KEY POINTS:
A high-flying Auckland property developer has warned others in his sector they could be inadvertently flouting the securities law because of the way they sell housing developments.
Patrick Fontein of Kensington Properties said he had offered about $5 million back to residential property purchasers at Orewa and Taupo after finding out he had accidentally breached securities rules.
Fontein - chairman of the Green Building Council and past-president of the Property Council in Auckland - applied to the Securities Commission for rulings on sales at his Taupo and Orewa housing estates, saying he went on the front foot because he wanted to ensure he was in the clear.
But in March the commission ruled his offerings were illegal and he had to make enforceable undertakings to ensure he complied, including repaying all the money he had raised.
So Fontein said he had paid back money but if his deals had breached the law, it was highly likely that many other developers would be unknowingly in breach as well.
Fontein said Bruce Patterson, his lawyer at Duncan Cotterill, had alerted him to a potential breach on the Orewa and Taupo developments.
Fontein is developing two master-planned communities worth about $600 million on the two sites.
"We were pro-active and acted ethically and went on the front foot to ensure we complied," Fontein said.
The commission found offerings from his Huka Falls Resort at Taupo and Kensington Park Properties at Orewa had breached the Securities Act 1978 because securities were being offered without an investment statement or registered prospectus.
A key part of both developments was the establishment of an incorporated society to own, manage and maintain common facilities at Taupo and Orewa. The societies were established to make and enforce bylaws of the developments, and run facilities such as gardens and common areas.
But purchasing membership of the society effectively amounted to property buyers buying securities - without full compliance with the act.
Liam Mason, the commission's general counsel, issued clear directives to Fontein.
"The company and the directors accept that the offer of securities in the form of membership in the society confers a right to participate in ownership and use of the common facilities in the development," Mason said. "Accordingly, persons who enter into sale agreements to purchase property in the development also subscribe for participatory securities through membership of the society. Securities have been offered to the public for subscription with a registered prospectus or an investment statement."
Mason told Fontein to offer no more securities, cancel the existing securities and offer back all money taken under the illegal scheme.
To comply, Fontein offered all the money back to the buyers and around $5 million was involved. All those buyers put their money back into the developments but under the new legal arrangement established by the commission's exemption. Fontein's companies then made enforceable undertakings to the commission.
"This is a warning to developers, lawyers and banks to inform them that they could be running a risk," he said. "Purchasers could default on deals because they could find they have been offered an illegal contract."
