Local Government (Building Upgrade Agreements) Amendment Bill

Committee Stage

In committee.

Clauses 1 to 6 passed.

Clause 7.

The Hon. I.K. HUNTER: My understanding is that the Hon. Mr Darley has asked the Hon. Mr Hood to move his first amendment on his behalf, but that he will not be proceeding with the remaining amendments.

The Hon. R.I. LUCAS: Given that this clause and proposed amendments that have been filed by the Hon. Mr Darley and his second reading contribution did raise the issue of the position of banks and financial institutions in terms of those who might hold mortgages over existing properties, can I ask the minister to indicate what, if any, response the government has received from either the Bankers Association or individual banks in relation to this particular proposal?

I notice in the minister's reply that he has referred to the National Australia Bank. I think he has replied at the second reading, but given that this bill has taken some time (if one goes back to the minister's second reading), have any other of the major banks, financial institutions or any bodies that purport to represent them put any views to the government since the minister indicated the broad position of the NAB at the close of the second reading?

The Hon. I.K. HUNTER: The advice I have is as follows: the National Australia Bank and the Clean Energy Finance Corporation have been engaged throughout this process. Both are involved in offering environmental upgrade for finance interstate, I am advised. Other financial institutions were also invited to provide feedback on the draft bill released for consultation in 2014. These include the ANZ, Commonwealth and Westpac banks, and Bank Australia formerly known as bankmecu, however these organisations have not provided feedback.

Whilst ANZ bank and Bank Australia have not engaged directly in the development of the legislation in South Australia, my understanding is they have loaned to environmental upgrade agreement projects interstate and are familiar with the mechanism. Officer-level discussions have been held with representatives from other financiers in our local market including BankSA and Beyond Bank.

I thank the honourable member for that question, and I think the other information that I could provide really relates to the NAB bank and I think their position is already well and truly on the public record, so I will not delay the chamber any further with that.

The Hon. R.I. LUCAS: My understanding is that that is essentially the same position that the minister put down in June or July when he replied to the second reading debate, so I am assuming from that that the answer is that there has been no further contact from any of the other major financial institutions since June or July in relation to the issues that the Hon. Mr Darley has canvassed.

The Hon. I.K. HUNTER: That is my understanding, yes.

The Hon. R.I. LUCAS: Given that, as I understand it, Mr Hood, according to the minister, is now moving an amendment or amendments on behalf of the Hon. Mr Darley, can I just clarify, because the Hon. Mr Hood, I guess, is the only one in a position to indicate, because some of us are unclear as to what is actually happening; that is, we have four filed amendments from the Hon. Mr Darley.

Certainly I have heard differing stories. Firstly, that he was withdrawing all of them, then he was not withdrawing any of them, and now the minister is indicating he is proceeding with one and withdrawing three others. So I am wondering whether the Hon. Mr Hood can throw any light on the position of the Hon. Mr Darley so that at least those of us who have got questions in relation to this, know where Mr Hood is actually heading on behalf of the Hon. Mr Darley.

The Hon. D.G.E. HOOD: I advise the chamber that I have literally been asked to move these on behalf of the Hon. Mr Darley five or 10 minutes ago, so I am certainly not an expert on them, but I am advised that he will be moving Amendment No 1 [Darley-1], so he will continue with that one, and I understand that that has government support so I expect that would pass, and Family First will support it. He will not be proceeding with any of the other amendments at this stage.

The Hon. R.I. LUCAS: At all?

The Hon. D.G.E. HOOD: At all. I move:

Amendment No 1 [Darley–1]—

Page 6, line 10 [clause 7, inserted Schedule 1B, clause 2(5)(a)]—After 'exceeding' insert '80% of'

I think members are probably familiar with this amendment but just in case they are not, I have agreed to read this out on his behalf. Clause 2(5) of the bill provides that a council must not enter into a building upgrade agreement unless the total amount of taxes, rates, charges and mortgages owing on the relevant land, when added to the total value of the building upgrade charge, as set out in the proposed building agreement, is an amount not exceeding the capital value of the relevant land prior to any works that would be undertaken as part of agreement, and the building owner has complied with subclause (6) and with any additional requirements prescribed by the regulations.

I will explain that in a little more detail. To put it more simply, the cumulative debt against the property when added to the total value of the building upgrade charge, must not be greater than the capital value of the land prior to the upgrade works being undertaken. The aim of this 'over-leveraged test', if you like, according to the Hon. Mr Darley, is to minimise any financial risks to the financier and to the first mortgagee and to ensure the viability of projects that obtain upgrade finance.

As he mentioned during his second reading contribution, he is extremely concerned that the government has sought to use the capital value rather than the security value of the land in question, particularly given that banks generally lend on security value, which is what you would expect a property to sell for in a forced sale. The capital value on the other hand, is what the property would be expected to sell for between a prudent, but not anxious, seller, and a prudent, but not anxious, buyer, both being fully conversant with the circumstances surrounding the sale.

Using the capital value rather than the security value could mean that an existing mortgagee, who would now be ranked second in terms of priority, would not be able to recover their costs. Because security values do not appear to be defined in our statutory books here in South Australia, Mr Darley sought advice on what is generally accepted as the difference between commercial values and security values. Based on the advice that he has received, I am informed that security values are generally valued at around 15 per cent less than capital values when dealing with residential properties and 20 per cent less than capital values when dealing with commercial properties if fully tenanted. So rather than to define what 'security value' means, I am informed that the Hon. Mr Darley, through this amendment, opted to require that the building upgrade charge not be greater than 80 per cent of the capital value of the land prior to the upgrade works being undertaken.

This is an important reason, the Hon. Mr Darley argues, for two reasons: first, in the event of default the new statutory charge will be ranked senior to the other existing mortgages and liabilities to the Crown and this is central to the government's bill as it enables financiers to offer building owners more attractive terms in the first instance; secondly, whilst an existing mortgagee may be notified of any building upgrade agreement, the bill stops short of enabling the existing mortgagee to object to the agreement being entered into.

Mr Darley has already outlined that under normal circumstances, and indeed I have just mentioned here, an existing mortgagee may not be overly worried about an additional charge against the land because their interests will be protected. In this situation, however, the interests of the existing mortgagee will now be ranked lower than those of the new financier. Even if the existing mortgagee assesses the risk is too high there is little they can do about it, so he said that he will be moving a further amendment and has since withdrawn that. I indicate that that is the position of the Hon. Mr Darley and that Family First will also be supporting the amendment.

The Hon. J.S.L. DAWKINS: I indicate that the Liberal Party will oppose the amendment.

The Hon. I.K. HUNTER: I would like to thank the Hon. Mr Hood for moving that amendment on behalf of the Hon. Mr Darley. He showed an amazing grasp of the details of that amendment at such short notice and did a very good job. I would like to also pass on the government's gratitude to the Hon. Mr Darley, particularly with his depth of experience in property and valuation which has assisted us in accepting this amendment.

This amendment seeks to strengthen the over-leverage test by requiring that the total amount of taxes, rates, charges and mortgages owing on the relevant land, when added to the total value of the building upgrade charge is an amount not exceeding 80 per cent of the capital value of the relevant land prior to upgrade works, and this goes to the issue of security value versus capital value which the Hon. Mr Hood explained very well indeed.

The government will be supporting this amendment. I would like to thank the honourable members who have indicated support for this and for their considered and thoughtful approach to the bill, particularly the Hon. Mr Darley who has sought to balance the interests of all stakeholders.

In relation to Mr Darley's other issues, which he did seek to address through other amendments but which he now will not be doing through that process, I have given an undertaking that I will attempt to address those concerns that he has via the making of regulations. These will be drafted to specify the reportioning and make good provisions under the 'no worse off' pathway.

This will clearly afford tenants legislative protection and a means of redress and so I am very pleased to be able to indicate that I will be dealing with those issues through the regulatory approach and, in the spirit of openness and transparency for members of the house, not only will I be consulting the Hon. Mr Darley in terms of drafting instructions for those regulations, but any other member who wants to express an interest in being part of that process I am happy to accommodate as well.

The Hon. R.I. LUCAS: In relation to this particular amendment, has the minister or the government received any indication from stakeholder groups (such as the Property Council) that they oppose the amendment that is being moved?

The Hon. I.K. HUNTER: While I am seeking some further advice I can put on the record that, in fact, we had, through my agency, an opportunity to consult and test whether there were any concerns about this amendment with the Sustainable Melbourne Fund, the National Australia Bank and the Property Council and my advice is that all three of those organisations have indicated no concerns with this amendment.

The Hon. R.I. LUCAS: Was there any position put by Business SA on this particular amendment?

The Hon. I.K. HUNTER: Not to my knowledge. I might point out that whilst we have been pursuing Business SA for commentary on this matter in recent times it has been very difficult to get hold of them.

The Hon. J.S.L. Dawkins: I understand you have had some conversations with them.

The Hon. I.K. HUNTER: Yes, just recently, after many failed attempts to get in touch in with them.

The Hon. J.S.L. Dawkins: Well, it works both ways.

The Hon. I.K. HUNTER: It has been a one-way street from our side for quite some time.

The Hon. J.S.L. Dawkins interjecting:

The CHAIR: Let's just have the minister.

The Hon. I.K. HUNTER: My understanding is that they have not expressed a view on this amendment.

The Hon. K.L. VINCENT: Just to assist the chamber, I indicate that Dignity for Disability will support Mr Darley's first amendment, but not his amendments 2, 3 or 4.

Amendment carried.

The CHAIR: Mr Darley is not going ahead with amendment Nos 2, 3 or 4.

The Hon. R.I. LUCAS: Just to indicate to Mr Hood that Mr Darley is not now proceeding with amendment Nos 2, 3 or 4. The minister has said that as part of his discussions with the Hon. Mr Darley, he is going to—I cannot remember the exact word—canvass these issues through regulatory change; I think that is a fair description of what the minister has just said.

Can I ask the minister what has been the nature of any commitment he has given in relation to amendment No. 2 from the Hon. Mr Darley, which was 'obtain the written consent of any such existing mortgagee to the building owner entering into the proposed building upgrade agreement'. How would he propose meeting that particular intention in the Hon. Mr Darley's amendment by a regulatory change? Or is that not part of the understanding with the Hon. Mr Darley?

The Hon. I.K. HUNTER: In relation to the Hon. Mr Darley's foreshadowed second amendment, which he is no longer moving, as he advises me, these were about, as the Hon. Mr Lucas said, the terms of the mortgagee, and my understanding is, through discussions with Mr Darley, that his first amendment—the 80 per cent limit in terms of capital value versus superior value—has significantly strengthened the position of existing mortgagees, thus ameliorating his concerns and therefore the need for the second amendment.

The bill requires a building owner to notify existing mortgagees of the intention to enter a building upgrade agreement and of the particulars of a proposed building upgrade change. This is consistent with the approach adopted in Victoria. In New South Wales, the legislation is silent on such a requirement. The second amendment would require that the existing mortgagee's consent be obtained prior to entering a building upgrade agreement. As I said, I understand that Mr Darley is persuaded that, given the strengthening that has been instituted in his first amendment for mortgagees, the second amendment is not required.

The Hon. R.I. LUCAS: Can we just further clarify that then? My understanding of the minister's original statement was that the Hon. Mr Darley was not moving ahead with amendments 2, 3 and 4 because he had been persuaded that the government was going to handle this through regulation. The minister has now clarified that his understanding of the Hon. Mr Darley's position is that in relation to amendment No. 2 that is not the case, that is, that will not be handled through any regulatory change, because the Hon. Mr Darley has agreed not to pursue that particular issue because of amendment No. 1 being successful.

Can I clarify, though, that when the minister said that Mr Darley was not proceeding with amendments Nos 2, 3 and 4, amendments 3 and 4 are the two amendments that the minister has now given commitment to the Hon. Mr Darley to pursue through the regulatory process that he is talking about?

The Hon. D.G.E. HOOD: Just to clarify, the Hon. Mr Darley has written a very helpful note here, which says that he will not proceed with No. 2 because he has decided not to; he simply put that. I guess, as the minister outlined, it is addressed largely by the first one. The third amendment of his is consequential on the second amendment, hence he is not proceeding with that. The fourth amendment is the one that the minister has indicated we would deal with in regulation.

The Hon. I.K. HUNTER: I could not put it better myself. I apologise if it was not clear. What I said, and I think I put on the record in relation to the honourable member's fourth amendment, was that it will be addressed by regulation. These will be drafted to specify the reporting and make good provisions on the worst-off pathway. This will clearly afford tenants legislative protection and a means of redress. My comments were directed to the fourth amendment.

The Hon. J.S.L. DAWKINS: As I am handling this legislation on behalf of the Hon. Michelle Lensink, I move:

Amendment No 1 [Lensink–1]—

Page 11, line 32 to page 12, line 21 [clause 7, inserted Schedule 1B, clause 12(2)(b)]—Delete paragraph (b) and substitute:

(b) the lessor has given the lessee written notice of—

(i) the amount of the contribution that the lessee will be required to pay; and

(ii) the period within which the contribution will be required to be paid; and

(iii) a reasonable estimate (calculated in accordance with an approved methodology) of cost savings that may be made by the lessee, as a consequence of the upgrade works provided for by the building upgrade agreement, during the period to which the contribution relates (a reasonable estimate); and

(iv) evidence of the calculations made in accordance with the particular approved methodology used to calculate the reasonable estimate; and

(c) the lessee consents to the payment of the contribution.

The Liberal Party believes that, as the bill stands, there remains a fundamental imbalance between the power of tenants (which in most cases are small businesses) and landlords. Our party remains supportive of the concept of this bill in principle; however, it is greatly concerned with the potential negative effects on small business, and the government's unwillingness to address reasonable concerns by this important sector.

The amendment standing in the name of the Hon. Ms Lensink seeks to address this issue by creating a more equitable system which requires landlords to gain tenant consent to the payment of financial contributions towards the environmental building upgrades. This is stark contrast to the government's approach, which forces tenants to make financial contributions to building upgrades, even if they genuinely believe the upgrade will not deliver any cost savings.

Even in better economic times, small businesses often have tight cash flows, and the effect of essentially retrospectively increasing their rental outgoings with some vague promise of a future correction for overcharging would cause substantial and unnecessary financial stress.

Despite this bill being on the Notice Paper since February of this year, the government has failed to reasonably negotiate with essential stakeholders, particularly those in small business who employ substantial portions of the population of our state. This added financial stress that will be placed on small businesses under the government's proposal will be their burden to wear.

Our party has always been willing to work with the government to find an acceptable outcome since this bill was introduced to the council in February this year, as I mentioned earlier. I must say that the Hon. Michelle Lensink, who has had carriage of this right up until her taking maternity leave, was always prepared to deal with the minister on this. In the many, many times that we were prepared to deal with this legislation, the government kept adjourning it.

Working with Business SA, we have been consistently willing to discuss the possibilities of other mechanisms that could strike a balance between the interests of landlords and tenants. This includes Business SA's recent suggestion, where 75 per cent of existing tenants provide approval, enabling the landlord to recover costs from tenants. The government has been quite unwilling to open discussion regarding this reasonable compromise, and I understand that has been communicated to Business SA very recently. If that is what the minister calls consultation, well then I suppose that is something that is not inconsistent with the government's attitude in many areas.

I also just mention, in relation to the other amendment that the Hon. Michelle Lensink has on file, which I will deal with when I get there, I would like to put on the record that the Liberal Party remain committed to our position that any building upgrade agreement should not override tenants' existing lease agreements and should not override the Retail and Commercial Leases Act 1995. I commend the amendment to the committee.

The Hon. I.K. HUNTER: The government does not support the amendment. The amendment effectively seeks to remove the no worse off approach and rather strengthen the consent pathway. Firstly, the government is opposed to the removal of the no worse off approach, because we think that provides the tenant with the greatest level of protection. The removal of no worse off provisions will compromise the bill's full potential to tackle the split incentive barrier in leased buildings and facilitate environmental upgrades, and will therefore reduce the opportunity of economic activity and job creation in this clean-tech sector.

In concluding the debate in June, I stressed that, through consultations, we had received support for both of these options. The South Australian division of the Property Council of Australia, the Shopping Centre Council of Australia, the Clean Energy Finance Corporation and the National Australia Bank expressed views indicating that the no worse off approach is essential to this legislation. The bill is designed to balance the views of various stakeholders and provide for pathways to suit individual circumstances, landlord-tenant relationships, tenancy profiles and ensure that the split incentive barrier, which has been effectively the barrier that has not been overcome with legislation interstate, can be addressed without causing a financial detriment to tenants and without adding extra red tape or reducing the mechanisms and potential for uptake.

I reiterate that the tenant protection concerns have been thoroughly considered. As a result, the no worse off approach is highly prescriptive. As I previously mentioned, the subsequent regulations will be drafted to specify the reporting and make good provisions under the no worse off pathway. This will clearly afford tenants legislative protection and a means of redress.

The honourable member's proposal to require building under the consent approach to provide the tenant with all of that information that is in the amendment really works against the consent pathway. The consent approach is designed for an administratively easy approach with a lack of red tape and a lack of bureaucracy, where the building owner and the tenant agree on a cost-sharing arrangement through normal commercial negotiations without prescribing how this should occur by the bureaucracy. That is probably going to be the easiest for smaller buildings that have very few tenants, and that is why we think this is a much preferable approach.

The honourable member's amendments would see the South Australian mechanism becoming more administratively complex than that in Victoria where the consent approach is operating without the requirement to make savings to the tenant or to use an approved methodology, as outlined in the amendment. In prescribing that this significant additional information must be provided as part of the commercial negotiation between landlord and tenant, the proposed amendments will increase the red tape and cost to building owners and, perversely, act as a barrier to the projects going ahead. For all of those reasons, we will be opposing the amendment.

The Hon. D.G.E. HOOD: Just for the record, we will be supporting the amendment.

The committee divided on the amendment:

Ayes 8

Noes 9

Majority 1

Amendment thus negatived.

The Hon. J.S.L. DAWKINS: I move the amendment standing in the name of the Hon. Ms Lensink:

Amendment No 2 [Lensink–1]—

Page 12, lines 33 to 44 [clause 7, inserted Schedule 1B, clause 12(5)]—Delete subclause (5)

The Hon. I.K. HUNTER: The government opposes this amendment. Ironically, the second amendment really removes tenant protections, I think, and I will explain why. The honourable member's amendment seeks to remove clause 12(5) of schedule 1B that clarifies that the provisions relating to the recovery of a tenant contribution towards a building upgrade charge applies, despite the provisions of the Retail and Commercial Leases Act.

Clause 12(5) of schedule 1B also clarifies that the contribution is considered an outgoing. If the lease was entered into prior to the execution of a building upgrade agreement, the contribution applies whether or not it was disclosed in a disclosure statement given to the tenant.

With consideration of the feedback received from consultations, specifically from the Property Council of Australia, the state government's preferred approach is to retain clause 12(5). The honourable member's amendment, which specifies that a contribution to a building upgrade charge is taken to be an outgoing, will, I am advised, have quite an adverse effect.

As a result of this amendment, should it be supported, there will not be a requirement for a building owner to include any such contribution into a disclosure statement, meaning that prospective tenants will not be aware of a contribution when negotiating a new lease relating to premises with an existing building upgrade charge. We think that is unconscionable. If they are going to enter into a new lease, that information should be disclosed to them. The effect of this amendment is to take that away, so we think the amendment should be opposed.

The Hon. D.G.E. HOOD: I indicate support for the amendment.

The committee divided on the amendment:

Ayes 8

Noes 9

Majority 1

Remaining clause (8), schedule and title passed.

Bill reported with amendments.

Third Reading

The Hon. I.K. HUNTER (Minister for Sustainability, Environment and Conservation, Minister for Water and the River Murray, Minister for Climate Change) (12:38): I move:

That this bill be now read a third time.

The Hon. J.S.L. DAWKINS (12:38): I wish to briefly indicate that the opposition will be opposing the third reading, and I have largely covered the reasons for that in my earlier presentation in relation to the first amendment. However, I would like to point out that I think the handling of this bill, particularly in the last 24 hours, has been appalling.

The way that I was treated last evening where it was attempted to railroad the bill through after dinner where one of the main proponents was actually told during the dinner break that it would be done immediately after the dinner break—in fact, that we were having an earlier resumption than normal after the dinner break—and that was the only way I found out that it was proposed to do it last night. I think we are better than that in this house, generally. This is the way that things happen in the lower house quite a lot where things are just pushed through like that, and I felt quite offended at the way that happened last night.

The minister seemed to say he had no knowledge of that not being communicated, but this has been appallingly handled since it first came here in February. The fact that we are here on 2 December doing this at one minute to midnight before the minister's trip to Paris, I think is an example of the way legislation should not be dealt with. With those few words, I indicate that the opposition will be opposing the third reading.

The council divided on the third reading:

Ayes 9

Noes 8

Majority 1

Third reading thus carried.