Beware: Developers May Be Tempted To Use Sunset Clauses To Cancel NSW Property Contracts In A Rising Market

Beware: Developers May Be Tempted To Use Sunset Clauses To Cancel NSW Property Contracts In A Rising Market

In real property terms, buying off the plan mean signing a contract to purchase a property, whether it is an apartment, townhouse or a house and land before it is built.  Buyers would pay a 10% deposit upfront and can be left waiting for years for the project to be completed and settled.  On top of that you would need to pay stamp duty 12 months after the contact is exchanged.  That is a lot of financial commitment upfront, but buyers enter into an off the plan arrangements to lock the property price today, hoping that the property go up in value when it is completed.  So it is a mixture of speculative investing and a fear of missing out.

So in a rising house market you can stand to make quick profit by buying off the plan, but this can be a double edged sword, because off the plan contracts typically include a ‘Sunset Clause’.  A sunset clause is a provision in contract that defines the maximum limit for the project to be completed.   If the project has not reached a certain stage (such as registration of the strata plan – i.e. so the title to the property has not been created) by the sunset date, then either the vendor or the purchaser can rescind the contract and the deposit and any stamp duty paid is refunded.  It was originally set to provide certainty and to protect the parties so they are not in limbo for indefinite time waiting for the property to be completed.  But due to the recent property boom, it can create an incentive for developers to abuse this provision to invoke the sunset clause by deliberately delaying the completion of the building and registration of title, so that they can resell the property at the higher market price.  The original purchaser may get their full refund, but they lose the financial gain from being in the market, and if they do want to purchase another property, their initial investment is now worth less because the housing prices has surged upward.

This windfall of profit is at the expense of the innocent buyers who have purchased a property off the plan in good faith.   One such example was a developer who won a class action lawsuit and gained a $13 million dollars windfall in Qi Wang –v- Kaymet Corporation Pty Limited [2016] NSWSC 742 .  The plaintiff, a group of 34 first home buyers took the defendant “Kaymet Corporation” to court in a bid to prevent the developer invoking the sunset clause in their contract.  The properties were purchased in 2009-2010 and by 2015 the property value of the apartments have risen by more than 75%.  The court decided that plaintiff “have not shown that had the defendants used reasonable endeavours during that period, the strata documents could have been registered by the dates for registration”.  In other words, the court believed that even if the developer had tried their best, they would not able to meet the sunset date.  This is a crushing blow to the plaintiff as they have already spent $800,000 in legal cost and they have to pay the developer’s cost which could bring the total cost to well over $1 million.  There were other smaller individual cases but this was one the major case that went to court where the purchasers contend that the developer abused the sunset clause for monetary gain and the developer won.

Now it seem the table has turned on the developers.  The NSW government have acknowledged that certain developers may be terminating contracts specifically for financial gain, through the use of ‘sunset clause’ provisions.  To respond to these concerns, on 17 November 2015 (effective 2 November 2015) the NSW government introduced the Conveyancing Amendments (Sunset Clauses) Act 2015 (NSW) or section 66ZL of the Conveyancing Act.  It applies to all contract regardless of the date signed.  Under the new legislation, a vendor is required to provide each purchaser with at least 28 days of notice prior to invoking the sunset clause.  The vendor must provide detail as to why they want to rescind the contract and provide reasons for the delay.  If the buyer does not consent to the rescission of the contract, then the vendor need to apply for an order from the Supreme Court to proceed with the rescission.  Under sub section 7 of the act, the court will look into the following factors when deciding on the vendor’s request:

(a) the terms of the off the plan contract,

(b) whether the vendor has acted unreasonably or in bad faith,

(c) the reason for the delay in creating the subject lot,

(d) the likely date on which the subject lot will be created,

(e) whether the subject lot has increased in value,

(f) the effect of the rescission on each purchaser,

(g) any other matter that the Court considers to be relevant,

(h) any other matter prescribed by the regulations.

The vendor will have to pay for the Supreme Court application cost, unless they can prove that the purchaser was unreasonable in their refusal to rescind the contract.  This new legislation places the burden of proof on the developer, rather than on the purchaser.

Jobema Developments Pty Limited v Zhu [2016] NSWSC 3, was the first case under the new legislation.  In this case, the purchaser Mr Wu bought a unit off the plan from a developer Xycom on 6 December 2013 with a sunset date of 31 December 2015.  In October 2014 Xycom sold the development project to Jobema Developments and all existing off the plan contracts were novated to Jobema.  At the time of sale, Xycom had made very little progress with the construction work, and Jobema realised that the project could not be completed until 2017.  Prior to the sunset date, Jobema approached Mr Wu and other purchasers with an offer to extend the sunset date in return for agreeing to a new, higher purchase price to cover increased construction costs.  Mr Wu refused the offer and on 1 December 2015, Jobema served Mr Wu and others who have refused the offer a 28 day Notice of Intent to rescind the contract under the sunset clause.  On 22 December 2015 Jobema applied for a Supreme Court order under section 66ZL of the Conveyancing Act.

The court found in favour for Mr Wu and the other purchasers.  They have found that it would not be just and equitable if they allow the vendor to rescind the contract.  Here are some of the key points from the Court’s decision:

  • The vendor could not rely on the previous developer’s failings. When Jobema purchased the project form Xycom, they have assumed all the risk and contractual obligation, which includes to use its best endeavour to complete the project prior to the sunset date.
  • The law being retrospective cannot be a factor in granting leave to rescind. The court stated that legislation changes is a foreseeable business risk that developers must consider.
  • The developer was not acting justly and equitably when dealing with purchasers. Jobema only offered sunset clause extension to those who agreed to its increased price offer.  This was a factor in refusing Jobema its application to rescind.

It is major victory for the little guy.  But this is not bullet proof vest for property buyers.  Regardless of the new legislation, you need to make sure you do your due process and minimise your risk when purchasing off the plan.  Always do your background check on the developer, check on its past projects.  Use a reputable developer when possible.  Check that development approval have been granted by the council.  Make sure that you are comfortable on the sunset date.  Remember you will need to pay a 10% deposit and then pay stamp duty 12 month after the contract is exchanged.   If you are selling and buying, you need to consider where you going to live while your new property is being built.  Do you have enough money to pay rent for one to three year or maybe more?  Most importantly seek legal advice from a reputable lawyer or conveyancer that specialises in off the plan contracts.