Reasonable endeavours and rights to rescind “Off the Plan” sale contracts – Don’t Blame it on the Sunset…
Why this matters
A ‘Sunset Clause’ serves a number of important commercial purposes for developers of residential projects.
In ‘off the plan’ sale contracts, such clauses often require a developer to use ‘reasonable endeavours’ to register a strata plan by a certain date or else either party may rescind the sale contract (Sunset Date).
In the Kaymet decision, the NSW Supreme Court considered a Sunset Clause and:
- accepted that the developer had validly rescinded 34 off the plan sale contracts; and
- found that the disgruntled purchasers had not proved that the developer had failed to use ‘reasonable endeavours’ to register the strata subdivision by the Sunset Date.
Understanding the impact of the decision
Blackstone Waterhouse is running workshops over the next month for developers in relation to:
- effective drafting of Sunset Clauses;
- understanding your obligations under such clauses;
- managing risks associated with ‘sunset clawback’ claims; and
- looking ahead at potential legislative changes.
The remainder of this case note summarises some key facts in the decision.
So what happened in Kaymet?
Between November 2009 and April 2010, Kaymet exchanged 34 ‘off the plan’ apartments with the plaintiffs in the proceedings in relevantly similar terms in relation to a 94 residential apartment development in Wolli Creek.
Clause 52 of each of the sale contracts included a provision that:
- Kaymet would use reasonable endeavours to register ‘draft Strata Documents’ by the ‘Date for Registration’;
- If, for ‘any reason’, the draft Strata Documents were not registered by the Date for Registration, either party could rescind.
The Date for Registration of the latest contract passed without the Strata Documents being registered. Kaymet issued notices rescinding each of the sale contracts.
It was common ground that the apartments were worth more than the contract price at exchange – but the purchasers, having initially asserted that Kaymet deliberately delayed the project for this reason, withdrew this assertion at trial.
Interpreting the Sale contracts
The proper construction of the sale contracts in dispute was the starting point to the decision.
Relevantly, it was noted that the contracts also included:
- an ‘entire agreement clause’ (clause 34.1);
- a clause permitting the developer, prior to completion, making such applications to the Rockdale City Council to vary the terms of the Development Consent in such manner as the vendor deemed appropriate (clause 35.5(b)).
Further, this was not a case which involved any suggestion of defects in the works being undertaken.
‘Reasonable endeavours’ was an obligation to use reasonable efforts – something less than ‘all reasonable endeavours’ or ‘best endeavours’. Those ‘reasonable endeavours’ had to be interpreted in circumstances where clause 35.5(b) permitted Kaymet to apply to Rockdale City Council to vary the terms of the Development Consent ‘at any time prior to completion’. The Court also placed emphasis on the fact that the clause provided a right to rescind ‘for any reason’.
In the circumstances, the issue before the Court was whether Kaymet was contractually entitled to exercise its right of rescission. This was determined by examination of whether Kaymet ‘used its reasonable endeavours to register the draft Strata Documents by the Date for Registration’.
Importantly, the Court reiterated the purchasers had the onus of proving that Kaymet did not use ‘reasonable endeavours’. This required evidence of what delays had been caused by Kaymet’s failure to exercise of ‘reasonable endeavours’ to meet the Sunset Date.
What were the delays?
There were 10 periods of delay which were used by the purchasers to try and argue that Kaymet had failed to use ‘reasonable endeavours’.
Ultimately, the evidence by Mr Metlej of Kaymet was critical in this regard- and the judgement reflects numerous instances where Mr Metlej was accepted based on his actual involvement on site and particular explanations against expert evidence which was speculative in many instances (and hamstrung by limited records).
The Court was not satisfied that delays relating to dead-man anchors, excavation, pouring the basement slab, the slabs above the lower basement, items identified in the financier’s quantity surveyor’s report, completion of concrete structures and the completion of services and finishes were reflective of Kaymet’s failure to exercise reasonable endeavours. It is noted the purchasers’ evidence was made more difficult by the limited records of Kaymet in this regard (as the builder was an entity related to Kaymet).
With respect to piling, the Court accepted a short delay of around 6 weeks had been caused by Kaymet and that this reflected a period where ‘reasonable endeavours’ had not been exercised by Kaymet – however, the project as a whole was over 6 months late – and this was not causative of the losses claimed by the purchasers. As such, the purchasers had not shown that Kaymet had not used reasonable endeavours to register the strata plan by the Sunset Date.
Decisions by Kaymet during construction to vary the Development Application to include a child care and to reduce the height of balustrades were held to be permissible by the contract – and there was no evidence as to why such modifications to the Development Application were unreasonable – nor was there cross-examination on those issues. In any event, these modifications were made after the last ‘Date for Registration’ so any further delay arising from this issue was irrelevant. In the circumstances, such issues did not reflect a want of ‘reasonable endeavours’.
Lessons for Developers
For developers, the Kaymet decision is an important reminder to be aware of:
- the scope of your obligations to complete by a Sunset Date;
- what purpose that Sunset Date serves and what your options are to reflect those commercial drivers when setting up your master sale contract – there are many legitimate reasons why you may wish to change a Development Application – and your right to do so can be freely bargained for and reflected in the sale contract; and
- how obligations relating to a Sunset Date can impact your options if you wish to make changes to a project after off the plan sales have been exchanged.
Self-promoters touting ‘class actions’ and ‘sunset recoveries’ by disgruntled purchasers against developers should take heed of this decision. The risk for purchasers where a sale contract is validly rescinded is that the purchaser will further suffer the costs associated with protracted litigation. Worse still, on 15 October, the Supreme Court referred for enquiry the damages payable to Kaymet by the purchasers – as they had restrained Kaymet from selling the properties pending the judgment.
Developers are usually well aware of their obligations relating to Sunset Dates – it is usually their financier’s risks relating to delay, change management, funding and construction which are the main drivers of the clause in the first place. Such clauses serve an important commercial purpose. Similarly, there is commercial certainty for a purchaser with the benefit of a Sunset Date that if not registered, they had a right to rescind.
The fact that this class action was successfully defended will assist in future actions relating to this type of claim. The clear contractual agreement of a Sunset Clause within a sale contract will prevail unless there is actual evidence of acts or omissions by the developer which amount to delay.
Ultimately, whilst each case will turn on the precise wording of a contract, the sale contract was in similar terms to many used in the industry. For purchasers of off the plan sale of land contracts, the decision is a timely reminder of the need to get more than basic advice on what is likely to be a major investment (if not the most significant investment) by an individual. Indeed, one would expect that the shoe would be on the other foot if the market was in decline – with purchasers happy to rescind in such circumstances!
Given the findings in Kaymet, the legislature should be slow to interfere with parties’ commercial bargain. If a party does not want the risks associated with ‘off the plan’ delays – know what the contract provides and consider purchasing something else.
Please contact Danny, Veno or Malcolm if you wish to discuss this decision or would like to attend one of our workshops this month.