Australia: Sunset clauses in off-the-plan contracts in NSW – A new regime

Last Updated: 1 September 2016
Article by Vanya Lozzi

Most Read Contributor in Australia, September 2017

On 17 November 2015 the NSW Government introduced the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) which inserted a new section 66ZL into the Conveyancing Act 1919 (NSW). The amendment makes significant changes to the ways that off-the-plan property contracts can be rescinded. In particular, it changes the ways in which developers can rely on sunset clauses.

Sunset Clauses

A sunset clause, is a provision in an off-the-plan contract that allows either the vendor or the purchaser to rescind the contract if the title to the property has not been created by a specific date (i.e. the sunset date). The sunset date is a date selected by the vendor and is usually a date that is at least 12 months from practical completion.

What were the previous laws?

Previously, there was no prohibition on vendors being able to rescind contracts where the sunset date had passed and the title to the property had not yet been created. This led to claims that some vendors were deliberately delaying completion of the building and registration of the title in order to be able to rescind off-the-plan contracts, refund deposits and sell the properties at a higher price.

What do the changes mean for developers?

Under the new legislation, a vendor is required to provide each purchaser with at least 28 days' notice prior to rescission of the contract under a sunset clause. The notice must state why the vendor is proposing to rescind and provide reasons for the delay. The purchaser may then give their written consent to the rescission.

If the purchaser does not consent to a rescission of the contract or, presumably, does not respond in any way to the vendor's notice, then the vendor must obtain an order from the Supreme Court to proceed with the rescission. The Supreme Court will take several factors into account when deciding whether to approve a vendor's proposed rescission. These include:

  • the terms of the contract;
  • whether the vendor has acted unreasonably or in bad faith;
  • the reason for the delay;
  • whether the subject lot has increased in value; and
  • any other matter the court considers to be relevant.

Vendors will be liable to pay the costs of the application to the Supreme Court unless they can prove the refusal of the purchaser to consent to the rescission was unreasonable.

This legislation reverses the onus of proof requiring the developer, rather than the purchaser, to prove that the delay was beyond its control.

The new laws came into effect on 2 November 2015 and apply to all contracts, regardless of the date they were entered into.

Jobema Developments Pty Limited v Zhu [2016] NSWSC 3

The case of Jobema Developments is the first case decided under the new legislation. The case concerned purchaser Mr Wu, who entered into a contract with vendor Xycom on 6 December 2013 to purchase a residential unit off-the-plan. The unit was part of a 14 storey property development project for 72 residential units and 7 commercial lots. The sunset date for the registration of the strata plan was 31 December 2015, after which the parties had 14 days to rescind. The vendor was further required to "use all reasonable endeavours to have the Strata Plan registered by the sunset date" before it could exercise its right of rescission.

In October 2014, Xycom sold the development site to Jobema Developments (Jobema) and the existing off-the-plan sale contracts, including Mr Wu's, were novated to Jobema. At the time of sale, Xycom had made little progress with the construction work. Consequently, the project was not expected to be completed and the strata plan not registered until 2017.

Prior to the expiration of the sunset date, Jobema approached Mr Wu (and other purchasers) with an offer to extend the sunset date in return for agreeing to a new, increased price to reflect increased construction costs. Mr Wu refused the offer. On 1 December 2015, Jobema served Mr Wu with a Notice of Intent to rescind the contract after 28 days. On 22 December 2015, Jobema proceeded to apply for leave in the Supreme Court under section 66ZL of the Conveyancing Act. It is important to note the Court must determine whether the requirements section 66ZL are satisfied, irrespective of whether the purchaser has consented to or opposed the vendor's application.

Justice Black refused Jobema's application, finding an order permitting the vendor to rescind the contract was not just and equitable in the circumstances. The fact that the strata plan had not been registered prior to the sunset date did not affect the decision.

Jobema Developments has three key implications:

  1. The failings of the previous developer will not support a leave application. Here, the Court stated Jobema had knowledge of Xycom's lack of progress when it assumed Xycom's obligations. Jobema therefore could not shift the blame for delay to the previous developer because it had assumed Xycom's contractual obligations, including the obligation to use its best endeavours to ensure the project was in a position to allow the strata plan to be registered by the sunset date.
  2. The retrospective effect of the amendment of sunset clause legislation is not a relevant factor. Jobema's argument that the new legislation was unforeseeable when it purchased the property in 2014 was rejected by the Court which stated legislative change, including change which increased protection for off-the-plan purchasers, is a foreseeable business risk that developers assume.
  3. The developer must be seen to be acting justly and equitably in dealing with purchasers. The "selective and unexplained process" by which Jobema extended the sunset date to only those purchasers who agreed to its offer was a factor against Jobema in the Court's consideration for granting leave.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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