An ‘off the plan’ contract is one in which the legal title to a property has not been created at the time that the Contract for Sale of the property is entered into. Often, an ‘off the plan’ contract will also involve a property where construction of the property has yet to be finished, and, in some instances, yet to have even commenced.
Most ‘off the plan’ contracts contain a clause which is commonly referred to as a ‘sunset clause’ A sunset clause will generally provide a date by which the development, construction and registration of the title of the property is to be completed. This date is, by no coincidence, called the “sunset date”.
The clause invariably then provide that where the registration of the title has not been completed by the sunset date, then one party to the Contract, or in some instances both parties may be entitled to rescind or cancel the Contract.
In most instances, the cancellation of the Contract will release the parties from their contractual obligation, endeavouring to place them in the position they were in prior to entry into the Contract. Typically this will involve the purchaser having their deposit refunded back to them.
What happens though in a rising market where the value of a property has dramatically increased between the exchange of Contracts and the sunset date. Many problems have arisen over the years where developers, seeing the value of their properties increase in the intervening period, have delayed completion of the development, sometimes intentionally, and endeavoured to rely on these sunset clauses to cancel the existing contract to then enter into new contracts with new buyers at substantially higher prices.
The situation will generally flow like this:-
- Developers secure purchasers at the commencement of their development. Contracts containing sunset clauses are exchanged. These sales allow the developers to obtain finance to complete the development and secure their profits.
- During the period between exchange of Contracts and the sunset date, the value of the property increases dramatically. It is not unheard of to see the value of a property increase by many hundreds of thousands of dollars between exchange of Contracts and the sunset date.
- The developer, seeing this massive increase in the price of their development, realises that the development could be immensely more profitable if the units were sold at the value as at the sunset date, as opposed to their value as at the date of exchange of Contracts.
- Developers then set about looking for ways in which they can get out of the Contract so as to avoid the current contract at the lower price, with a view to then reselling at the higher price.
- Delaying construction or approval processes or deferring registration of the titles are but one of many ways that developers have attempted to explain why the titles have not been registered by the sunset date.
- Where the Vendor rescinds, unfortunately, in many instances, the purchaser had no choice but to accept the rescission. Whilst the purchaser obtains a refund of their deposit, they are often then faced with the scary prospect of being priced out of the new market, with the new and higher prices.
Sensing that some developers may have been taking advantage of this situation, the NSW State Government in 2015 passed the Conveyancing Amendment (Sunset Clauses) Act (NSW). This Act introduced a new Section 66ZL into the Conveyancing Act 1919 (NSW) which applies to all off-the-plan contracts for sale of residential lots, regardless of whether they were entered into on or before the commencement date of the amendment.
The new section restricts a vendor from automatically rescinding an off-the-plan contract under a sunset date clause.
Why the change?
The government expressed concern that developers were intentionally delaying the registration of plans past the sunset dates provided for in contracts, with the result that they were free to rescind and resell at a higher price. This left a purchaser without a home and facing a new market in which prices had likely increased, in most instances, dramatically.
The new section 66ZL has the effect of inserting terms into off-the-plan contracts in an attempt to protect purchasers.
Developer has right to rescind within certain confines but must explain delay
Under the Act, the activation of a sunset clause does not automatically allow the developer (as vendor) to rescind an off-the-plan contract (see section 66ZL(5)). If a developer wants to rescind, he or she must do so within the confines of section 66ZL(4), which requires the developer to give the purchaser(s) 28 days’ written notice of the proposed rescission, and set out:
•why the developer wants to rescind, and
•the reason for the delay in creating the subject lot
Section 66ZL(3) provides that rescission may only take place if:
•each purchaser under the contract consents in writing to the proposed rescission;
•the developer obtains a court order permitting the proposed rescission; or
•the proposed rescission is otherwise permitted by the regulations made under the Act.
In considering a court order, the Supreme Court of NSW will only allow the contract to be rescinded if it can be shown that the rescission of the contract is just and equitable. To determine this, the Court will take the following factors into consideration:
1. The terms of the off-the-plan contract;
2. Whether the vendor has acted unreasonably or in bad faith;
3. The reason for the delay in creating the lot;
4. The likely date on which the lot will be created;
5. Whether the lot has increased in value;
6. The effect of the rescission on each purchaser; and
7. Any other matter it considers relevant.
The vendor will be responsible to pay the costs of the application to the Supreme Court unless the vendor can show that the purchaser’s refusal to consent to the rescission was unreasonable.
In essence, these amendments make it seemingly difficult for a developer to cancel a contract where they have been unable to register the plan of subdivision within the time allowed for by the Contract.
The concern amongst developers however is that the amendments focus on the protection of the purchaser without having due regard to the difficulties that developers may face in obtaining approvals, finance and finalising construction.
As always, if you have any queries regarding ‘off the plan’ properties, or any other conveyancing queries, please don’t hesitate to contact your local First State Conveyancing office.