New laws seek to protect “off the plan” purchasers

Developers often contract to sell parcels of land that have not yet been created (e.g. strata lots that are to be created). Such sales are made under contracts for sale known as “off the plan contracts”.

Off the plan contracts usually contain a deadline for the creation of the relevant parcel, known as the “sunset date”. There is also usually a clause that entitles either party to rescind the contract if the sunset date deadline is not met. Such clauses are known as “sunset clauses.”

As property prices have increased sharply over the past few years, so too has the incentive for developers to rescind contracts in order to re-sell and capitalise on the booming market.

It has been alleged that some developers have deliberately delayed construction of buildings or registration of plans in order to take advantage of sunset clauses. Although such deliberate delays may preclude a developer from relying on a sunset clause, the purchaser bears the onus of taking the developer to court and showing that the developer’s failure to meet the sunset date deadline was caused by intentional delays. This onus can be very difficult and extremely costly to discharge.

New laws

On 17 November 2015, the NSW Government passed the Conveyancing Amendment (Sunset Clauses) Act 2015.

The new laws seek to protect off the plan purchasers from such delay tactics and apply to any purported rescission by a developer on or after 2 November 2015.

The laws only apply where the parcel to be created is “residential property” (within the meaning of section 66Q of the Conveyancing Act 1919).

Restrictions on rescission

Under the new laws, a developer who proposes to rescind under a sunset clause must give the purchaser written notice at least 28 days beforehand, providing reasons for the proposed rescission and the delay in creating the relevant parcel of land.

More significantly, a developer can only rescind under a sunset clause if:

1. after the developer serves the required notice, the purchaser gives written consent to the proposed rescission; or

2. the developer obtains an order from the Supreme Court permitting the rescission; or

3. regulations permit the proposed rescission (no regulations have yet been made).

The Supreme Court can only make an order permitting a rescission if the developer satisfies the Court that making the order is just and equitable in all the circumstances. In determining whether it is “just and equitable in all the circumstances”, the Court must take into account a number of matters, including:

1. the terms of the contract;

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

3. the reason for the delay;

4. whether the parcel has increased in value; and

5. any other matter the Court considers relevant.

Additionally, the developer will be liable for the purchaser’s costs of any application by the developer to the Supreme Court, unless it can be shown that the purchaser unreasonably withheld consent to the rescission.

Ramifications for developers** **

The new laws reverse the position that would normally apply between developer and purchaser. The onus is now on the developer (rather than the purchaser) to obtain relief from the Court.

Furthermore, the financial burden of such Court proceedings will generally be born exclusively by the developer. Where there are a multitude of purchasers, any Court application by the developer is likely to be extremely costly.

Accordingly, these reforms will substantially reduce the value to developers of sunset clauses. Additionally, they will make reliance on sunset clauses significantly more difficult. This will be the case even in circumstances where it would normally be reasonable for the developer to rescind (e.g. despite the developer complying with the contract, unforeseen circumstances have arisen that make the development no longer viable).