New sunset clauses law protects purchasers by overriding vendor rights to end an off the plan Contract

The new sunset clauses law in NSW is proving useful to property purchasers in a rising market by allowing them to override the vendor’s use of the sunset clause, and to enforce an off the plan contract.

In Klein v McMahon [2017] NSWSC 1531 (13 November 2017), Justice Darke in the Supreme Court of New South Wales granted a purchaser specific performance of a Contract for the purchase of land (off the plan) long after the sunset date had passed, after ruling that the vendor’s rescission under the sunset clause was invalid.

The facts

By Contract for Sale dated 2 July 2015, Klein agreed to purchase from Mr and Mrs McMahon lot 1 (with a residence built on it) in a proposed subdivision of land into two lots at Picton for a price of $350,000.

The Contract for Sale contained a sunset clause – a Special Condition, similar to printed clause 28 in the Law Society / Real Estate Institute standard form Contract for Sale of Land. The clause conferred the right to rescind the Contract if the subdivision plan was not registered within 6 months of the contract date.

It was more than a year later, namely on 17 August 2016, that the Wollondilly Shire Council issued a Subdivision Certificate, which certified that the subdivision had been completed in accordance with the development consent.

On 25 August 2016, the vendors (the McMahons) issued a Notice of Rescission of Contract to the purchaser (Klein) to end the Contract immediately on the basis that the subdivision plan had not been registered within 6 months (that is, by 2 January 2016).

The purchaser’s solicitor did not consent to the rescission, and pointed to a failure to comply with the sunset clauses law requirement that a vendor must give the purchaser:

at least 28 days notice in writing 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 - Section 66ZL(4) Conveyancing Act 1919

The vendor’s solicitor sent a lapsing notice to lapse the purchaser’s Caveat (which the purchaser had registered on the title). The purchaser responded by commencing proceedings in the Supreme Court claiming that the rescission was invalid and seeking an order that the vendor specifically perform the Contract.

The subdivision plan was registered on 23 December 2016.

The property was valued at $515,000 in April 2017, which provides the commercial reason why the vendor wanted to rescind the contract – so as to keep the windfall profit of $165,000.

The decision

The preliminary issue for the Court to determine was whether the Contract was legally binding upon Mr McMahon – because he had not signed the Contract. The Court decided that the Contract was binding upon him because there was a principal and agency relationship by which he had entrusted his wife with financial dealings, he knew of the transaction, and Mrs McMahon had signed the Contact for him and had written ‘Vendor’s Representative’.

This illustrates why it is proper conveyancing practice to require all vendors to sign the contract, either personally or with proper authority such as under a Power of Attorney.

The main issue was whether section 66ZL(4) applied. The Court found it did apply because the requirements of section 66ZL(1) & (2) were satisfied:

the land was a “residential lot”;
it was an “off the plan contract” because the residential lot had not been created at the time the contract was entered into;
the Special Condition was a “sunset clause” because it allowed the contract to be rescinded if the plan creating the lot has not become a registered plan by a certain date; and
the date was a “sunset date” because it was the latest date for the creation of the residential lot.

The Court found that the vendor’s notice of rescission was invalid because it did not comply with section 66ZL(4), in that the notice was not a 28 day notice and no reason was given for the delay in registering the subdivision plan. Therefore the Contract for Sale remained on foot.

To obtain an order for specific performance of the Contract for Sale, Klein gave evidence that he held loan approval to borrow $300,000, and could pay the balance from his personal funds. This coupled with the increased value, was sufficient to satisfy the Court that “Mr Klein is now, and has at all relevant times been, ready, willing and able to perform his essential obligations under the contract”.

One matter of interest is that the Court was informed that $411,000 was owed under the first mortgage over the property, which was greater than the price payable. The Court did not see that as a reason to withhold specific performance on the ground of impossibility. The Court speculated that “The mortgage is, presumably, registered over both of the lots created by the sub-division”, and so the remaining lot was available to secure the remainder of the mortgage debt.

Conclusion

This decision illustrates that the sunset law applies equally to a two lot land subdivision, as to a multi lot high rise strata subdivision, to override the vendor’s rights in a sunset clause.

The purchaser’s remedy of specific performance is only available if the subdivision is registered, as it was in this case. Otherwise, the purchaser has a claim for loss of bargain damages.

The reasons for delay that a vendor might use to rescind an off the plan Contract were not explored in this case. click The new Sunset Clauses Law passes its first test