Property problems: Communal facilities and the Securities Act

Q: As a developer of a number of medium to large residential developments my company will often include communal facilities as part of its development plans to attract buyers. I understand that in some instances an offer of a right to share in commercial assets may give rise to obligations under securities legislation. Please explain.

A: The Securities Act 1978 is the legislation you are referring to and it is important that all developers of residential land are aware of its application.

It is common for residential developments to incorporate shared communal facilities, including communal land and other assets. Examples include communal recreation facilities and sewage treatment schemes.

The act is designed to provide statutory protection to the public looking to invest in various schemes. It doesn't cover direct interests in land and this may lead to a perception that the act is not relevant to the development of land for residential purposes. The definition of "security" in section 2D of the act clearly suggests otherwise.

Where a property development includes shared ownership of common facilities, Securities Act requirements need to be taken into account. The word "security" means any interest or right to participate in any capital, assets, earnings, royalties, or other property of any person.

Thus, a purchaser acquiring shared rights to use communal land or facilities in a residential development will almost always be subscribing for a "security".

Advertising for sale lots in a development with communal facilities or by way of an agreement for sale and purchase also comes within the definition of "offer" under section 2 of the act being: "an invitation and any proposal or invitation to make an offer".

To come within the ambit of the act the offer of the security must be made to the "public".

Under section 33 of the act no such security can be offered to the public without:

* a current registered prospectus; and

* an investment statement that complies with the act.

The act therefore applies to residential developments marketed for sale to the public with communal land and facilities.

However, there is an exemption entitled "The Securities Act (Residential Property Development) Exemption Notice 1999".

Compliance with the exemption notice requires that the communal facilities be owned or leased by an incorporated society, the members of which are the owners of the residential sections being sold in the development.

Other requirements include the provision by the purchaser at the time an offer is made of a copy of:

* the society rules;

* any management agreement;

* any proposed transfer agreement or lease of the communal facilities by the society;

* the relevant sale agreement for purchase of a property in the development; and

* if requested, society financial statements.

Developers of rural residential subdivisions may be caught where they are required by resource consent conditions to establish sewage and water supply schemes.

In the event that such arrangements do not involve the creation of a separate lot owned or leased by the incorporated society then the development as a whole may not fall under the exemption.

There are potentially serious consequences should a development not qualify for the exemption and lots sold to members of the public without a prospectus and investment statement having been issued.

Section 37 of the act provides that in such circumstances the allotments will be void and the purchaser may cancel any contract and seek reimbursement.

You would be well advised to seek legal advice on the proposed structure of your residential development to ensure compliance with the exemption notice or in the alternative, with the act itself.