Price increases and a shortage of building supplies has created a perfect storm in the building industry, with delays and unforeseen costs. In record numbers, purchasers and developers have been invoking sunset clauses to cancel their building contracts because of rising prices, unprecedented delays, and shortages in building supplies.
So, what does this mean for you? If you have bought a house and land package, the agreement will often have a sunset clause. Such a clause is a condition in the agreement that provides the purchaser, and occasionally the developer, with the right to cancel the agreement if the house does not receive a Code Compliance Certificate by a certain date.
Since COVID-19 arrived on our shores, sunset clauses have been invoked by both purchasers and developers in increasing numbers because:
- With a rapidly rising property market, developers were cancelling contracts as the resale value was significantly higher than what the packages were initially sold for;
- Purchasers who were responsible for any costs increases under their contracts were cancelling on the basis that they did not want to cover the additional costs; and
- Significant delays for building supplies has meant construction has not been completed by the specified date.
In the recent decision of the High Court in Titterton v Dynasty Capital Limited  NZHC 1202, a purchaser, Ms Titterton, was successful against Dynasty Capital who Ms Titterton had entered into an agreement for sale and purchase with for a fixed price house and land package in Kaiapoi.
Dynasty Capital attempted to cancel the agreement by invoking the sunset clause on the basis the construction of the house was not completed and a code compliance certificate had not issued by the sunset date in the agreement due to delays in the construction process. Ms Titterton claimed the delays were due to Dynasty Capital's delays in applying for building consent, its refusal to progress the build unless Ms Titterton agreed to pay an additional $45,000 towards the purchase price, and its failure to order the kitchen joinery due to it having insufficient funds to do so.
Ms Titterton refused to pay the additional sum or accept Dynasty Capital's cancellation and applied to the High Court to sustain a caveat over the property, which prevented Dynasty Capital from being able to sell the property to anyone else.
The High Court found that the delays with construction of the house were predominantly caused by Dynasty Capital and that they had an obligation to complete the construction in a "proper and workmanlike manner", which ultimately extended to an implication that Dynasty Capital had a duty to Ms Titterton to exercise reasonable diligence in the construction of the house. The sunset date in the agreement was set some 68 weeks after the date of the agreement which the Court noted was almost three times the normal length of time to construct a house like this.
Ultimately it appeared to the Court that Dynasty Capital was responsible for the delays due to funding issues it encountered shortly after it had entered into the agreement with Ms Titterton. In respect of Dynasty Capital's refusal to progress the build unless Ms Titterton agreed to pay an additional $45,000 towards the purchase price, the Court said ".the threat of cancellation if a substantial increase was not agreed to, smacks of an attempt to put unfair pressure on the purchaser." As the agreement between Ms Titterton and Dynasty Capital was for a fixed price, Dynasty Capital took on the risk of price escalation, not Ms Titterton.
We are seeing similar cases to Ms Titterton's as June 2022 appears to have been a popular sunset date in these types of agreements, most of which were entered into prior to the significant cost escalations experienced during the past 12 months.
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.