Sunset Clauses – Then and Now

All off the plan contracts for the sale and purchase of property have a clause contained in them which is most commonly referred to as a “sunset clause”. These clauses in a contract define a date by which the development, construction and registration of the purchased lot needs to be completed – also known as the “sunset date”. Should the lot not be registered by the sunset date, the sunset clause effectively provides either party with the option to rescind the contract. In other words, they can walk away from the contract with no penalty.

Then – Vendors exploiting sunset clauses for financial gain

In recent years, with the property boom that has been occurring in New South Wales and, particularly, in Sydney, a plethora of purchasers found that the developments and off the plan lots that they has purchased were being delayed and developers were invoking the sunset clause to rescind the contracts. These developers were then re-exchanging contracts with new purchasers for drastically increased prices. Developers were locking into contracts with purchasers at the commencement of their development, allowing them to obtain finance and securing their profits. Then, during the term of the contract (often 12-24 months) both parties were finding that the prices of the properties were rising immensely, sometimes by hundreds of thousands of dollars.

The purchasers were loving this situation, thinking they had made a great investment that was immediately paying off for them, even before settling and paying the full purchase price. However, the developers had other ideas and many of these contracts never made settlement. Construction programs were deliberately being delayed and approvals were allegedly lagging – myriad reasons were coming out thick and fast from developers to explain why the lots were not able to be registered by the sunset date of the contract. Unfortunately, in the majority of instances, the purchaser had no choice but to accept the rescission. The purchaser in that case receives their deposit back but is out of pocket for their legal/conveyancing expenses and are potentially priced out of buying a replacement property.

Now – Legislative change focusing on purchaser protection

Such was the obviousness of the loophole that sunset clauses were causing in a booming property market, providing no protection for a purchaser’s investment, calls were made for the NSW Legislature to act swiftly. On 17 November 2015, the NSW Government passed the Conveyancing Amendment (Sunset Clauses) Act 2015 to provide further protections for purchasers in off the plan property contracts. The Act specifically addresses the concerns that many developers were using the “sunset clause” as a way of terminating an off the plan contract specifically for financial gain.

Vendor’s right to rescind

Under the new protections, a vendor must give each purchaser notice in writing at least 28 days prior to rescission under a sunset clause. The notice must state why the vendor is proposing to rescind and give reasons for the delay.

If the lot has not been created before the sunset date, the vendor can only rescind under a sunset clause if:

  • the purchasers give written consent to the vendor’s proposed rescission; or
  • the vendor obtains an order from the Supreme Court permitting the rescission; or
  • the reason for the rescission comes within a category prescribed by the Regulations (which have not yet been made).

An order permitting the vendor to rescind the contract under the sunset clause will only be made if the Court is satisfied that making the order is “just and equitable”. The factors the Supreme Court will consider when deciding whether to approve the vendor’s proposed rescission will 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
  • any other matter the Court considers to be relevant

What’s also interesting to note is that the vendor is liable to pay the purchaser’s costs of the application to the Supreme Court, unless it can be shown that the purchaser’s refusal to consent to the rescission was unreasonable.

Purchaser’s right to rescind

The new provisions do not limit any right a purchaser may have to rescind an off the plan contract under a sunset clause.

Commencement of the new laws

The new laws had a retrospective application and apply to any purported rescission that takes place on or after 2 November 2015. Therefore, the laws even apply to off the plan contracts that were entered into before that date but are currently yet to be completed.

Impact of the new laws

There have been a few cases of developers attempting to obtain an order of the Supreme Court to rescind a Contract under a sunset clause since the application of the new laws. Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3 is an interesting case that illustrates the difficulties developers are now going to face when trying to rescind off the plan contracts under a sunset clause. In that case, the purchaser of the subject lot did not even appear at the Supreme Court hearing and the developer’s application to have the rescission approved was dismissed.

There is a danger that the new legislation excessively focuses on protecting purchaser’s without having due regard to the difficulties developers may be facing in financing and completing their developments. The impact of the new laws has not yet been felt with respect to the certainty, or lack thereof, provided to both parties when the Court orders that a developer cannot rescind a Contract that it simply cannot complete. In these circumstances, will both parties be bound to a Contract indefinitely with no prospects of completion? There is no doubt that the new legislation is a positive change, however, circumstances will surely arise where the honest developer will be unduly burdened.

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Author Johnsons Law Group

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