Court applies the new law on sunset clauses against the developer

In New South Wales, new legislative provisions1 on sunset clauses in off the plan contracts of sale came in to effect on 24 November 2015. These provisions were designed to prevent a developer from unreasonably rescinding an off the plan contract for a residential property under a sunset clause.

Recently, the Supreme Court of New South Wales considered and applied these provisions for the first time in Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3. Justice Black refused to grant the developer an order allowing it to rescind the contract in question.

Sunset Clause

A sunset clause in an off the plan contract is one that provides for the rescission of the contract if the residential lot (e.g. strata lot) is not created by a deadline specified under the contract.

The New Law

Under the new law,2 a developer can only rescind an off the plan contract pursuant to a sunset clause if:

  1. written consent from the purchaser is obtained in the following way:

    a. the developer has sent the purchaser a prescribed notice in writing, at least 28 days before the proposed rescission, that specifies why the vendor is proposing to rescind the contract and the reason for the delay in creating the subject lot; and

    b. the purchaser, after being served with the notice, consents in writing to the rescission; or

  2.  the Supreme Court of New South Wales makes an order permitting the vendor/developer to rescind the contract on the basis that it is just and equitable in all of the circumstances.

Application of the New Law

In Jobema, Justice Black determined that it was not just and equitable in the circumstances to allow the developer to rescind the contract. In doing so, his honour considered the following matters as prescribed under the new law and held as follows:

  1. the terms of the relevant contract – the developer was in breach of the contract clause requiring that it uses all reasonable endeavours to have the strata plan registered on or before the sunset date. This is despite the fact that delay was largely attributable to the previous developer, the rights of whom the developer had subsequently assumed;
  2. whether the developer has acted reasonably or in bad faith – the developer did not act unreasonably or in bad faith;
  3. the reason for delay in creating the subject lot – the developer assumed the previous developer’s obligations to use all reasonable endeavours to progress the work. The delay on the part of the previous developer does not assist the developer’s application;
  4. the date on which the lot will be created – the developer established that the date on which the lot would be created will be mid-2017, but this factor did not weigh in favour of or against the developer;
  5. whether the lot had increased in value – there was a bare assertion, but not evidence, that the value had increased. Even if there was evidence establishing that the value had increased, it weighs against the developer’s application because if the developer was allowed to rescind the contract, it would deprive the purchaser of the bargain, particularly where the delay arose from the previously developer’s failure to perform contractual obligations; and
  6. the effect of rescission on the purchaser – there was no evidence in this regard, other than that the purchase had not consented to the rescission. The purchaser did not appear at the hearing or lead evidence.

The Court then proceeded to consider other matters that the developer contended were relevant as follows:

  1. notwithstanding that since the developer took over the project, it diligently progressed the construction of the building, the Court could not disregard the previous developer’s lack of diligence, where the developer had expressly assumed the previous developer’s obligations under the contract;
  2. there was no substantive evidence led to establish that the construction costs had increased;
  3. the developer acquired the site from the previous developer with knowledge that the previous developer did not advance the project and nevertheless assumed the previous developer’s obligations;
  4. the proposition that the project did not meet financial requirements in 2015 is not established by substantive evidence and was arguably a risk that the developer assumed when it assumed the previous developer’s obligations;
  5. the developer offered the purchaser a new contract at a higher price for the same property but there was no evidence that the higher price reflected the 2015 prices;
  6. the developer argued that when it took over the project, it did not expect that new law would be introduced offering protection to the purchasers. The Court held that any business entity undertaking a project over a period of time assumes the risk of adverse legislative change and therefore if the developer did assume that there would be no legislative change, that assumption was a business risk; and
  7. finally, on this project, some purchasers had their sunset dates extended by consent, and for unknown reasons, others (including the purchaser in this case) did not – this tends against the grant of the order sought by the developer.

Conclusion

This decision serves as a useful guide to both developers and purchasers on any future arguments as to the rescission of off the plan contracts. In summary:

  1. from the developer’s point of view: 

    a. care should be taken to ensure that there is substantive evidence before the Court as to, amongst other things, the increase in construction costs and reasons why some purchasers are treated differently to others (if any); and

    b. they should exercise extreme caution and obtain legal advice before agreeing to assume the obligations of any existing developer looking to offload responsibilities to a new developer, as the existing developer’s failure to comply with the contract will be considered as a factor against the new developer on any application for permission to rescind the contract; and

  2. from the purchasers’ perspective, while it is comforting to know that the Court generally appears to be reluctant to deprive them of their bargain, they would be best served if they are able to lead evidence as to the prejudice they would suffer if rescission is allowed to occur, including the difference between the purchase price, loss of interest and/or opportunity costs.

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1 Conveyancing Amendment (Sunset Clauses) Act 2015
2 Section 66ZL of the Conveyancing Act 1919 (NSW)