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.
Expert commentary on the court's decision
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:
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:
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.