Rob Balanda from MBA Lawyers sees many inexperienced developers come to grief over easements. They may sound innocuous but they can mean the difference between making money and not or even being able to develop the site. Rob talks about what you can and can’t do with easements.
Kevin: A couple of weeks ago, we had a chat to Rob Balanda from MBA Lawyers about some of the legal things you should be considering prior to becoming a developer or moving into developing a site.
Rob, there are a couple of other considerations, too. One in particular is easements. Let’s talk that one through.
Rob: They seem pretty innocuous, but they’re what lawyers call a classic defect in title. When I see easement, I mean the right to use a property without taking something from it. For example, a right of way or a drainage easement to the local council or an easement to the energy authorities. They’re classics. The big thing about them is you cannot build over them.
Secondly, they often seriously affect the value of the property. I’ve seen even humble drainage easements running around the boundary in the setback area, which you can’t build over anyway, Kevin. I’ve seen valuers value a property down 10% to 15% because of the existence of that easement. If you buy a property, you must do proper searches and check out the existence of any easements. The thing is you buy it subject to the easements.
Things to check are, how wide is the easement? If it’s a right of way, for example, is it gated off? Do you have the right to gate it off? Does anyone have the right to lock it up? Who repairs it? I was looking at one recently where a battle-axe block, a rural property, had a 500-meter concrete easement leading to this property. That was really important. Could anyone gate it off or lock it? Who repaired it when it needed repair? Even concrete drives need repairing eventually.
Easements are a really big thing, and if there are any doubts, you should add a clause to the contract… You would expect me to say this, Kevin.
Kevin: I would.
Rob: …Add a clause to the contract making the deal subject to you checking that out.
Kevin: I know there’s another thing that we’ve discussed in the past, too, and that is getting access to the site to do some of the work that you’re talking about.
Rob: Yes. If you’re going to redevelop the site, time is money. It’s really crucial that from the date that you settle, you’re in a position to proceed immediately – you’re out of the blocks – because run-ons and time delays can be very expensive.
Include a little clause in the contract – sellers never object to this, Kevin – that says you are allowed reasonable access at a reasonable time to go onto the property to do surveys and checks and anything you need so that come settlement, you’re out of the blocks.
Kevin: Would you need to quantify that, Rob? Would you need to say how many times you need to have access?
Rob: That’s a good point, Kevin. Sometimes you need to tweak the clause. Sellers might be a bit anxious. They might push back and say, “That means you can come in at any time, any day.” You might say something like “Access hours will be Monday to Friday only, 9:00 to 5:00, and the buyer will have a maximum of six accesses during the term of this contract.” Something like that.
Kevin: It’s a funny thing with negotiations. There’s always a way around it if you just become specific. That could be an objection easily overcome.
Rob: Easily, but you have to be flexible. As an investor/developer, you have to understand you have to bounce back. Unless you educate yourself about these things, they might seem pretty trite, but they’re not really. As I’ve said to you before, it’s the micro-skills in life that are most important, rather than the macro-skills. Knowing things like that if you’re a developer can save you a lot of money and a lot of pain.
Kevin: What’s another one of the considerations, Rob?
Rob: More properties are being sold now with development approvals already open. Somebody decided a couple of years ago that this was a good idea. Now, the GFC has really hit and they don’t want to proceed or can’t proceed, I see people picking up properties now with DA approval.
A big thing about that is, make sure you have clauses in the contract that say that they guarantee that they have paid for all of the work to get that DA approval, especially the consultants, that they own the plans, and that they have copyright in any building plans or development plans, otherwise, they’ll stay with the architect and the builder – people don’t realize that – and that the benefit of all of that stuff, reports and plans and everything, gets assigned to you and the originals of all of the copies and evidence that they paid for it get delivered to you on settlement. That’s very important, Kevin.
Kevin: Yes, very important. That can actually go in as a clause in the contract.
Rob: Yes. You’d probably have a due diligence clause in the contract, as well, where you would have checked all of that stuff out. You check it all out that it’s all valid and paid for, and then the seller has to give you the originals of all the stuff on settlement.
Kevin: Rob, I want to thank you for coming along and giving us so much sound advice.
Rob: Thank you, Kevin.