Settlement agent fined over involvement in failed property deals: Settlement agents bulletin issue 76 (December 2017)
20 December 2017
Settlement agent fined over involvement in failed property deals (KDD Conveyancing Services Pty Ltd)
An Ellenbrook settlement agent has been fined $14,000 by the State Administrative Tribunal (SAT) for their role in relation to two failed Pilbara strata property deals involving what is termed ‘mezzanine financing’.
KDD Conveyancing Services Pty Ltd was reprimanded by the SAT and also ordered to pay costs of $1,000 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 immediately notify affected parties.
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 Crescent and at 29-31 Barramine Loop. KDD Conveyancing Services was the settlement agent for the developer for these purchase contracts, as well as the off-the-plan sales contracts.
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 $1,500,000 from the sale of off-the-plan units in the Somerset Crescent property and $2,469,000 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 Crescent developer in October and November 2013
- $1,080,000 to settle the purchase of the parent lot at the Somerset Crescent property in November 2013
- $551,000 to the Barramine Loop developer between May and October 2014
- $1,918,000 to settle the purchase of the parent lot at the Barramine Loop property in June 2014
- $1,000 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 $4 million in the failed property deals.
The settlement agent also found a deficiency in the trust account of $1,000 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 immediately inform all affected persons.
Commissioner for Consumer Protection David 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,” Mr Hillyard 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.”