AN Ellenbrook settlement agent has been fined $14,000 by the State Administrative Tribunal for their role in relation to two failed Pilbara strata property deals involving what is termed mezzanine financing.
Consumer Protection commissioner David Hillyard said KDD Conveyancing Services Pty Ltd was reprimanded by the tribunal and also ordered to pay costs of $1000 for breaching the Settlement Agents Act and Code of Conduct over unauthorised withdrawals from its trust account, failing to rectify deficits in its trust account and failing to notify affected parties.
Mr Hillyard said in 2013, a developer had planned to purchase two blocks of land in South Hedland to build strata apartment complexes and sell units off-the-plan at 15 Somerset Cres and at 29-31 Barramine Loop.
KDD Conveyancing Services was the settlement agent for these purchase contracts, as well as the off-the-plan sales contracts, and acted for both the developer and buyers.
The developer set up a mezzanine financing arrangement where investors do not directly purchase the property in the normal way, but provide a ‘loan’ to the developers for the same value as the unit. A sales contract for the purchase of the unit was then separately entered into by these buyers and the developer.
Under this mezzanine financing-purchase arrangement, the settlement agent received a total of $1.5 million from the sale of off-the-plan units in the Somerset Cres property and $2.469m from the sale of off-the-plan units in the Barramine Loop property.
The Strata Titles Act requires that any deposit or other moneys paid by a purchaser prior to the registration of the strata/survey-strata plan are to be held by a solicitor, real estate agent or settlement agent; on trust.
These moneys are not to be disbursed until the strata plan has been approved and registered by Landgate.
KDD Conveyancing Services breached the Act by making payments from their trust account while the strata plans were not registered. These payments included $420,000 to the Somerset Cres developer in October and November 2013 and $1.08m to settle the purchase of the parent lot at the Somerset Cres property in November 2013
They also included $551,000 to the Barramine Loop developer between May and October 2014, $1.918m to settle the purchase of the parent lot at the Barramine Loop property in June 2014 and $1000 deposit refund to a purchaser in November 2015.
Importantly, while the land had been purchased by the developer, the developments did not go ahead and investors lost more than $4m in the failed property deals.
The settlement agent also found a deficiency in the trust account of $1000 in November 2015 and failed to inform the affected persons.
In March 2016, KDD found a further deficiency in its trust account of $56,000 and failed to balance the account or inform all affected persons.
Mr Hillyard cautioned settlement agents not to get involved in such risky property investment arrangements and to understand their requirements under the law.
“The role of a settlement agent is not to use their trust account to facilitate speculative property investments and there are good reasons why purchase proceeds must remain in trust until all approvals for the development are confirmed,” he said.
“Consumer Protection will take swift action against any settlement agent who breaks the law while being involved in these dubious mezzanine financing deals which are primarily designed to get around the laws and regulations that protect property buyers.”
More information on the obligations of settlement agents in WA is available on the Consumer Protection website:www.consumerprotection.wa.gov.au or enquiries can be made by email [email protected] or by calling 1300 30 40 54.