Sunset clauses - consumer protection to the fore!

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By Tim L’Orange, Partner and Lachlan Paterson, Partner

On 17 November 2015, the NSW Government passed the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) to protect purchasers from developers unreasonably rescinding off-the-plan contracts under a sunset clause.

From 2 November 2015, a developer’s ability to rescind an off-the-plan contract due to a lot not being created under a registered plan by the relevant sunset date, is limited to the following:

  • each purchaser under the contract consenting; or
  • the vendor obtaining a Court order; or
  • reasons prescribed by the Regulations.

The Controversy

Controversy was recently sparked by consumers who had made off-the-plan apartment purchases in certain projects, only to have these rescinded by developers who relied on a sunset clause to end the contracts. After refunding the deposits, the developers resold the same apartments, and because of the rising property market, were able to resell at a higher price.

Use of Sunset Clauses

A sunset clause allows the buyer or developer to lawfully rescind the contract if a particular milestone of the project, such as registration of the strata plan, is not achieved by a specified date. The intention of the sunset clause is to protect buyers and developers from unforseen delays, not caused by either party, and to allow a right to end the contract and pursue other options.

The new consumer protection legislation

The objective of the new laws is to prevent developers from unreasonably rescinding off-the-plan contracts of residential property under a sunset clause.

The Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) inserts a new Division 10 into the Conveyancing Act 1919 (NSW) entitled “Off-the-Plan Contracts”.

Below is a summary of the new provisions.

Applies only to residential property

The new provisions only apply to “residential property” which is defined in s. 66Q of the Conveyancing Act 1919 (NSW) as:

  • land (less than 2.5 ha) on which are situated (or are in the course of construction) not more than two places of residence;
  • vacant land on which construction of a single place of residence is not prohibited by law; or
  • a lot or lots (whether constructed or in the course of construction) under the strata schemes development legislation comprising of a single place of residence.

The vendor’s right to rescind

The new provisions only allow a vendor to rescind a contract under a sunset clause in certain circumstances. The requirements and procedures are set out below:

  • The vendor must give each purchaser under the contract at least 28 days written notice prior to rescinding under a sunset clause.
  • The notice must state why the vendor is proposing to rescind the contract and the reason for the delay in creating the subject lot.
  • The vendor can only rescind if:
    • each purchaser consents in writing to the rescission; or
    • the vendor has obtained a Supreme Court order permitting the rescission; or
    • the reason for the rescission is prescribed by the Regulations (which have not yet been made).
  • An order permitting the vendor to rescind the contract under a sunset clause will only be made if the Court is satisfied that making the order is “just and equitable”.
  • In determining whether it is just and equitable, the Court will consider the following factors:
    • the terms of the off-the-plan contract;
    • whether the vendor has acted reasonably or in bad faith;
    • the reason for the delay in creating the subject lot;
    • whether the subject lot has increased in value;
    • the effect of the rescission on the purchaser; and
    • any other matter the Court considers relevant or are prescribed by the Regulations.
  • The vendor is liable to pay the costs of a purchaser in relation to the proceedings unless the vendor can show that the purchaser unreasonably withheld its consent.

Purchaser’s right to rescind not limited by the new laws

The new provisions do not limit any right a purchaser may have to rescind an off-the-plan contract under a sunset clause.

Commencement of new provisions

The new laws have retrospective application. It applies to all purported rescissions on and from 2 November 2015 (the date on which the Minister for Innovation and Better Regulation announced that the legislation would be brought before Parliament). Therefore, these new laws will apply to all current off-the-plan contracts that have not yet been completed.

The impact of the new consumer protect legislation on developers

This additional layer of legislative consumer protection might be regarded as excessively focusing on protecting buyers without having due regard to the difficulties developers may face in financing and completing developments in a regulatory environment which significantly shifts the risk profile in the buyers’ favour.

The purchase / sale of off- the- plan apartments carries risk for both the buyer and the developer. Both parties need to understand the risks, and developers should ensure that the sunset date is set with sufficient time to enable them to deliver the project on time.

This article is current as at 21 December, 2015.

For further information, please do not hesitate to contact us.

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