In the year 2015, the NSW government introduced the Sunset Clause (Conveyance Amendments) that modified the traditional Conveyance Act 1919. Basically, these amendments were meant to bring significant changes to the rescission of the off-the-plan contracts and the manner in which the developers can rely on sunset clauses.
Generally, a sunset clause is that clause that allows the purchaser or the vendor in the off the plan contract to rescind the contract provided the title to the property has not been created by a particular date. This date is usually referred to as the sunset date. Normally, the sunset date is usually set by the vendor as is normally counted 12months from practical completion.
Traditionally, there was no legislation that prohibited the vendors to rescind the contracts whenever the sunset date had elapsed and the title to the property is not yet created. In this regard, some vendors were accused of deliberately delaying the registration and the completion of the buildings to enable them rescind off the plan contracts, refund the deposits, and eventually sell the property at higher prices and make more money.
What the changes mean for the developers
The changes in the traditional legislation mean a lot for the developers. The current piece of legislation stipulates that the developers need to provide each purchaser with a minimum of 4 weeks before the decision to rescind a contract under the sunset clause. In addition, the new law requires that the vendor needs to provide sufficient reason related to his decision to rescind the agreement and the reason for the delay. Thereafter, the purchaser may provide a written consent to the rescission. In this regard, the developer only has the option of obtaining an order from the supreme court to proceed with rescission when the purchaser refuses to rescind the contract or fails to respond in any way. In deciding such a case, the supreme court will take several factors into account such as the terms of the contract and the reasons for the delay. The supreme court will also decide whether the vendor has acted in bad faith or unreasonable and whether the property in question has increased in value. Also, the supreme courts have the powers to consider any other matter that appears relevant to them. In this arrangement, the vendors will be liable in settling the costs of the application to the supreme court. They can only be exempted from settling such costs when the vendors can prove the refusal of the purchaser to consent to the rescission was unreasonable. Generally, the law reverses the proof requiring the developer as opposed to the purchaser in proving that the delay was beyond control. The benefit of the new law that came into effect on November 2015 is that it applies to all contracts, regardless of the date such contracts were created.
Case of Jobema Developments Pty Limited v Zhu (2016) NSWSC 3
This is one of the cases that reflects the application and precedents of the sunset clause as it was the first case decided under this recent piece of legislation. In this case, Mr Whu entered into a contract with the vendor named Xycom towards the end of the year 2013. The structure in question was a 14 storey property development with several residential units and other commercial lots. The parties to the contract set the sunset date at 31st December 2015, after which they had two weeks to rescind. The contract also stipulated that the vendor could utilize all the reasonable endeavours to ensure that the strata plan was registered by sunset date. In October 2014, Jobema development bought the development site and the existing of the plan sale contract from Xycom. Xycom had made little progress during the time of sale. Also, the project was not expected to be completed any soon and the strata plan was not registered until the year 2014.
Before the expiration of the sunset clause, Jobema went to Mr Wu with the intention to extend in exchange for a new agreement that would reflect the increased cost of construction. Unluckily, Mr Wu refused the offer and this made matters complicated for Jobema. On 1st December 2015, Jobema served Mr Wu with the intent to rescind the contract after 4 weeks. Few days later, Jobema proceeded to apply for leave in the Supreme Court under the section 66ZL of the conveyance Act. Irrespective of whether the purchaser had opposed or consented to the vendor’s application, the courts had to determine whether the requirement of section 66ZL of the act had been violated.
The courts refused Jobema application by indicating that the order to rescind the contract was unjust and equitable in the circumstances. It is interesting to note that the ruling of the court was not affected by the fact that the strata plan had not been registered prior to the sunset date. The Supreme Court ruling set precedence with three main implications in relation to contracts under sunset clauses.
First, the courts set the precedence that the failings of the previous developer will not support the leave application. In this ruling, the courts noted that Jobema had the knowledge of Xycom lack of progress when it assumed the Xycom obligations. In this regard, Jobema had no right to shift the blame for the delay of the project to the previous developer since it had assumed the Xycoms contractual obligations. Such obligations also included to use its best endeavours to ensure that the project was in a position to allow the strata plan to be registered on the sunset date.
The other implication of this ruling is that the courts portrayed that the retrospective effect of the amendment of the sunset clause legislation is not a relevant factor in the off the plan contracts. In this regard, the court rejected the Jobema argument that the new legislation was unforeseeable during the time it purchased the property. The effect of such amendment is also not relevant in the change which increased the protection for off the plan purchases as part of the foreseeable business risks that developers assume.
The other implication of the above ruling is that developers must be seen to act justly and equitably when dealing with purchasers. The selective and the unexplained process by which the sunset clause is extended can be a factor that can work against the party to the contract.