The sun sets on developer’s rescission rights in off the plan contracts of sale

The Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) (Sunset Clauses Law), which came into force on 2 November 2015, limits a developers ability to rescind an off the plan contract of sale pursuant to a sunset clause. The Sunset Clauses Law introduced division 10, section 66ZL of the Conveyancing Act 1919 (NSW) (Act).

The decision of Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC (Decision) is the first to apply the new law. The Court’s application of the Sunset Clauses Law highlights that developers will either require the buyer’s consent or a very good reason to rely on a sunset clause to rescind an off the plan contract.

Background

Sunset clauses are common provisions in off the plan contracts. In specific circumstances, they allow either party to rescind if the subject lot has not been established by the sunset date, as provided in the contract. These clauses are designed to protect developers from the risk of being locked into a project that ultimately proves to be commercially unviable.

Sunset Clauses Law

The Sunset Clauses Law applies to all off the plan contracts of sale for residential lots, with the effect of incorporating additional provisions into every contract. Importantly, it also applies to contracts entered into before 2 November 2015.

If the sunset date passes, a developer can now only rescind if it does so within the limitations of section 66ZL(4) of the Act. This section requires a developer to provide a purchaser with at least 28 days’ notice of its intention to rescind the contract. This notice must set out the reasons for the proposed rescission as well as an explanation for the delay in creating the subject lot.

On receipt of the notice of intention to rescind, a purchaser may choose whether or not to consent to the contract coming to an end. If the purchaser does not provide consent, a developer has an option to seek an Order of the Supreme Court permitting the rescission of the contract under the sunset clause.

The decision in Wang v Kaymet Corporation [2015] NSWSC 1459, which was handed down prior to the enactment of the Sunset Clauses Law, placed the onus on the purchaser to prove that the developers delay in reaching the sunset date was unreasonable. The Sunset Clauses Law effectively reverses the onus and requires the developer to provide reasons for the delay, satisfying the Court that it is just and equitable to rescind in the circumstances.

The relevant factors that the Court must consider when deciding whether or not to grant leave to the developer are contained in section 66ZL(7) of the Act, and include:

• the terms of the off the plan contract;
• whether the vendor has acted unreasonably or in bad faith;
• the reason for the delay in creating the subject lot;
• the likely date on which the subject lot will be created;
• whether the subject lot has increased in value;
• the effect of the rescission on each purchaser;
• any other matter that the Court considers to be relevant; and
• any other matter prescribed by the regulations.

In addition to these factors, the Court will take into account whether the value of the lot has significantly increased, and if so, the exercise of the sunset clause will be prima facie unfair.

Facts of the Decision

On 6 December 2013, Mr Wu, entered into a contract with Xycom Pty Limited (Xycom) to purchase a residential lot in Dora Street, Hurstville. Mr Wu’s contract required Xycom to ‘use all reasonable endeavours to have the strata plan registered on or before the sunset date’. The sunset date was 31 December 2015.

In late 2014, Xycom sold the site to Jobema Developments Pty Limited (Jobema), by way of a deed of assignment. Jobema agreed to assume Xycom’s rights and obligations under the contract of sale with Mr Wu, amongst others.

Shortly after settlement, Jobema commenced construction work and by late 2015, significant progress had been made on the project. Prior to the expiration of the sunset date, Mr Wu, along with other purchasers, were approached by Jobema and offered an extension to the sunset date in exchange for an increase in the purchase price. Mr Wu did not accept Jobema’s offer.

On 1 December 2015, Jobema served a notice on Mr Wu pursuant to section 66ZL(4) of the Act, advising of its intention to rescind the contract. The reasons provided in the notice included the fact that Xycom completed very little physical work prior to Jobema acquiring the site in early 2015 and as a result, Jobema anticipated a delay in registration of the strata plan until mid 2017. Jobema also suggested that there had been a significant increase in the project’s construction costs since the date the contract was entered into with Mr Wu.

Given that Mr Wu did not consent, Jobema sought an order under section 66ZL of the Act that it be permitted to rescind the contract.

The Decision

A key feature of Justice Black’s decision was that, although Jobema executed a deed of assignment with respect to the contracts of sale entered into by Xycom with the relevant purchasers, the effect of the deed was in fact to novate Xycom’s obligations which had been assumed by Jobema.

Jobema was therefore responsible for Xycom’s failure to use its best endeavours to construct the building so that it could be registered by the sunset date, despite the Court accepting that Jobema was diligent in progressing the project since acquiring the site from Xycom. Importantly, Justice Black held that Jobema had knowledge of the lack of progress by Xycom when it assumed its obligations and despite the delay largely resulting from Xycom’s lack of action, that fact could not be overlooked in determining whether leave should be granted under section 66ZL.

Developers should be careful when purchasing sites and assuming rights and obligations under existing contracts, as it is evident that the Court will not only consider the circumstances of the present vendor but also a prior vendor in determining whether leave should be granted. According to Justice Black, ‘the question is whether, as Jobema and Mr Wu now stand, Jobema can satisfy the requirements for rescission under section 66ZL of the Conveyancing Act’. Unfortunately for Jobema, it was unable to ignore the delays caused by Xycom and rely on a sunset clause to rescind Mr Wu’s contract.

Jobema also suggested that the new Sunset Clauses Law was unenforceable because it took effect from 2 November 2015. The Court did not agree, however, confirming that legislative change is commonly a foreseeable risk of business activity.

Another important factor in the outcome of this case was Jobema’s failure to adduce evidence to substantiate its claims in Court. For example, Jobema argued that the project would not be viable if some of the contracts were not rescinded, however, this was a bare assertion which was not supported by evidence. It also argued that increased construction costs affected the construction finance but again, no substantive evidence was produced to establish that the costs of construction had increased.

Concluding remarks

While the new Sunset Clauses Law does not prevent a developer from including a sunset clause in an off the plan contract, it does present a barrier that must be overcome in order for it to be relied on to rescind. This protects purchasers by avoiding the potential for some developers to intentionally delay the registration of a strata plan in order to bring a contract to an end.

As a result of the Decision, property developers should be cautious when seeking to rely on a sunset clause as a means to rescind a contract.