First Home Owner Grant boost: Legal risks to avoid

By Nila Sweeney

When the Federal Government increased grants for first homebuyers on 14 October, parts of the industry predicted that some purchasers may attempt to pull out of existing contracts to re-sign and take advantage of the larger amount. It's a possibility that poses a range of ethical and legal questions for buyers, sellers, real estate agents and legal practitioners.

There are legal implications for such actions which can't be ignored, not the least of which could include having to repay the grant money. In addition to handing back that money, there would be further penalties to pay.

Changes to the FHOG
As you are no doubt aware, in another attempt to boost activity in the slowing housing sector, the Federal Government recently announced a $1.5bn package aimed at luring more first homebuyers into the property market.

Subject to the introduction of the necessary legislation, first homebuyers entering into contracts between 14 October 2008 and 30 June 2009 will have their First Home Owner Grant significantly increased from the standard amount of $7,000.

First homebuyers who commit to established houses receive $14,000 towards their purchase, which is double the existing grant. And first homebuyers who build a home or buy a newly constructed one receive $21,000, which triples the grant money. However, for purchasers to be eligible for the $21,000 grant, the home must meet the energy efficiency and sustainability standards under the relevant state or territory law.

The government has not specifically stated whether purchasers of units are also to be entitled to the increased grant. In our view, we expect they will, provided that it is the purchaser's 'home'.

Market predictions and legal risks
Predictions in the market are that some first homebuyers who entered into contracts before 14 October will attempt to rescind their contracts and enter new ones with the intention of claiming the increased grant.

Purchasers should be aware that there are legal risks involved and the following issues could arise as a result of doing so.

1. Purchasers may be required to pay duty on both transactions. While there are duty exemptions that apply to cancelled agreements, they are valid only in certain circumstances.

2. The Commissioner may require the purchaser to repay the grant as well as imposing a monetary penalty. The purchaser and any other party – such as the seller, lawyer or agent – who assists the purchaser to rescind the contract for the purposes of obtaining the increased grant may be found to have committed fraud under the Criminal Code Act 1899.

3. The increase in the First Home Owner Grant is subject to legislation currently in the process of enactment, and this may contain other requirements or identify additional issues as yet unknown. For example, the new Grant Application Form could require a declaration by a buyer as to past contracts entered into.

Maximising the FHOG
The First Home Owner Grant scheme is a national one funded by the states and territories and administered under their own legislation. Consequently, there are variables in each state as to how first homebuyers can make the most of the grant. Applicants have to meet particular eligibility criteria in order to receive the offset payment for buying their first home.

The existing rules for the scheme have not changed as a result of the Federal Government's boosting the First Home Owner Grant, and buyers still need to meet the stipulations already in place, including:
• All applicants must satisfy all the eligibility criteria and any person who has a relevant interest in the land on which the home is situated must be an applicant and must also satisfy the eligibility criteria
• The applicants must have an eligible transaction in relation to the purchase or construction of their first home
• The applicants must reside in the home to which the application relates as their principal place of residence for a continuous period of at least six months. The period of occupation must start within one year after the eligible transaction is completed

These guidelines are specific to Queensland and buyers in other states should refer to their relevant housing offices for the appropriate criteria.

Even applicants who meet all the necessary criteria perfectly could risk losing their grant if they are found to be terminating contracts without due reason to apply for the new, increased grant.

Terminating contracts
In Queensland, prompted by a number of enquiries received, the Law Society Ethics Guidance Officers released information, along with advice for practitioners who are requested by clients eligible for the First Home Owner Grant scheme to terminate existing contracts so they can enter into new ones.

As some requests to terminate contracts could be legitimate, the industry was advised to assess each one on a case-by-case basis. A non-exhaustive list of considerations was provided, some of which include:
• Whether the arrangement appears artificial and contrived in order to benefit from the boost
• Whether the terminated contract and the new contract are proposed to be on the same terms. Changes to the new contract may not be sufficient to avoid the impression that it is a sham
• Whether there are legitimate grounds for termination, such as an agreement for the sale of a house being entered into on 10 October and the house burns down on 15 October, and so the parties agree to terminate the contract due to frustration of the contract
If all circumstances for termination of an existing contract are sound and legitimate as assessed by regulators, buyers should find they are still eligible for the new grant when they do enter into a new one.

Sellers with unconditional contracts should also be aware that they have an enforceable contract and do have rights if a buyer attempts to terminate. Sellers are not obliged to enter into any new contract with the buyer and should consider carefully whether any proposed arrangements to terminate and re-enter a contract are illegal or a sham.

Unfortunately, first homebuyers who entered a contract prior to 14 October 2008 will not be entitled to the increased grant amount, even if the contract does not settle until after 14 October. Eligible applications relating to contracts signed and dated before 14 October 2008 will be entitled only to the standard rate of the grant ($7,000).