Property 101: Developer's application to rescind contract rejected in first case on new Sunset Clause Laws

GUEST OBSERVER

The Conveyancing Amendment (Sunset Clauses) Act 2015 came into effect on 2 November 2015, as the new division 10 s66ZL of the Conveyancing Act 1919 (NSW).

The amendments require vendors to either obtain the consent of all of the purchasers before they can rescind an off-the-plan contract in reliance on a sunset clause in the contract, or alternatively, obtain the permission of the Supreme Court to rescind.

These new laws apply to all attempts to rescind for sunset dates in all off-the-plan contracts for sale of residential lots in New South Wales after 2 November 2015, no matter when the contract was entered.

The Case

Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3 is the first case in which the Supreme Court had a developer's request to rescind a contract in reliance of a sunset clause for an off-the-plan property since new laws came into effect. The Court rejected the developer’s application to rescind a contract pursuant to a sunset clause.

Background

Mr Wu (defendant) entered into the contract with Xycom, the original vendor, on 6 December 2013, to purchase a home unit off-the-plan. It was in a 14 storey property development project for 72 residential units and 7 commercial lots in Dora Street, Hurstville. The sunset date for the registration of the Strata Plan was 31 December 2015. After that date, either party had 14 days to rescind the contract. The developer’s right to rescind the contract was qualified by the requirement to ‘use all reasonable endeavours to have the Strata Plan registered by the sunset date'.

However, although Xycom obtained the development approval, they carried out little to no construction work after entering into the contracts to the Purchasers. Subsequently, in October 2014, Xycom sold the development site to Jobema Developments (plaintiffs) which settled in January 2015. The sale was subjected to the existing off-the-plan sale contracts, which were novated to Jobema. Jobema assumed the development and other obligations of Xycom under the existing off-the-plan contracts, however was unable to get the strata plan registered within the contemplated time in the contract. 

On 1 December, Jobema served a notice to Mr Wu proposing to rescind the contract under s66ZL(4):

"Jobema is proposing to rescind the contract because:

1. Since the date that the Contract was entered into, construction costs have increased significantly;
2. (Xycom) did not advance the property to the time that Jobema acquired it in 2015;
3. The contract does not meet the financial requirements for funding the project in 2015;
4. Jobema has offered [Mr Wu] the opportunity to continue with the purchase at a new price which reflects 2015 current market conditions;
5. [Mr Wu] [has] elected not to continue on the basis set out in paragraph (d);
6. Jobema has the opportunity to sell the property in the Contract at a price which reflects the 2015 market and takes into account the increased construction costs referred to in paragraph (a).

The lot which is the subject of a Contract has not yet been created for the following reasons:

1. From the date of the Contract until 5 February 2015 [Xycom] carried out little or no physical work for the Project;
2. Since 5 February Jobema has entered into contracts to sell other lots in the Project in order to secure finance for the Project;
3. Jobema has commenced physical works but anticipates that the lot will not be created until sometime in 2017.”

Mr Wu did not consent to the rescission and Jobema applied to the Supreme Court under s66ZL of the Conveyancing Act seeking the Court’s permission to rescind the contract pursuant to the sunset date clause contained in the contract. 

The Court's Decision 

Justice Black of the Supreme Court found against the developer in all factors outlined in s66ZL.

In s66ZL(7)(g) – any other matters or factors that the Court may consider to be relevant, the developer raised two matters:

1. That there was an increase in construction costs that affected the construction funding. However, the Court noted that ‘an inability to rescind’ the contract would not affect the availability of construction finance – it would only result in a requirement ‘to contribute additional capital to meet its lender’s requirements’.
2. That the new Sunset Clause Law was unforeseeable when Jobema purchased the property from Xycom, and thus Jobema’s rights should not be restricted. The Court disagreed, stating that legislative change is generally a foreseeable risk of business activity.

Not Just and Equitable

An order under s66ZL(6) of the Act is only made if the Court is satisfied that the order is just and equitable in all the circumstances to do so. Whilst the Court accepted that the evidence indicated that since buying the site in 2014, Jobema had exercised diligence in progressing the construction of the site, the court was unable to disregard Xycom’s lack of diligence in considering an order where Jobema had expressly assumed Xycom’s obligations. 

The Court dismissed the application for an order allowing the developer to rescind for the sunset date under s66ZL(6) because it was not satisfied that it was just and equitable to make the order.

Importance

The reason sunset clauses are included in “off-the-plan” contracts is to protect both parties and prevent contracts with no end date from going for too long. The new laws do not prohibit or discourage sunset clauses, however they do put the onus on the developer to show that the rescission is just and equitable (s66ZL(6)) when the purchaser does not consent to the rescission. 

The Court took into account the prescribed factors laid out in s66ZL of the Act, including that it will look at what was done by the present vender developer and also what was done by the prior vendors. This case serves as guidance as to how the Court is likely to interpret these new provisions of the Act in the future. 

If you have any queries regarding Sunset Clauses or this case please do not hesitate to contact TressCox Lawyers here.