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Property Law

Mortgage is in Arrears

What Happens When Your Mortgage is in Arrears and the Bank Threatens Repossession or Foreclosure

By | Property Law

An issue many people may be facing in these tough economic times – whether caused by the COVID-19 pandemic or other factors – is falling behind on their home mortgage.

Potentially losing your home is a frightening prospect for anyone and the situation is often exacerbated by the fact an individual is facing the power and resources of the major financial institution who lent them the money to buy the house.

This article is designed to give you the basics on what happens when your mortgage is in arrears and your financial lender takes action to possess or foreclose on the property so that they can satisfy your debt to it, including your rights and obligations.

You’re in arrears on your mortgage repayments – what next?

A borrower is in arrears as soon as they miss a mortgage repayment. Other than providing a reminder notice and perhaps offering a hardship variation of repayments so that the borrower can catch up on repayments, most lenders refrain from serious action on mortgages in arrears until 90 days have passed (usually equating to three months, or three mortgage payments missed).

At any stage once a borrower is in arrears, a lender may issue a default notice allowing the borrower 30 days to fix the default by making the missed repayments, or applying for a hardship variation. If the borrower takes no action within this time period, the lender has the right to seize and sell the mortgaged property in order to recover the whole debt.

The next steps will see the lender serve a statement of claim or summons on the borrower for the arrears, and/or the whole debt, and/or the possession of your home. You then have a set period to respond by filing a defence or lodging a complaint with the Australian Financial Complaints Authority (AFCA).

If you do not respond within the specified period, the lender receives a court judgment in its favour and may apply for a writ to take possession of the property. This is followed by a Notice to Vacate with details on when you will be evicted from the property.

Even if legal proceedings have been commenced by a lender to repossess a property, a person with a mortgage can enter into dispute resolution to try and achieve the best outcome in their circumstances, such as a good sale price for the home. This may constitute a financial hardship arrangement giving them time to sell the property. A negotiation on this basis may involve providing evidence to the lender that the home is on the market, such as a contract with a real estate agent, a marketing plan and ‘for sale’ ads for the home.

After a court judgment about repossession, the dispute resolution process is only available in very limited circumstances and expert legal advice should be sought.

The important difference between repossession and foreclosure

Many people are confused by the difference between repossession and foreclosure. While foreclosure is quite common in places like the United States, repossession is more common in Australia.

This is because foreclosure involves a court proceeding in which the lender applies to have the borrower removed as the title-holder of the property and itself substituted as the owner. With repossession, the lender obtains a court order to take over the property in order to sell it, but the title remains with the borrower.

Because foreclosure can be a lengthy and costly process, repossession of a property where the owner is in arrears is more common, particularly in Australia.

In order to repossess the property in NSW, the lender needs to obtain an order from the Supreme Court. If your property is tenanted, the tenant must be notified, however the court can still make the repossession order even though the tenant did not know about the proceedings.

Supreme Court orders for possession are enforced by the NSW Sheriff’s Office, who will serve the home owner or the tenant with a notice giving the tenant at least 30 days to vacate the property. If you do not move out within this period, the Sheriff can remove you from the property.

What are your options once the property is repossessed or foreclosed?

If your property is repossessed by the lender, it is possible to apply for the judgment to be set aside in some circumstances, provided you can provide a good reason for not stating a defence earlier and you have a cross-claim against the lender. The guidance of legal representatives with experience in mortgagee repossession is vital here.

You can also seek a stay of enforcement of the court order in order to gain more time to sell the house, refinance, or find alternative accommodation. It may even be possible to negotiate a hardship variation with the lender if you’re granted a stay, which are generally only granted for short periods.

Property sale and the place of mortgage insurance

The lender has certain obligations to the property owner in selling the repossessed property.

Specifically it must:

  • take reasonable steps to sell the property at market value;
  • act in good faith;
  • not recklessly sacrifice the interests of the title-holder.

While the lender must account for the sale of the property, it does not need to keep the title-holder informed about the progress of the sale, nor does it have an obligation to improve the property for sale. It may also charge you for its reasonable costs in taking possession of the home and the sale process. These costs can be challenged if they appear unreasonable.

After sale, any money in excess of the loan amount will be forwarded to you as the title-holder. But if the sale of the property results in a shortfall on the loan amount, you are still liable to the lender for the amount owed, including interest, costs and fees.

If you took out mortgage insurance with the lender when the home loan was negotiated, the insurer will pay this shortfall to the lender but also seek reimbursement from you as the policy-holder. Without insurance, you will be pursued by the lender for the outstanding amount on the loan.

In this situation you may need to apply for a release from the debt on compassionate grounds or by citing long-term financial hardship. A repayment plan or even filing for bankruptcy may be the most sensible options thereafter.

Seek expert legal advice

In real life, the steps outlined above are terrifying and stressful. For most people their home is likely their only major asset. To lose it is devastating.

At Felicio Law Firm we have years of experience helping people facing repossession or foreclosure when they fall behind on the mortgage. We can guide you through by providing realistic, workable solutions designed to achieve the best possible outcome in your situation.

Contact us today for an initial appointment on (02) 4365 4249.

Should I Set Up a Family Discretionary Trust? The Pros and Cons…

By | Property Law

Discretionary trusts are a legal instrument that offer control and flexibility in both holding and distributing property or other assets to beneficiaries of the trust.

There are also significant tax advantages for property and assets held in such a trust, which is one reason they are a popular structure for small businesses, particularly family businesses.

A discretionary trust – sometimes also referred to us a ‘family trust’ –invests in the trustee the power to determine the nominated beneficiaries of the trust and the discretion to distribute property and income to them in whichever amounts they choose. This means beneficiaries have no interest in the trust property unless the trustee exercises its discretion. The trustee is not held to predetermined arrangements or agreements about distributions, as in a fixed or unit trust.

Beneficiaries will usually be close family members, other family companies or charities. Significantly not all beneficiaries need to be included at the establishment of the trust; they can be added later under the trust instrument.

Below we’ll briefly outline the key advantages and disadvantages of establishing a discretionary trust. If you are thinking this structure may suit your circumstances, you should seek the guidance of a legal practitioner with expertise in the area of trusts to ensure you are fully aware of both the benefits but also the drawbacks.

The advantages of a discretionary trust

Asset protection: Property and assets held within a discretionary trust are held beneficially for the beneficiaries by the trustee. This structure means trust assets cannot be taken by creditors in bankruptcy proceedings, unless the claim relates to a debt of the trust.

Some discretionary trusts use a corporate structure in which the directors of the company act as the trustees. This form is preferred by some people because companies are perpetual and on the death of a director, a new director can be appointed without affecting the company. Even in this situation, property held by a company as trustee is not accessible by creditors in a liquidation of the company, unless the debt is a debt of the trust.

Estate planning: Generally speaking, the ownership of assets held in a trust cannot be passed on through a person’s will. But by making a testamentary discretionary trust under a will, which only takes effect on death, the trustee can exercise discretion in the payment of income and capital of the trust to the beneficiaries.

This is a strength of a discretionary trust to protect against the situation where a beneficiary is or becomes bankrupt. Where a person inherits assets in their own name, these pass to the trustee in bankruptcy. In a testamentary discretionary trust, the beneficiary’s inheritance is protected, provided they have not transferred wealth to the trust with the intention of defeating creditors.

Likewise that inheritance is in general protected in the event the beneficiary experiences a marriage or de facto relationship break-up and the ex-partner seeks access to the assets or income via a Family Court order, though it should be noted the Court may still consider any assets owned by the discretionary trust as a form of financial resource which could become a factor in the split of assets.

Tax effectiveness: Discretionary trusts can be a tax effective structure as a holding entity for investing in real estate, other fixed assets, shares or units in trusts. Income derived from these assets is held in the trust, which distributes it at its discretion in any particular year.

Each beneficiary pays income tax on his or her allocated share of income, according to his or her normal tax rate. In a simple discretionary trust held by a husband and wife, for example, if she earns much more than he does in a year and is taxed at the top marginal tax rate, it makes sense to distribute a greater share of trust income to the husband, who will be taxed at a lower marginal rate.

There is a significant capital gains tax advantage, too. If the investment is held in the trust for more than 12 months, any gain on the value of the investment is eligible for a 50% capital gains tax discount when it is sold, but only if the capital gain is distributed to an individual beneficiary.  Expert tax guidance from a tax lawyer or accountant would be required.

Flexibility: Beneficiaries can accumulate assets within the trust structure. Unlike superannuation funds, there are no contribution limits or restrictions on where to invest, unless specified by the trust deed.

Trusts can also represent a simpler reporting structure when it comes to tax liabilities, debt deductions and dividends on investments.

And the disadvantages…

Beneficiaries lack legal or equitable interest in property: Since beneficiaries do not own the assets of the trust, they do not hold a legal or equitable interest in trust property, meaning the trustee or trustees can employ their discretion to change allocations from the trust on a whim.

There may also be a restriction on who can be distributed to if you need to make a family trust election (FTE). An FTE entitles the trust to certain tax concessions when claiming losses from prior years or imputation credits on franked dividends received. Making an FTE, however, means family trust distribution tax is imposed when distributions are made outside the family group.

Only profits are distributed: Losses are trapped in the trust and cannot be distributed to a beneficiary in order to reduce their taxable income.

Complexity and compliance: Depending on whether your discretionary trust is a close family trust or uses a corporate structure, and the number of beneficiaries, the trust instrument can be complicated. There can also be onerous compliance obligations, particularly when it comes to taxation, adding to the administrative costs of maintaining a trust.

Attracting investment: Investors can be more difficult to attract to a business where a trust structure is employed. Banks who are unfamiliar with the terms of the trust deed may express hesitation about lending for investment.

Ask us for guidance

Whether a discretionary trust is suitable for your situation based on the factors we’ve outlined above is a decision you should consider after expert legal advice.

At Felicio Law Firm, we have years of experience advising people on both the benefits and potential drawbacks of establishing a discretionary trust for protection of family and/or business assets.

Call us today on (02) 4365 4249 for an initial consultation in which we can fully discuss with you the implications of setting up a discretionary trust.

What You Need to Know About Foreign Surcharges and Discretionary Trusts

By | Property Law

Trusts are a complex area of the law, particularly when it comes to taxation.

In NSW, when a foreign person – defined as an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holding a substantial interest – acquires residential land in the state, ‘surcharge purchaser duty’ is payable by that foreign person. NSW residential land owned by foreign persons is also subject to ‘surcharge land tax’. Both these ‘foreign surcharges’ are payable in addition to any other duty or land tax payable.

Where a discretionary trust exists, the trustee may be liable for these foreign surcharges if any one of the potential beneficiaries of the trust is a foreign person. This applies to all potential beneficiaries under the various categories of beneficiaries provided for under the relevant trust deed, not just the named beneficiaries.

It’s a wise course of action to seek the advice of legal professionals experienced in the administration of trusts in order to avoid these foreign surcharges, which we’ll provide some more detail on in this article.

What a discretionary trust must do to avoid foreign surcharges

The NSW Commissioner of Revenue released a practice note in June 2020 on how surcharge purchaser duty and surcharge land tax is applied in situations where land is held by a discretionary trust, clarifying the application of section 104JA of the Duties Act 1997 and section 5D of the Land Tax Act 1956 to this situation.

The advice noted that potential beneficiaries of a discretionary trust are not limited to those named in the trust instrument and can include members of any class of persons to whom, or for whose benefit, trust property can be distributed or applied when the trustee exercises its discretion. This can include beneficiaries who are not included when the trust deed is executed, including foreign persons for the purposes of the foreign surcharges.

In this circumstance, the trustee of a discretionary trust will be designated a foreign person.

The note advised that to avoid being a foreign trustee, the discretionary trust must ensure:

  1. no potential beneficiary of the trust is a foreign person; and
  2. the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary. This is known as the ‘no foreign beneficiary requirement’ and is usually satisfied when the terms of the trust prevent any property of the trust being distributed to or applied for the benefit of the person.

Some examples

The Commissioner’s note provided a number of examples applying the provisos around discretionary trusts and foreign persons.

A simple example is where a couple maintain a family trust and have children who are the primary beneficiaries. Potential beneficiaries of the trust include future spouses and children of those children who are primary beneficiaries. To remain exempt from foreign surcharges, therefore, the trust must be amended to exclude any foreign beneficiaries and this amendment must be irrevocable.

In a similar example, potential beneficiaries may include children but also their spouses, grandchildren, aunts and uncles, and an Australian charity operating in Australia for the benefit of residents in Australia.

Even though there may be no existing foreign beneficiaries, the trust must still be amended irrevocably to exclude any future foreign potential beneficiaries.

In another example where the trust owns no land in New South Wales, the trust does not need to contain a prohibition on foreign persons being beneficiaries. But if the trust purchases residential property in NSW it will be liable for surcharge purchaser duty in 2020 and surcharge land tax for the 2021 tax year. To escape liability for foreign surcharges, again it will need to amend the trust deed to explicitly exclude potential foreign beneficiaries.

In some cases, the trust instrument will already exclude a class of beneficiaries, including foreign persons, and is not capable of amendment. In this case the trustee will not be liable for foreign surcharges.

In the circumstance where an Australian corporation enters into a contract for the purchase of residential property in NSW and the corporation’s shares are held in a discretionary trust, the company will be liable to surcharge purchaser duty if the trust does not contain a provision to exclude foreign beneficiaries.

It should be noted that corporations are considered foreign persons if a shareholder who is a foreign person has a substantial interest in it, including where a discretionary trust is the shareholder of the company.

Further examples are available for us to discuss with you in cases where general beneficiaries of a discretionary trust will only benefit after the death of the principal beneficiary, or if the trustee is liable for surcharge purchaser duty on a transfer of dutiable property that occurred before 24 June 2020, or after that date but before midnight on 31 December 2020. In the second case, the trustee will still not be liable if the terms of the trust have been amended before midnight on 31 December 2020.

Seek our advice today

If any of the issues in this article relating to liability for foreign surcharges by a discretionary trust need further explanation, please contact us today on (02) 4365 4249 for an initial consultation. We are specialists in family trusts and can advise you in a prompt and relevant fashion on what you need to do to avoid foreign surcharges.

Property Law

Avoiding Pitfalls and Delays When Developing Residential and Commercial Land in NSW

By | Property Law

Developing land for either residential or commercial use in NSW can be a complicated and time-consuming process. From the purchase of the land through to all the issues posed by construction and the ultimate sale of the property, it can be a challenging path to a final profit.

One of the trickiest issues for any developer is dealing with local councils and other relevant authorities to not only gain consent for the project, but also remain compliant with the multitude of legislation, by-laws and other rules which govern property development in NSW.

This article provides a general overview of what’s required through that particular part of the process, but recommends any developer avail themselves of the guidance of expert legal professionals before interacting with government authorities during development, be it local, state or Federal.

What are the key things to know for a property developer

Once you’ve navigated finance and purchase issues to secure a property, the steps to get a development project off the ground have just begun.

It’s important to do your due diligence before securing the land you wish to develop. Different councils interpret NSW development laws in different ways in order to ensure a development is appropriate in its area. A good understanding of the local authority’s approach to town planning will help prevent costly delays in approval of your development project.

There are nine different planning approval pathways in NSW, determined by the size and scale of the development. While smaller development projects such as home renovations and even modest commercial or industrial constructions may be dealt with by the ‘exempt’ or ‘complying’ development pathways (where on application, the project already meets specific standards and land requirements) – and are therefore faster to approve and commence – most residential and commercial property development will fall under the ‘local development’ pathway.

A development is considered local development if a local environmental plan (LEP) or State environmental planning policy (SEPP) states that development consent is required before the development can take place; and it is not considered to be either regionally or ‘State significant’ development.

A developer can enter the address of the proposed development at NSW Planning Portal to see what planning constraints and zoning rules affect the property.

If your development needs consent, an application must be lodged with the local council and will need to include:

  • A description of the development;
  • the estimated cost of the development;
  • a plan of the land;
  • a sketch of development;
  • environmental assessment in the form of an environmental impact statement or statement of environment effects.

The ultimate aim, of course, is a development consent issued by the ‘consent authority’. This will usually be the local council unless the SEPP specifies the NSW Planning Minister as the consent authority.

The stages of gaining development consent are detailed at the NSW Department of Planning, Industry and Environment website here.

Under the Environment Planning and Assessment Act the council will assess the development application (DA) on the basis of:

  • All plans and policies that apply, such as SEPPs and LEPs.
  • Impacts of the proposal on the natural and built environment and the social and economic impacts in the locality.
  • The suitability of the site for the proposed development.
  • Any submissions from neighbours or other groups.
  • Any comments or agreements/approvals from any NSW Government agency.
  • The broader public interest.

Avoiding pitfalls and likely costs

Time is money and delays during the DA process can significantly impact the economic viability of a development, particularly if the obstacles are serious. Commonly delays arise because the developer has failed to prepare properly in terms of complying with some of the factors we’ve discussed above.

The best way to make sure your DA can proceed relatively smoothly through the process is to rely on the expertise of others in the preparation stage. An experienced architect or designer, builder, town planning specialist and legal expert are some of the key people who can help you avoid costly delays.

Detailed site analysis, research on other recent developments in the surrounding area and speaking with consultants who’ve advised on similar developments are all recommended before you get to the DA stage.

At this stage a thorough budget should also be put together. There are many potential costs facing any developer. Some of those in relation to approvals from government authorities include:

  • The DA fee, including the cost of referral to State Government agencies.
  • The construction certificate fee as well as fees incurred in the building process for official inspections, engineer’s certificates and more.
  • Development contributions payable for State and local services.
  • Conditions that may be imposed by council such as bonds to cover potential damage to surrounding infrastructure; environmental clean-up or rehabilitation; dilapidation surveys of attached properties, etc.
  • Water and other service connections.

It’s advisable to itemise the known outlays in terms of paying for government approvals and services at the outset of the development.

Discuss your development proposal with us

This article serves only as a brief overview of what’s involved in a progressing a residential or commercial development through the processes demanded by local councils and higher government authorities.

For more detailed advice and guidance, contact Felicio Law Firm. We have the background in all matters related to property development to offer clear, targeted advice that will save you time and money when dealing with the regulatory regime. Call us for an initial consultation today on (02) 4365 4249.

Your Rights When Someone Wants to Mine on Your Land?

What are Your Rights When Someone Wants to Mine on Your Land?

By | Property Law

If you’re a landholder in NSW, particularly in regional areas, there’s always a chance your land could be sitting atop a valuable mineral resource.

So what happens when mining companies with the finances, expertise and equipment to access and utilise such a resource want to explore your land to further investigate the natural asset? Is there compensation? What are your rights as the landholder?

Whether they are located on privately owned land or not, most mineral resources are owned by the state in which they’re found. Royalties from the mining of natural resources are a significant part of state revenue, used to fund services for residents of that state.

But both landholders and explorers have statutory rights and obligations when it comes to accessing land for mineral exploration, with the Mining Act 1992 providing specific landholder protections in respect of dwellings, gardens and significant improvements. It also sets out a statutory right to compensation for any ‘compensable loss’ suffered due to exploration carried out under an exploration licence or assessment lease.

Read on for a brief overview of the position of landholders when a potentially valuable natural resource is discovered on their land.

Access arrangements

Land access arrangements are negotiated between a landholder and a mineral explorer to ensure an orderly process by which a mineral resource can be explored and assessed on privately owned land. These agreements are based on mutual recognition of each parties’ rights and obligations, and set out the terms and conditions under which the resources company can access the land. No work can begin without such an arrangement in place.

It should be noted that access arrangements differ between mineral and petroleum titles, with agreements for mineral explorers applying only to exploration and for petroleum, both exploration and production.

Land access arrangements are usually written agreements between the landholder and the holder of an exploration title, though they are also sometimes determined through either mediation or an arbitration process. Such arrangements might include details on:

  • Times and dates the exploration titleholder is allowed access to the land;
  • which parts of the land the titleholder may work on;
  • the sorts of exploration activities permitted on the land;
  • the compensation payable by the titleholder (either monetary or in-kind);
  • the procedures for varying or changing the arrangement, as well as dispute resolution processes;
  • notification requirements;
  • any other conditions and requirements agreed to by the landholder and the titleholder.

If an explorer contravenes any of the conditions within the agreed access arrangement, access to the land can be denied.

What happens when circumstances under the arrangement change?

Access arrangements may be varied where the landholder’s title changes, or the existing access arrangement may continue in force. If the original exploration licence on the land is renewed for a further period, again the arrangement may be varied or continue in force.

Arrangements are generally in place for the duration of the planned exploration work but can be varied or terminated by agreement between all parties, through an arbitrator, or – on application by any of the parties – by an order of the Land and Environment Court if the arrangement was determined by a court or an arbitrator.

In situations where a landholder and exploration titleholder can’t negotiate an arrangement between them, NSW legislation sends the parties to a mediation process. If mediations are unsuccessful, parties proceed to arbitration where an arbitrator will make a determination, which can be appealed in the Land and Environment Court if unsatisfactory to either party. Landholders and titleholders are required to act in good faith throughout this process.

A landholder’s rights

In addition to the rights contained in the details of access arrangements listed above, landholders also have:

  • Avenues of recourse where an explorer fails to observe the terms of the access arrangement;
  • general immunity against actions arising as a consequence of titleholder actions on their land;
  • full rehabilitation of their land by the explorer.

Where compensation is payable, landholders can get an indication of amounts payable by checking the Independent Pricing and Regulatory Tribunal (IPART) website for its 2015 report and guide to benchmark compensation rates for gas exploration and production. Expert, independent legal advice should be sought before proceeding to make a compensation claim against an exploration titleholder.

Speak with us today

At Felicio Law Firm we have the necessary understanding and experience of the rights of landholders and how they are protected by NSW legislation. We will provide relevant and timely advice if a mining company wishes to further explore a resource located on your land.

While very few exploration licences proceed to a production facility, the issues around access arrangements, arbitration, changing agreements, rehabilitation and compensation can be complex and time-consuming. We can make the process relatively trouble-free so call us for an initial consultation today on (02) 4365 4249.