In Short
- A sunset clause allows contracts to be ended if property titles are not registered by a set date.
- New laws in NSW require vendors to give 28 days’ notice before using a sunset clause.
- Vendors need Supreme Court approval to rescind contracts if buyers do not agree.
Tips for Businesses
Before signing an off-the-plan contract, carefully review any sunset clauses. Ensure the sunset date is realistic and ask for explanations of any potential delays. If you are unsure about the terms, seek legal advice to avoid unexpected contract cancellations or disputes.
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. Buying off the plan imposes risks for both purchasers and vendors. Recent changes to the Conveyancing Act 1919 (NSW) (‘the Act’) have imposed greater scrutiny on the ability for vendors to rescind contracts due to certain circumstances, such as construction delays. This article explores sunset clauses and how the new rules 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 rules concerning sunset clauses use registration an a key anchor point in interpretation.
What is a Sunset Clause?
A sunset clause is a rule that dictates when a law or contract will automatically terminate after a fixed period unless extended. In the context of off the plan sales, this is a clause determining that the contract can be rescinded after a certain fixed period or obligation not being met.
Continue reading this article below the formThe 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 that:
- 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 lot is not created by the sunset date.
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 NSW Supreme Court provides that if the parties do not agree to rescind the contract, they can apply for an order. 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.
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.
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.
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Further Developments in Sunset Clause Protections
The landscape of sunset clause protections in NSW has continued to evolve since the 2015 amendments. In 2018, the NSW Government introduced additional measures to strengthen purchaser protections and increase transparency in off-the-plan contracts. The Conveyancing Legislation (Amendment) Act 2018 was responsible for:
- expanding the definition of sunset clauses to encompass a broader range of termination events, such as the issuance of an occupation certificate This expansion aims to prevent vendors from circumventing the 2015 protections by relying on alternative contract termination triggers;
- clarifying the NSW Supreme Court’s power to award damages if a vendor is permitted to rescind a contract under a sunset clause. This addition provides an extra layer of protection for purchasers who may suffer financial loss due to a rescission; and
- creating a retrospective application, as the new Section 66ZS of the Act, which the changes are under, applies to all off-the-plan contracts, regardless of when they were signed. This underscores the government’s commitment to enhancing purchaser protections across the board.
Disclosure Regime
In addition to the expanded sunset clause provisions, the 2018 amendments introduced a new disclosure regime for off-the-plan contracts. This regime, which was enacted on 1 December 2019, mandates that vendors provide more comprehensive information to potential purchasers before contracts are signed.
The disclosure requirements include detailed information about:
- the proposed lot;
- a draft plan;
- proposed by-laws for strata properties; and
- a schedule of finishes.
This increased transparency aims to empower purchasers to make more informed decisions when entering into off-the-plan contracts.
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 does not allow you to alter;
- understand the risks involved in off the plan purchases regarding completion of the development and amendments to the development;
- if the contract is part of a staged development, be sure to understand whether the other stages impact your purchase;
- know where your deposit goes and whether it is refundable; and
- get advice from a property lawyer or licensed conveyancer.
Key Takeaways
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, our experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A sunset clause allows a party to end the contract by a set date. It protects against delays but can be misused by developers to cancel contracts and resell at higher prices.
Vendors must now give 28 days’ notice before ending a contract under a sunset clause. If the buyer does not agree, the vendor needs Supreme Court approval to proceed.
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