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

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.

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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:

3. the terms of the contract;

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

5. the rea­son for the delay;

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

7. whether the sub­ject lot has increased in value;

8. 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);

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

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

12. 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.