Property boom-increased values

The current property boom has brought into focus the rights of a seller to terminate an” off the plan”  contract where registration of the plan (and other requirements) has not been completed by a sunset date.

“Off the plan” contracts contain provisions that invariably entitle either of the parties to terminate if the property has not reached a point of registration of the plan by a certain date. Typically these sunset dates span several years, and across a property cycle, this can mean that the parties arrive at a sunset date where the value of the property has either increased or decreased dramatically since the initial contract date.

In a declining property market, the right to terminate may favour a buyer and in an increasing boom property market, may favour a seller.

For a developer in a rapidly increasing market, the initial sale price at the time of contract some years ago could be significantly below the current value at the time of a proposed settlement.

In what circumstances can a seller exercise their entitlement to terminate, and resell the property at a higher price reflecting the current increased value?

Note that unlike other jurisdictions such as NSW and Victoria (which restrict a seller's right of termination under a sunset clause), there is no statutory regulation on this issue in Queensland.

In the absence of any defined meaning and express contractual terms, the onus is on a buyer seeking to contest a termination to show that the seller did not use “reasonable endeavours” to reach completion of a project by the sunset date in the contract.

Guidance and instruction on “reasonable endeavours”  can be taken from the following cases:

Woodside Energy Ltd v Electricity Generation Corporation [2014] HCA 7 (Woodside) – is the leading Australian authority on reasonable endeavours clauses in commercial contracts. The HCA made 3 key observations regarding the nature of reasonable endeavours clauses:

  1. the obligation is not an absolute or unconditional obligation;
  2. the nature and extent of the obligation are conditioned by what is reasonable in the circumstances, including circumstances that affect the obligor's business. The High Court emphasised that a party is not required to sacrifice its own business interests in order to fulfil its obligations to use reasonable endeavours; and
  3. some contracts may contain their own internal standard as to what is reasonable, by some express reference relevant to the business interests of the obligor.

Importantly, the HCA commented that the sellers' entitlement to take into account “commercial, economic and operational matters” constituted an “internal standard” that conditioned the standard of reasonable endeavours in this particular case.

Wang v Kaymet Corporation Pty Ltd [2015] NSWSC 1459 is a NSW case directly on an off the plan property project in which a developer sought to terminate and the buyer sought to argue that the developer had failed to use “reasonable endeavours” to achieve registration of the plan by the sunset date. The buyer failed in that case.

In Kaymet's case, there was an extensive examination of the whole of the building process and a consideration of each point of delay and the reasons for such delay.

In determining this issue now in Queensland cases, the circumstances which have led to the delay in construction and the failure to obtain the relevant certificates prior to the sunset date is critical. The seller must carefully consider the history of this project in terms of the reason for and the duration of each period of delay.

If the seller has:

  • by its conduct, actions or omissions,
  • deliberately or recklessly delayed or caused a delay in obtaining the certificates,
  • then it may be regarded as having not used reasonable endeavours.

then it may be said to have not acted reasonably in its endeavours.

However-delays which occur as a result of adverse weather events, product or skills and trade shortages without fault on the part of the developer may be sufficient to justify a termination if it leads to being unable to reach a defined point by a sunset date. In some cases, this may mean a developer may get a significant windfall if they can resell the property for an increased price on a climbing market.

Before the seller does exercise its rights to terminate, we would recommend that it carefully and objectively examines its own conduct in the project, and that of others where it has had control and where it has not had control to identify each event or events which has caused delays. If the seller is able to determine that it has used all reasonable endeavours and that any delays which have occurred are not as a result of any act or omission over which it has had control, then, subject to the express terms of the contract, it may safely terminate the contract in issue.

There is no guarantee that a court would necessarily follow the same reasoning as the seller in determining whether “reasonable efforts “ were used, and may well be sympathetic to a buyer. Ultimately this is a commercial decision for the seller to weigh up based upon the quantum of the potential resale price and the risk of a contested termination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.