Developers pulling out of off-the-plan contracts
Mar 10, 2016As some people may be aware the government passed new legislation, the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW), at the end of last year with the sole purpose of amending the Conveyancing Act 1919 (NSW) to prevent a developer from unreasonably rescinding an off-the-plan contract for a residential lot under a sunset clause.
Firstly, what is an off-the-plan Contract?
If you purchase a property off-the-plan you are buying a residential property that does not have a separate title at the time you exchange Contracts. For example, purchasing a lot in a new housing estate or a unit in a new strata complex. Developers will often sell the properties before they begin building to gauge interest and to finance the construction.
Secondly, what is a Sunset Clause?
Sunset clauses set a time limit (the sunset date) within which registration of the separate title for the property must be completed. If registration does not happen by the sunset date then the Contract can be rescinded. If this happens then the deposit and any monies paid under the Contract to date are reimbursed to the purchaser. Sunset dates can vary in length depending on the size of the development and the Contract normally contains a provision that the date can be extended within certain limits.
Why was the legislation changed?
Due to the nature of off-the-plan contracts, they can be on foot for a number of years before the construction is finalised and the purchase can be completed – during which time the property market can change drastically.
The government was concerned with reports of developers using the sunset clauses to rescind Contracts and re-sell the same property at a higher price.
Some developers found the opportunity to re-sell at a higher price too good to pass up and deliberately dragged out the construction or registration to the point that the sunset date came and went and they could then rescind the Contract. This then left the purchasers without the new property, and quite often not being able to afford to purchase in the higher property market.
For example, a developer of a new unit block in Surry Hills rescinded contracts for 7 units, then proceeded to resell them for up to 50 per cent more than the original contract price. Closer to home, a group of 34 purchasers took a class action against a developer of a new unit block in Wolli Creek who rescinded their contracts, claiming that the developer did not use “reasonable endeavours” to complete the construction and register the new strata documents before the expiry of the sunset date.
What do the changes mean for purchasers?
Under the new legislation (section 66ZL of the Conveyancing Act), if a developer intends to rescind a contract under the provisions of a sunset clause, they must give the purchaser notice of their intention at least 28 days prior to rescinding the contract together with their reasons as to why they are rescinding. Only if the purchaser consents can the developer go ahead and rescind. If the purchaser does not consent the developer must apply to the Supreme Court for an order permitting the rescission of the Contract.
Recent Case under the new legislation
The legislation has already been put to use at the start of this year in the case of Jobema Developments Pty Ltd v Zhu & Ors [2016] NSWSC 3. In this case a developer (“Jobema”) purchased a development site from a developer and took on the obligations of the original developer under several off-the-plan contracts that had been entered into with purchasers. Jobema subsequently made an application to the Supreme Court of NSW to rescind one of the contracts after the sunset date had come and gone. The reasoning given was that the first developer had done little to no construction work at the time Jobema took over the development site and that as a result of this, registration of the separate lot was not expected until mid-2017. The Court dismissed the application and refused the order for rescission.
If you are purchasing an off-the-plan property, you should obtain legal advice before exchanging contracts, so that you are aware of your rights and obligations – and the possible delay in completion.
Contact the Shire Legal team if you have any questions.
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