The new Sunset Clauses Law passes its first test

Property developers will need to think twice before rescinding off the plan contracts using a sunset clause, following the first NSW Supreme Court decision under the new Conveyancing Amendment (Sunset Clauses) Act 2015 (the Sunset Clauses Law).

The decision is Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3.

Justice Black refused to allow Jobema Developments to rescind Mr Wu’s off the plan contract after the sunset date had passed, despite the fact that registration of the strata plan had not taken place prior to the sunset date.
 

The background

Mr Wu entered into the contract on 6 December 2013, to purchase a home unit off the plan. It was in a 14 storey property development project for 72 residential units and 7 commercial lots in Dora Street, Hurstville.

The sunset date for the registration of the Strata Plan was 31 December 2015. After that date, either party had 14 days to rescind. The vendor’s right to rescind was qualified by the requirement to ‘use all reasonable endeavours to have the Strata Plan registered by the sunset date’.

The vendor, Xycom, carried out little construction work after entering into the contract, although it had DA approval, possibly because it did not have construction finance.

In October 2014, Xycom sold the development site (with the DA) to Jobema Developments. The sale was settled in January 2015. The sale was subject to the existing off the plan sale contracts, which were novated to Jobema. Mr Wu’s contract was one of many novated, but in Mr Wu’s case, the sunset date was not extended, as was done with some other contracts.

Jobema started demolition and construction work on 5 February 2015. By December 2015 work was progressing well - it had constructed 4 out of 5 basement levels. An April 2017 completion was estimated (subject to inclement weather), and a July 2017 date was estimated for registration of the strata plan.

Before the sunset date expired, Jobema approached Mr Wu and other purchasers offering to extend the sunset date in return for agreeing to a new price (a price increase on account increased construction costs). Mr Wu did not accept this offer.

On 1 December 2015, Jobema served Mr Wu (and others) with a Notice of Intent to rescind the off the plan contract after 28 days. The Notice set out (1) why it was proposing to rescind the contract, and (2) the reason for the delay in creating the strata lot, as required by s 66ZL(4) of the Conveyancing Act 1919.

The Notice was ‘timed’ to expire so as to enable Jobema to obtain the Court’s leave to rescind before the right was lost – which was 14 days after the expiry of the sunset date.
 

Was it just and equitable for Jobema to be given leave to rescind under s 66ZL of the Conveyancing Act, 1919?

Mr Wu did not consent to, nor oppose, the leave application made by Jobema. Procedurally, being a leave application, the Court must still determine whether or not the requirements of s 66ZL are satisfied.

Section 66ZL(6) requires the developer to satisfy the Court that it is just and equitable to rescind.

Section 66ZL(7) requires the Court to take into account specific factors. The Court’s analysis was:

66ZL(7)(a) - the terms of the off the plan contract – Jobema argued it was not responsible for Xycom’s failure to use its best endeavours to construct the building so that the Strata Plan could be registered by the sunset date. The court did not agree. It said that Jobema was responsible for Xycom’s breach of the best endeavours covenant because it had knowledge of the lack of progress by Xycom when it assumed Xycom’s obligations under the sale contracts.

66ZL(7)(b) - whether the vendor has acted unreasonably or in bad faith – none in this case.

66ZL(7)(c) - the reason for the delay in creating the subject lot – Jobema cannot shift the blame for the 12 month delay in construction to Xycom, because it assumed Xycom’s contractual obligations to the purchasers.

66ZL(7)(d) - the likely date on which the subject lot will be created – no significance in this case.

66ZL(7)(e) - whether the subject lot has increased in value – It was suggested that the lot had increased in value, but no evidence was tendered. The Court stated that a price increase may ‘have tended against the grant of leave so as to deprive Mr Wu of his bargain, particularly where the delay has arisen from Xycom’s apparent failure to perform obligations which Jobema has now assumed’.

66ZL(7)(f) - the effect of the rescission on each purchaser – Mr Wu had not consented to the rescission.

66ZL(7)(g) - any other matter that the Court considers to be relevant – Jobema argued two matters–

1. that the increase in construction costs affected the construction funding. The Court noted that ‘an inability to rescind’ would not affect the availability of construction finance – it would only result in a requirement ‘to contribute additional capital to meet its lender’s requirements’.
2. that the new Sunset Clauses Law was unforeseeable when it purchased the property. It took effect afterwards, on 2 November 2015, and so Jobema’s rights should not be restricted. The Court did not agree – ‘legislative change generally is a foreseeable risk of business activity’. Specifically - ‘if Jobema assumed that the legislature would not intervene to increase the protection available to off the plan purchasers, that assumption was a business risk’.

The Court was also concerned about – ‘the selective and unexplained process by which some purchasers had their sunset dates extended, by agreement with the vendor’ while other purchasers did not. It said that this ‘is a matter which tends against the grant of leave sought.’

The Court dismissed the application because it was not satisfied it was just and equitable.
 

Comments

Sunset clauses are included in off the plan contracts so as to limit the property developer’s risk that it might be locked into an unprofitable contract, forever. The Sunset Clauses Law does not prohibit sunset clauses, but raises the hurdle that the property developer must show that the rescission is just and equitable when the purchaser does not agree to the rescission.

Jobema’s gamble that it could ignore its predecessor’s delay and go ahead and rescind the contract has backfired, because it has now lost the ability to use the sunset clause at all if it strikes difficulties in the future. In hindsight, it should have extended the sunset date, for 12 months, to ‘neutralise’ the delay.

The Jobema decision shows that property developers need to be a bit smarter when considering using a sunset clause to rescind a contract, so as to be seen to acting justly and equitably.

For more information on the Sunset Clauses Law, click 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.

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