The new law for sunset clauses will require property developers to obtain the buyer’s consent or have a good reason to rescind a contract

To combat a recent trend by Sydney property developers to make windfall profits by rescinding off-the-plan contracts, then re-selling the apartment or land at a higher price because of a rising market, the NSW Government has passed into law the Conveyancing Amendment (Sunset Clauses) Bill 2015.

The new law limits the vendor’s rights to use sunset clauses to terminate contracts.

In the second reading (10 November 2015), Mr Victor Dominello, the Minister for Innovation and Better Regulation, said:

At the centre of this bill is our resolve to prevent a developer manufacturing delays to obtain an unjust benefit … at the expense of homebuyers
 

How do sunset clauses work?

Sunset clauses are inserted into Contracts for Sale of new apartments and land packages. Sunset clauses extend the time for completion of the contract until the building or subdivision is completed. They follow these lines:

• Completion of the contract is made subject to and conditional upon the registration of the strata plan / subdivision plan by the sunset date.
   
• The vendor must use its reasonable endeavours to complete the building work and register the plan by the sunset date.
   
• If the plan is not registered by the sunset date, then both the vendor and the purchaser may rescind the contract.
   
• If the contract is rescinded, apart from the purchaser’s deposit being returned, the purchaser receives no compensation for expenses or loss of capital gains, and neither the vendor nor the purchaser will have any claims against the other.
   
• The time period in the sunset clause is usually between 2 and 5 years.

Politically, the need for the new law was highlighted by the recent decision of Wang v Kaymet Corporation Pty Ltd [2015] NSWSC 1459 (6 October 2015)

In Wang v Kaymet, the Supreme Court of New South Wales upheld the rescission of the home unit sales contracts by the developer using a sunset clause, despite:

1. the purchasers’ willingness to wait beyond the sunset date until the building was completed; and
2. the reason for the rescission being the developer’s inability to complete the building within the 30 months sunset period that it had set.

To add insult to injury, the Court ordered the 43 purchaser plaintiffs to pay the developer’s legal costs in the proceedings (which included 9 hearing days), and also to pay damages arising from the fact that the developer had been restrained from selling or leasing any of the apartments for almost 2 years whilst the proceedings were in progress - see [2015] NSWSC 1528.

 

The new law for sunset clauses

The new law will apply all contracts as from 2 November 2015 – not only to new contracts but also to contracts current as at that date. The new law overrides inconsistent provisions in sunset clauses.

The new law is found in section 66ZL Conveyancing Act 1919 in Division 10 which is headed Rescission under sunset clauses. This is a summary:

• The law applies to off the plan contracts for the sale of a residential lot (an apartment / home unit / land) where a separate Certificate of Title has not yet been created by the registration of a strata plan or subdivision plan at the NSW Land & Property Information Office.
   
• After the sunset date, the vendor (the developer) is limited in rescinding an off the plan contract under a sunset clause, to these ways. Either:
  (a) the purchaser consents in writing to the rescission; or
  (b) the vendor has obtained a Supreme Court order permitting the vendor to rescind; or
  (c) the vendor rescinds for a reason set out in the regulations.
   
• The process starts with the vendor serving a 28 day notice that specifies why the vendor is proposing to rescind the contract and the reason for the delay.
   
• If the purchaser does not consent to the rescission or if it is not for a reason set out in the regulations, then the vendor must satisfy the Supreme Court that making an order to rescind is just and equitable in all the circumstances. The specified circumstances include:
  (a) the terms of the off the plan contract,
  (b) whether the vendor has acted unreasonably or in bad faith,
  (c) the reason for the delay in creating the subject lot,
  (d) the likely date on which the subject lot will be created,
  (e) whether the subject lot has increased in value,
  (f) the effect of rescission on each purchaser,
  (g) any other matter that the Court considers to be relevant,
  (h) any other matter prescribed by the regulations.
   
• The vendor is liable to pay the legal costs of the purchaser in the Supreme Court proceedings unless it satisfies the Court that the purchaser has unreasonably withheld their consent to the rescission
   
• The new law does not affect purchaser rescissions. It applies the vendor rescissions only.
   

Comments

The new law treats sunset clauses as an unfair contract term which disadvantages purchasers. It sits squarely within the Australian Consumer Law (Part 2-3) which labels as unfair a term that would cause a significant imbalance in the parties' rights and obligations arising under the contract (section 24(1)(a)).

The new law introduces a list of circumstances which are not found in the Australian Consumer Law. These might be a useful guide for off the plan purchasers in states other than NSW, which do not have a sunset clause law, to dispute the validity of sunset clauses as containing unfair contract terms.

There will be more laws to protect off the plan purchasers. The Minister has warned developers that other measures will be taken “in tackling the off the plan market” to prevent abuses such as reducing the sizes of lots in a development after contracts have been exchanged, better disclosures and other one-sided contractual terms which purchasers are rushed to accept without negotiation.

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