Off the plan contracts are a common feature in the modern residential housing market. With the rise of multi-stage developments, apartments and strata titling, vendors have leveraged the concept of an off the plan sale to guarantee the viability of their developments early on. ‘Viability’ refers largely to the economic considerations of a large and lengthy construction process.
Buying off the plan imposes risks for both purchasers and vendors. Recent changes to the Conveyancing Act 1900 (NSW) (‘the Act’) have imposed greater scrutiny on the ability for vendors to rescind contracts due to certain circumstances. The most common of these being construction delays. Unscrupulous vendors were known to engineer delays to rescind contracts under the old laws and re-sell them at a higher rate. The new laws seek to plug this loophole.
Below we explore what sunset clauses are and how they affect off the plan contracts in NSW.
What is an Off-The-Plan Contract
An off the plan contract is a property sale contract where the property is bought before it is built. Purchasers typically enter into these contracts at the early stage of the development cycle. Development companies or their agents advertise the property via models and marketing material.
Many of these sales are to be strata titled once completed. This is important because the new CA Amendment uses registration of the strata plan as an anchor point for interpreting sunset clauses governed by the Act.
What is a Sunset Clause?
A sunset clause is a rule that dictates when a law (in this case a contract) will automatically terminate after a fixed period unless extended by the contract or law. In the context of off the plan sales, this is a clause determining that the contract can be rescinded after a certain fixed period or obligation not being met.
Amendments to the Act have now imposed requirements on the operation of and rules around rescission under contractual sunset clauses. On 17 November 2015, the NSW Government passed the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) (‘the Amendment’) introducing section 66ZL into the Act.
The New Rules
The Amendment now defines both ‘off the plan’ and ‘sunset clauses’ as well as ‘sunset date’. These terms refer to a contract of sale a purchaser enters into before the residential lot has been built, and includes a clause providing for a party to rescind the contract if the sunset date does not create the lot. In the section, ‘created’ refers to the moment when the plan creating the lot is registered. ‘Sunset date’ is the date that the lot must be created subject to any extension.
The new section 66ZL is largely a check on a vendor’s ability to rescind for reasons such as delay in construction, or delays in meeting council requirements. As referred to above, it seeks to stop vendors from being able to push out the development cycle to rescind and re-sell properties at a higher price.
The NSW Supreme Court governs the amendment and provides that if the parties do not mutually agree to rescind the contract, an application can be made to the court for an order rescinding the contract unless otherwise exempted by the regulations. At the time of writing, the regulations do not change this position.
The vendor can effect mutual rescission by serving a notice to the purchasers 28 days before the proposed date of rescission. The purchaser then consents to the notice in writing.
An application to the Supreme Court asks the court to determine whether it is just and equitable in all the circumstances to rescind the contract and does so by reference to 8 specified circumstances the court is to take into account. The onus is on the vendor to satisfy the court that it is just and equitable to grant the order.
The court has only heard one case on section 66ZL since its inception, Jobema Developments Pty Limited v Zhu & Ors 2016 NSWSC 3 (‘Jobema’). The case serves as a warning to vendors that have taken over from earlier vendors and seek to rely on this section to rescind if matters don’t improve. It further highlights the operation of the clause and the types of considerations the court makes under the provision.
Jobema Developments Pty Limited v Zhu & Ors
The case involved Jobema (the Vendor) and Mr Wu (the Purchaser). Jobema had made an application to the Court after serving notice on Mr Wu that he did not accept.
Jobema had purchased the rights to the development from Xycom, who was the previous vendor of the project and who had not made much progress. The development was well behind schedule and forecast to cost much more than anticipated.
Jobema had contracted under the purchase of the development site to extend certain off the plan contract’s sunset dates but not others (such as Mr Wu), seeking instead to rescind and have these older contracts re-purchased at higher prices.
Importantly for the Court was whether the prior failings of Xycom protected Jobema in the sense that it gave it access to an order under section 66ZL. This involved considerations of the reasons for the delay, likely completion, increase in the value of the lot and the effect of the recession under the new section.
The analysis in this decision can be distilled into some key points:
- If rights under a prior agreement have been absorbed, such as Jobema’s purchase of the development site, the new vendor is taken to have known of those obligations, and any lack of action on the part of the former vendor cannot be used to avoid the test in section 66ZL; and
- The ‘just and equitable test’ is one that takes into account all purchasers.
Legislative changes are a reasonably foreseeable event in business. By and large, the full effect of this decision remains to be seen. Jobema filed limited evidence and instead sought leave to adduce further evidence during the hearing. Due to the matter’s urgent nature, the Court refused this request. As such, the door remains open for further argument later down the track.
Other Key Considerations for Purchasers
From this case and the Amendment we can identify some key considerations for purchasers buying property off the plan:
- Pay close attention to the clauses in an off the plan contract to see what it does and doesn’t allow you to alter as the development continues.
- Understand the risks involved in off the plan purchases regarding completion of the development and amendments to the development as the vendor has to meet Local Government requirements through the development cycle.
- If the contract is part of a staged development, be sure to understand whether the other stages impact your purchase and how your purchase will be impacted.
- Know where your deposit goes and whether it is refundable.
- Get advice from a property lawyer or licensed conveyancer.
Final Note for Vendors
It is not yet clear how high a bar the Amendment will be for rescission under sunset clauses. Vendors should be careful and ensure they understand their obligations under the contract as these will influence whether an order is just and equitable, and not rely on the ability to rescind off the plan contracts haphazardly.
If you have any questions about purchasing off the plan, or how the amendment will apply to your development, get in touch with our construction lawyers on 1300 544 755.