Vendors of off the plan developments lose sunset clause rescission rights in favour of purchaser protection
On 17 November 2015, the NSW Government passed the Conveyancing Amendment (Sunset Clauses) Act 2015 (“Sunset Clauses Act”), which inserted Division 10, Part 4 into the Conveyancing Act 1919 (NSW) so as to limit the right of vendors to rescind an off the plan property contract through the use of a ‘sunset clause.’
Before addressing the key aspects of this amendment, reference must be made to the meaning of the terms ‘off the plan’ and ‘sunset clause’.
What is an off the plan contract?
A contract is considered ‘off the plan’ if it relates to the sale of a residential that which does not, at the time of entry into the contract, have a separate title, meaning that the plan to which the lot is a part is not yet registered.
What is a ‘sunset clause’?
A ‘sunset clause’ is a provision in an off the plan contract that sets out the latest date, named the ‘sunset date’, by which the lot being purchased must be registered before the Vendor may rescind the contract.
Overview of Amendments
The amendments created pursuant to the Sunset Clauses Act are summarised as follows:
- A vendor may only rescind an off the plan contract under a sunset clause where the lot has not been registered if:
- The purchaser consents, in writing, to the rescission of the contract; or
- The vendor obtains leave from the Supreme Court at NSW Permitting the vendor to rescind the contract;
- A vendor seeking to rescind a contract must submit to the purchaser notice of this intention, in writing, at least 28 days before the proposed rescission. This notice must contain the vendor’s reasons for the delay in registering the lot;
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Any sunset clause that purports to automatically rescind the contract is void, and instead, the provisions of Division 10 apply;
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Where the vendor applies for a Supreme Court order to rescind the contract, the vendor must show that the rescission requested is just and equitable, taking into consideration:
- Whether the vendor acted unreasonably or in bad faith;
- The reason for the delay in registering the lot;
- The likely date on which the lot will be registered;
- Whether the lot has increased in value; and
-The effect of rescission on the purchaser;
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Unless the vendor successfully shows that a rescission is fair and equitable, the vendor will be liable to pay the purchaser’s court costs relating to the proceedings.
Purpose of Amendments
The overall purpose of the amendments is to afford greater protection to purchasers entering into off the plan contracts.
As contracts for off the plan developments are often entered into in the early stages of the development, lots within the developments generally increase in sale price between the date on which a contract is entered into and the date that the lot is registered. In order to take advantage of this increased sale price, some vendors may delay registration of the plan so as to activate the sunset clause, rescind the off the plan contract and subsequently on-sell the property to another purchaser at a higher price.
It seems that vendors are more often than not the only winners in this scenario, as an increase in property prices over the period the purchaser was contracted may make it difficult for the purchaser to re-renter the property market. Moreover, the purchaser may have, in the meantime, lost an opportunity to invest their deposit elsewhere.
Effective date
The application of the amendment is retrospective and applies to any vendor rescission of an off the plan contract, pursuant to a sunset clause, on or after 2 November 2015.
Vendors and developers of off the plan properties should familiarise themselves with this new legislation and consider amending their off the plan contracts to reflect the Sunset Clauses Act.