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Veno Panicker

New ‘sunset clause’ legislation in NSW New legislation in NSW will hurt an already softer property market Why this matters

New legislation in NSW will hurt an already softer property market

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 recent Kaymet[1] 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• accepted that the developer had validly rescinded 34 ‘off the plan’ sale contracts; and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.

Following Kaymet was a sensational media storm and public outcry. Whilst not relevant in Kaymet, the complaint was that there were developers rescinding off the plan contracts to take advantage of a rising market.

On 17 November 2015, the NSW Government enacted an amendment to the Conveyancing Act 1919 putting the onus on a developer to have consent of a purchaser or seek a Court order prior to rescinding an off the plan sale contract.

Significantly, the changes operate retrospectively – to existing contracts – and import vague notions of what is ‘just and equitable’ into the determination of what should be a strictly contractual issue.

Developers will need to immediately amend their future sale contracts to best protect their rights as a result of this one-sided legislation.

It is unclear how the legislation will be interpreted by the Court. As a starting point, it is hoped that the terms of the sale contract will have primacy. If this is accepted, a narrow reading of the legislation will simply shift the burden onto a developer to show that the exercise of a right of rescission is reasonable. However, a wider reading could significantly impact the risk allocation clearly provided within an off the plan sale contract. Watch this space!

How does the new legislation operate?

Previously, a purchaser had to prove that a developer had failed to use ‘reasonable endeavours’, or the equivalent of such an obligation as drafted in a sale contract, to register a strata plan by the Sunset Date. This was could only be achieved by a purchaser seeking an order from the Court that the rescission by the developer (which had already taken place) was unlawful.

The recent decision in Kaymet highlighted that this was a very difficult evidentiary burden for purchasers to meet.

Under the new legislation, if a developer wishes to rescind a sale contract after a Sunset Date expires:

• the developer must give written notice to the purchasers of the proposed rescission specifying why this step is to be taken and the reasons for the delay in creating the subject lot;
• the purchasers have 28 days to consent to the rescission – absent this consent, the developer must apply to the Court;
• the developer must satisfy the Court that a rescission is ‘just and equitable’. This anticipates the Court having regard to:
• the terms of the contract;
• whether the vendor has acted in bad faith or unreasonably;
• the reason for the delay(s);
• the likely date the lot will be created;
• whether the lot has increased in value;
• the effect of rescission on each purchaser;
• any other matters prescribed by the regulations (to be proclaimed); and
• any other matter the Court considers relevant.

The developer is liable to pay the costs of a purchaser in relation to the proceedings unless the developer can satisfy the Court that the purchaser unreasonably withheld consent to the rescission under the Sunset Clause.

There are no changes to a purchaser’s right to rescind.

Cause for concern

This should be of significant concern in respect of current sale contracts – where decisions as to how a project is managed and administered and the extent of record keeping relating to the progress of building works may have been informal. The new legislation requires the developer to show that they took reasonable steps to meet a Sunset Date.

In the second reading speech for the legislation, it was stated that if the value of a lot had increased significantly ‘the exercise of the sunset clause is prima facie unfair’. Whilst this factor did not ultimately find its way into the new legislation, such a harsh starting point should concern developers. The Court can consider second reading speeches in their interpretation of the intent of the legislation.

As those in the industry know, there are many reasons a developer may not be able to achieve a Sunset Date. These include the timing of an acquisition, development approvals, finance arrangements, construction related issues and a myriad of other facts which are unrelated to a rising market. Indeed, many off the plan sale contracts clearly state the potential for further development approvals or changes to a proposed development, the result of which can render a Sunset Date impossible – but are clearly the intended contractual agreement – and a risk the purchasers are on notice of at the time they agree to the terms of the sale contract.

Contracts should be interpreted at the time they are formed – this is the usual process under contract law – and this type of purported ‘just and equitable’ assessment of a developer’s right to rescind simply cause uncertainty for developers. Presumably prior to rescission a developer will now have to incur costs evidencing the steps it took to manage its builder (including keeping more records that most presently maintain and further bear costs associated with a programmer to evidence the steps it has taken to reasonably meet a Sunset Date) – without any assurance that it will recover any such costs – despite the fact that if validly rescinded, it has not breached any contractual obligation.

It remains to be seen what constitutes a ‘reasonable and equitable’ basis for rescission by a developer. Presumably, despite the broadly drafted legislation, the terms of the contract will have primacy when determining whether a rescission was reasonable. Whilst not expressly stated, the legislation does not preclude a developer from putting on evidence as to (a) why the Sunset Date was not met as a result of changes to a project anticipated within a sale contract and/or (b) the increased costs incurred by the developer necessitating rescission. Presumably such evidence will be permissible in support of the developer’s conduct being reasonable. In circumstances where the legislation operates retrospectively to existing contracts, this shifts risks onto developers which could not have been anticipated at the commencement of a project.

In our view this legislation has shifted risks disproportionately onto the developer. In a softening market, the legislature should have been 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. Caveat emptor!

Way forward

Developers should be immediately reviewing their sales contracts with respect to:

• the scope of a developer’s obligations to complete by a Sunset Date; and
• the circumstances under which the developer should be entitled to rescind the contract.

Blackstone Waterhouse is able to advise developers as to their rights and obligations if considering whether to rescind off the plan sales contracts and potentially seeking leave of the Supreme Court of NSW under this new legislation.

Blackstone Waterhouse is holding workshops for developers in relation to our recommended amendments to  standard master contracts and managing the risks now presented by this new legislation. If this is of interest, please contact us.

Veno Panicker