In NSW, almost all off-the-plan contracts contain a sunset clause. If the property being purchased is not completed and ready for occupation by an agreed date, the sunset clause allows the vendor and purchaser to end the contract. If the contract is ended, the purchaser’s deposit is repaid to them.
However, under amendments made to the Conveyancing Act In 2015, developers can only end a contract under a sunset clause for good reason. The legislation was introduced to combat an emerging trend whereby developers were deliberating stalling and waiting out their sunset dates in order to rescind and relist the property at a higher sale price.
Given the market at the time, most people agreed the passing of this legislation was a reasonable and necessary change to the law.
The COVID-19 pandemic, rising interest rates, and an overloaded and increasingly expensive construction industry has now placed significant strain on developers, particularly where:
- contracts for a development were exchanged prior to these changes in market forces; and
- the development includes the construction of a building (such as a strata complex) rather than the subdivision of vacant land.
So, can a developer rescind their Contracts if they don’t stand to make a profit, or worse, if they simply just can’t fund the development?
Not easily.
Section 66ZS of the Act sets out the two primary ways a developer may be able to rescind an off-the-plan contract under a sunset clause:
- the first is with the consent of the Purchaser, which is unlikely to be given if the Contract price is significantly lower than the current market value of the property; and
- the second by order of the NSW Supreme Court, which in all practicality is even less likely than getting the purchasers to agree to a rescission and sure to be more expensive.
If a developer makes an application to the Supreme Court under section 66ZS, the Court will consider the following in making its decision:
- the terms of the off-the-plan Contract;
- whether the developer has acted unreasonably or in bad faith;
- the reason for the developer not meeting its obligations under the contractual sunset date;
- the likely date on which the developer will meet its obligations (if at all);
- whether the proposed property has increased in value since the Contract date;
- the effect that allowing the rescission would have on each purchaser; and
- and any other matter the Court considers to be relevant in the circumstances.
Court decisions since the introduction of the 2015 legislation indicate a general reluctance to make an order in favour of the developer under section 66ZS.
Given the difficulty developers have rescinding under sunset clauses, it is important that off-the-plan Contracts are drafted very carefully to allow developers to rescind if things don’t go as planned.
At Fishburn Watson O’Brien, we are able to assist with this, as well as all other matters pertaining to property development. We encourage you to contact our commercial and property lawyers Richard Cook and Luke Jones if you need assistance.
