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Could a developer rescind off-the-plan contracts to cash in on a rising property market? Which case won?
23 Feb | Which Case Won

Could a developer rescind off-the-plan contracts to cash in on a rising property market? Which case won?

by Merrill Phillips, Taree

The Facts

Vendor and purchasers enter off-the-plan contracts containing sunset clause

In 2014, the vendor and several purchasers entered into contracts for the sale of residential units in a building that was yet to be constructed.

The purchasers were unable to inspect a display unit, so they instead exchanged residential off-the-plan contracts with the vendor, relying on the information and documentation provided in the contracts.

Each contract was in substantially the same terms and was for the sale of a proposed lot in an unregistered plan of subdivision.

The contracts contained a sunset clause, stipulating that if the unregistered plan of subdivision was not registered by 31 December 2016 (the “sunset date”), then the parties were each legally entitled to rescind the contract (ie walk away from it).

The contractual sunset clause was subject to section 66ZL of the NSW Conveyancing Act 1919. (The relevant part of the current legislation is section 66ZS.)

This section states that a vendor may only rescind an off-the-plan contract under a contractual sunset clause if the buyer is given notice and consents in writing to the rescission, or if the vendor has obtained an order from the Supreme Court permitting the vendor to rescind the contract.

Construction delayed and vendor seeks to rescind contract under sunset clause

The sunset date in each contract was two and a half years after the contract date, and therefore considered more than sufficient time to complete the building and register the plan of subdivision.

However, the development was troubled with delays, and the plan of subdivision was not registered by the sunset date. Ultimately, the plan was registered nearly 13 months after the sunset date.

Less than a month after the expiry of the sunset date, the vendor served notices to the purchasers that it was rescinding the contracts, giving the reason as external events which caused delays in completion of the development.

Purchasers refuse to accept rescission and vendor seeks order from Supreme Court

The purchasers did not consent to the rescission, believing that the vendor was trying to cancel their contracts so that it could resell the apartments for a higher price in the rising property market.

The vendor made an application to the Supreme Court for an order permitting it to rescind the contracts.

It was up to the court to decide whether making such an order was just and equitable in all the circumstances.

casea
The case for the purchasers
  • It was the vendor’s fault that the plan of subdivision was not registered by the sunset date. The vendor failed to ensure that appropriate finance was available. It failed to contract the builders in a timely fashion and did not organise construction certificates for each stage in time for commencement. It also failed to monitor the construction of the complex with all due expedition.
  • The vendor also acted unreasonably by using misleading scare tactics to try to force us to terminate our contracts. This included letters and notices presenting a gloomy account of future progress and threatening that if we insisted on the contracts being completed, our units might shrink or might never be finished.
  • The difference between the current market value of the respective lots and the purchase price under our contracts is of the order of $1.8 million. Clearly, the vendor is only trying to rescind in order to cash in on this rising market by reselling our lots.
  • Not only would rescission deprive us of an economically valuable asset, it would also deprive us of the social benefits we purchased, including living close to the CBD and enjoying the café lifestyle.
  • We have even offered to pay a 15% uplift in value for the contracts to settle, but the vendor has rejected the offer.
  • Given the vendor’s behaviour and the impact of rescission on us as purchasers, the court should deny the vendor’s application.
caseb
The case for the vendor
  • The purchasers knew when they signed the contracts that there was no certainty that completion would occur. They understood that the contract entailed a risk on us as vendor in a falling property market, and on them as purchasers in a rising market. The purchasers agreed to manage these risks by means of a mutual right of rescission, which they voluntarily granted under the contract. We are merely seeking to exercise that right.
  • Further, we did not cause the delays that led to failure to register the plan by the sunset date.
  • National Australia Bank would only provide finance on the basis that we first secured at least nine pre-sales. Accordingly, we could only obtain finance, enter into a construction contract and select a builder after we had entered into contracts with the purchasers.
  • The builders could not carry out works on the site for four months in 2015, due to the council’s delay in granting a construction certificate.
  • In early 2016, the builder was placed in external administration. This was entirely outside our control. We quickly instructed the project manager to seek tenders for a builder to finish the job. We completed the process as soon as possible.
  • When the builder was placed in external administration, this resulted in the costs to complete the development exceeding the available funds and contributed to the strata plan not being registered by the contractual sunset date.
  • Given that the purchasers voluntarily agreed to the sunset clause and that the failure to register the strata plan by the sunset date was due to circumstances outside our control, the court should grant our request for an order to rescind.

So, which case won?

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Expert commentary on the court's decision

Merrill PhillipsLicensed Conveyancer
“This case confirms the role of section 66ZS in preventing developers from using sunset clauses as ‘get out of jail free’ cards. This has happened all too frequently in apartment block developments, where developers have delayed completion and then used sunset clauses to cancel off-the-plan contracts, only to resell them days later for a windfall profit.”
Supreme Court finds in favour of purchasers

In Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445, Justice J Darke of the Supreme Court of NSW dismissed an application by Silver Star Fashions for permission to rescind the off-the-plan contracts it had entered into with nine buyers for the sale of residential apartments at Harmony Apartments, 22 May Street, Surry Hills, in the inner city of Sydney.

Justice Darke concluded:

…it would not be just and equitable to permit the Vendor to rescind any of the Contracts, particularly in light of the Vendor’s conduct that made a considerable contribution to the delay in the development, the loss to the purchasers of the valuable benefit of the contract if rescission was permitted, and the fact that the Vendor would not itself suffer any financial detriment if rescission was not permitted.

To rub salt into the wound, the vendor was also ordered to pay the purchasers’ legal costs.

Proceedings brought by developer in vendor’s name

After the original builder was placed in external administration, Silver Star Fashions entered into a Project Delivery Agreement with OZD. OZD agreed to complete the development at cost and make certain payments to Silver Star Fashions.

After accounting for those payments and its development costs, the gross proceeds of the sale contracts would go to OZD as its fee for providing development services.

The Project Delivery Agreement also provided that OZD could initiate proceedings in Silver Star Fashions’ name, seeking orders for the rescission of sale contracts, and to negotiate with purchasers for the mutual rescission of sale contracts.

These proceedings were brought by OZD in the vendor’s name.

Court can grant order to rescind if just and equitable to do so

Section 66ZS of the Act states that a vendor cannot rely on a contractual sunset clause to automatically rescind an off-the-plan contract once the sunset date has passed.

The vendor can only rescind under the contract if either the purchaser consents in writing, or the vendor is granted permission by the Supreme Court to rescind the contract.

The court can only grant permission if it is satisfied that it is just and equitable in all the circumstances to do so.

The objective of this section is “to prevent a developer from unreasonably rescinding an off-the-plan contract for a residential lot under a sunset clause”, and according to Justice Darke it “limits the exercise of the contractual right by imposing the conditions set out in [the Act]”

Court must consider specific factors in determining if rescission is just and equitable

Section 66ZS(7) specifies the factors that must be taken into account in determining whether rescission would be just and equitable. These are:

  • The terms of the off-the-plan contract
  • Whether the vendor has acted unreasonably or in bad faith
  • The reason for the delay in creating the subject lot
  • The likely date on which the subject lot will be created
  • Whether the subject lot has increased in value
  • The effect of the rescission on each purchaser
  • Any other matter the court considers to be relevant
  • Any other matter prescribed by the regulations

According to Justice Darke, the Act does not specify the weight, or relative weight, that ought to be given to these factors. That is left to the discretion of the court.

Vendor causes some but not all of delay

The court determined that while some of the delays could be attributed to Silver Star Fashions, it could not conclude that these failures caused the strata plan not to be registered by the sunset date. This was because there were other delays caused by external events that were not within the Silver Star Fashions’ control.

Vendor acts unreasonably by making misleading statements

Consistent with the Project Delivery Agreement, the court viewed the conduct of OZD in conducting negotiations with the purchasers for the mutual rescission of their contracts as conduct of the vendor.

The court determined that the vendor acted unreasonably when OZD sent letters to the purchasers that contained misleading statements as to the reasons for delay in the project and why rescission was sought.

In particular, the statement that OZD’s task was “to assess what has been done already and then to decide the viability of the project going ahead” was misleading, since an assessment on the feasibility of the project had already been carried out and was considered sufficient for OZD to assume obligations under the Project Delivery Agreement to complete the development.

Some of the letters also contained a statement to the effect that OZD would grant an extension of the sunset date by 30 months in exchange for the release of the deposit by the purchasers. However, according to Justice Darke, OZD had not formed any intention to extend the sunset date, let alone by 30 months.

Vendor has no impediment to completing contracts

The Strata Plan was eventually registered on 23 January 2018, nine months prior to these court proceedings.

According to Justice Darke, since the strata plan had now been registered and an occupation certificate had been issued, there was no impediment to the vendor proceeding to complete the contracts.

Vendor would suffer no financial detriment if permission to rescind denied

Justice Darke found that denying permission to rescind would not cause financial detriment to the vendor. Only OZD, not Silver Stars Fashions, stood to be affected by the court’s determination.

If the court permitted rescission, OZD would gain the benefit of the resales in a rising market.

If the court denied permission, OZD might or might not suffer loss, but it was an experienced developer that had entered into the Project Delivery Agreement after conducting a feasibility analysis that specifically took into account the possibility that the contracts would not be able to be rescinded.

Rescission would be detrimental to purchasers

The court found that if it granted an order for rescission, this would be detrimental to the purchasers.

They would lose the benefit of purchasing a property well below the current market value, would be extremely disappointed that they had waited to no avail for construction to be completed, and would be deprived of both a valuable asset and the social benefits residents of the CBD enjoy.

Sunset clauses are not “get out of jail free” cards for developer or builder

This case confirms the role of section 66ZS in preventing developers from using sunset clauses as “get out of jail free” cards.

This has happened all too frequently in apartment block developments, where developers have delayed completion and then used sunset clauses to cancel off-the-plan contracts, only to resell them days later for a windfall profit.

Not surprisingly, there were a lot of eyes on this case.

Importance of legal advice if confronted with suspect moves by developer

This court victory for off-the-plan property purchasers demonstrates that it is worth getting expert legal advice when confronted by developers or builders seeking to change the agreement that was signed.

It’s not just the sunset clause that can affect purchasers. Developers and builders can also seek to change the size and shape of apartments while the building is under construction, causing you to receive something other than what you signed up for.

It is well worth consulting an experienced solicitor or conveyancer if you have concerns about what is happening to your property.

NOTICE: This article is accurate as at the time of publication and does not constitute legal advice. Please see our legal notices page for more information. Information related to coronavirus can be outdated very quickly.
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