Sunset clauses in an off the plan purchases

In contracts for off the plan purchases, clauses are often included that provide for either party to end the contract in the event that the unit being purchased is not complete by a sunset date.

In 2015, the media reported that developers were exploiting these sunset clauses by ending the contract, then re‑selling the property to a new purchaser for a higher price to take advantage of rising property prices.

To address this practice and to provide purchasers with protection against developers exploiting sunset clauses to end a contract, on 2 November 2015 “sunset date provisions” were enacted under the Conveyancing Act 1919 (NSW).

Under these provisions:

  • a purchaser is required to consent in writing to the ending of the contract;
  • if a purchaser does not agree to end the contract, a developer is required to obtain an order from the Supreme Court permitting it to end the contract under the contract sunset clause; and
  • to obtain the court order, the vendor developer must show that the ending of the contract is “just and equitable” in all the circumstances.

In determining whether it is just and equitable for a developer to end the contract, the Court is required to consider:

  • the terms of the 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 the purchaser; and
  • any other matter that the court considers relevant.

The new provisions were retrospective: in other words they apply to all off the plan contracts whether or not they had been entered into before or after 2 November 2015.

 

Is this enough for purchasers?

Up until now there have only been two applications by developers to the Court to end off the plan contracts.

In the first case, the developer did not provide sufficient evidence to justify ending the contract. Although the Court accepted that delays caused by contamination, the carrying out of remediation works and delays with the sewer mains had prevented the developer from completing on time, nevertheless evidence that included an increase in construction costs was not sufficient.

In the second case, a question arose as to whether it was possible for purchasers to be awarded compensation if the Court permits the developer to invoke the sunset clause to end the contract.

The ending of a contract pursuant to a sunset clause is called a rescission. This means that once the contract has been ended, the respective parties are put back in the position they were in before the contract was entered into. For purchasers, this means repayment of their deposit. However, purchasers are then in a position of attempting to purchase another property several years after entering into the contract, during which time prices may have risen considerably. This means that they may need to pay more for a comparable property.

In light of these considerations, is the refund of a purchaser’s deposit adequate? Should a purchaser be entitled to compensation as well?

Before the court made a decision, the case settled.

 

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Conveyancing can be a complex area, and we recommend involving an experienced and qualified lawyer when buying or selling property.
Contact our conveyancing team today.

 

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