged to register
a charge over the entire property in favor of the Board which will rank pari
passu with the Bank’s security: Section 31.
For these and other reasons the JMB insists
that all sale proceeds be placed in an escrow account which is closely
monitored.
The Closing
The main concerns at the time of closing are
not so much technical as practical. These include:-
Getting
the transfer executed and securing the splinter titles in due
time.
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Collecting
the shortfall, escalation and interest from the purchaser.
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Collecting
the proceeds of the long term mortgage.
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It
is essential to lodge the pre-checked plan (laying out the
project) and the subdivision approval with the Registrar as
early as possible as the surrender application will not be
accepted unless it refers to the number of the pre-checked plan
(the “DP Number”).
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In
the case of a development under the Registration Strata Titles
Act the strata plan is the equivalent of the pre-checked plan.
The strata plan describes the lots into which the building has
been divided, and should not be completed by the surveyor until
the structure is near completion (in practice the completion of
the belt course is regarded as an acceptable stage for this
purpose).
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The
construction contract should provide for payment of the balance
of the construction cost at practical completion. This may be
certified by an engineer or quantity surveyor, and triggers the
start of the defects liability period, during which certified
defects are to be corrected.
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Escalation
is often a major legal consideration at this stage, and arises
where the cost of construction has exceeded that which the
developer forecasted. The extent to which this is recoverable is
entirely dependent on the terms of the construction agreement
and, very often, practical considerations like the ability of
the purchaser to pay. Too much care cannot be taken when
drafting escalation clauses so that they fully protect the right
to recover these unexpected cost increases.
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The
claiming of interest on late payments is also a relevant
consideration. Here one should be guided by the common law rule
that any attempt to recover more than one’s actual loss will
be treated as a penalty, which is unenforceable.
Finally
Experience has taught that many of
the mistakes that are made during the development process can be
avoided with careful planning and competent advice. You would be
wise not to follow the example of those developers who think that
they can reduce costs by avoiding professional advice. More often
than not mistakes are made, time is lost, and time in the
development business means money.
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