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9 December 2015 Breaking News: the sun is setting on unfair use of sunset clauses in off-the-plan sales!

By Daniel Kentwell, Solicitor

In Brief

The recent amendment to the Conveyancing Act by the NSW Government has shifted the balance in relation to strata developments. For a long time, the perception has been that developers have held all the power in off-the-plan contracts. Daniel Kentwell shares his insights.


Terms:

  • "off the plan contract" (for the purposes of this article) is a contract where a purchaser is buying a lot in a strata scheme (ie, a unit in an apartment building) where the strata plan showing the lot is yet to be formally registered with Land and Property Information, and construction of the apartment building is yet to commence.

  • "sunset clause" is a clause, normally found in off the plan contracts that allows a party to the contract to rescind the contract if the strata plan in which the lot being purchased is not formally registered with Land and property Information by the date stipulated as the sunset date.

  • "rescind" means to essentially, cancel the contract with the effect that the parties in the same position they were in before entering into the contract (as if the contract was never entered into) – the deposit is refunded to the purchaser, unless the contract expressly provides otherwise.

When units in a new apartment building are being sold by a developer, they are normally done so "off the plan".  This is generally because the developer requires purchasers to enter into binding contracts (and pay deposits) in order to receive finance from banks to complete the construction of the apartment building. 
 
The plan contained in the contract which shows the lot being purchased is a draft strata plan.  The final strata plan must be lodged with and registered by Land and Property Information before the lot being purchased is formally created.  Registration usually triggers settlement (for example, the contract may stipulate the settlement date to be 21 days after registration of the strata plan). 
 
There can be a long period of time between parties entering into an off the plan contract and the actual creation of the lot by registration of the strata plan with Land and Property Information. 
 
Therefore, the main benefit of a sunset clause is:

  1. for the purchaser, to allow the purchaser to rescind the contract where registration of the strata plan has not taken place and may still be many months (or years) away; and

  2. for the vendor, to allow the vendor to rescind the contract where registration is extensively delayed or, may even be unlikely to occur.

A rescission of contract does not allow the same remedies that arise upon termination of a contract (ie, there is no right for either party to sue the other unless a breach of the contract can be established prior to rescission).
 
The standard contract pages issued by the Law Society of New South Wales (which are most commonly included in all contracts for sale and purchase of land in New South Wales) contains by default a sunset date of 6 months.  This allows either party to rescind the contract if the strata plan is not registered by 6 months after the contract date. 
 
Many off the plan contracts delete the default clause in favour of specifically drafted sunset clause which usually contain longer sunset periods and entitle only the vendor to exercise a right of rescission.
 
Recently, there has been a wave of negative publicity against property developers who have allegedly exercised rescission rights contained in sunset clauses in off the plan contracts to capitalise on the increased market value of the property being sold (for example, at the sales launch, an apartment might be priced at $500,000 and one year later, before construction of the apartment building is completed, due to a rise in demand, the market value of the same apartment may have increased to $700,000).
 
In order to address this issue, the NSW Government has recently passed the "Conveyancing Amendment (Sunset Clauses) Act 2015 No 62".
 
The Act provides that a vendor can only rescind under a sunset clause if:

  1. each purchaser under the contract is served with a notice and consents to the rescission; or

  2. the vendor has obtained an order of the Supreme Court permitting rescission; or

  3. the regulations to the Act otherwise permit the rescission.

With respect to point 1 above, the rescission notice must be served on each purchaser at least 28 days before the proposed rescission, and specify why the vendor is proposing to rescind and the reason for delay in registration of the strata plan.
 
In relation to point 2 above, the vendor must satisfy the Court that it is just and equitable in all the circumstances to allow the rescission.  The Court is to take a number of factors into account in determining so, including:

  1. the terms of the contract;

  2. whether the vendor has acted unreasonably or in bad faith;

  3. the reason for the delay;

  4. the likely date on which the lot will be created;

  5. whether the subject lot has increased in value;

  6. the effect of rescission on the purchaser.

It is important to note that the Act provides:

  1. a vendor is liable for the purchaser's costs in relation to proceedings to obtain an order of the Court for rescission (unless the vendor can satisfy the Court that the purchaser has unreasonably withheld its consent to the rescission);

  2. nothing in the Act limits the purchaser's ability to rescind a contract under a sunset clause;

  3. a provision of an off the plan contract has no effect to the extent it is inconsistent with the Act; and

  4. the Act applies retrospectively to all contracts, and also applies to contracts that were rescinded on and from 2 November 2015.

The impact of the Act is to remove the vulnerability of the purchaser and shift the perception that developers have for a long time held all of the power in off the plan contracts.

For further information, please contact:

Mary Digiglio, Managing Partner  |  Phone: +61 2 9233 5544  |  Email: med@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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