Good News: New Legal Protections for ‘Off the Plan’ Property Purchasers

On 17 November 2015, the NSW Government passed the Conveyancing Amendment (Sunset Clauses) Act 2015. Introduced by NSW Minister for Innovation and Better Regulation, Victor Dominello, the Act purports to provide Purchasers under ‘off the plan’ contracts with greater protection, by restricting the rights of a Vendor to rescind an ‘off the plan’ contract under a sunset clause.

‘Off the Plan’ Contracts

An ‘off the plan’ contract refers to the purchase of vacant land in subdivisions that are yet to be registered, or the Purchaser of a unit, house or commercial building that has not been built. Vendors use ‘off the plan’ contracts in order to presell vacant land lots or buildings, prior to building and contract works being finalised. The Purchaser pays a deposit and waits until the Vendor has obtained registration of the plan at Land Property and Information. Such registration will create an individual title to the land or unit and once this has been issued, the contract can be completed in the typical way.

Sunset Clauses

A sunset clause is a provision contained within an ‘off the plan’ contract that allows the contract to be rescinded if the lot is not created by the sunset date. The sunset date specified in the contract is the latest date the lot will be created, and will have a separate title issued for it. Typically, sunset clauses allow either the Vendor or the Purchaser to rescind if the development is not completed within time. The purpose of the sunset clause is three fold:

1. To protect the Purchaser from being tied financially to a development that is not completed within a set time frame;
2. To protect the Vendor where there have been unusual delays beyond their control; and
3. To protect the Vendors from Purchasers exiting the agreement before the provided date for settlement.

Why were the changes needed?

Subject to the terms of a contract, a Vendor may rescind a contract if the sunset date for the completion of the building works has passed, and the subdivision is not yet registered. The new legislation addresses emerging concerns that some Vendors are using the ‘sunset clause’ as a way of terminating an ‘off the plan’ purchase in order to gain an unjust financial benefit. There have been claims that some Vendors are deliberately delaying works in order to rescind contracts and sell the units for higher prices. While the Purchaser will receive their deposit back, they are often out of pocket for legal/ Conveyancing expenses. This has created uncertainty and disappointment for would-be buyers, who anticipated settling the purchase for many months or years. Prior to the changes, the onus of proof was on Purchasers to establish that the Vendor has caused deliberate delay.

What are the Changes?

The new Division 10 of the Conveyancing Act 1919 aims to prevent Vendors from unreasonably rescinding off the plan’ contracts for residential property, under a sunset clause.

The Vendor’s Right to Rescind

Vendors will now only be permitted to rescind contracts under the sunset provision if they are able to justify the termination of the off-the-plan sale. The Vendor will be obliged to give each Purchaser notice in writing at least 28 days prior rescinding under a sunset clause. The notice must outline why the Vendor is proposing to rescind and provide reasons for the delay.

When a lot has not been created before the sunset date, then the Vendor is only entitled to rescind under a sunset clause if:

1. The Purchaser’s provide written consent regarding the Vendor’s proposed rescission; or
2. The Vendor obtains an order from the Supreme Court permitting the rescission; or
3. The reason for the rescission is derived from a category prescribed by the Regulations.

Supreme Court Considerations

In the instance a Vendor seeks an order from the Court, the Vendor must satisfy the Court that the rescission is just and equitable in all circumstances. The factors the Supreme Court will take into account when deciding whether to approve the Vendor’s proposed rescission will include:

• The terms of the contract;
• Whether the Vendor has acted unreasonably or in bad faith;
• The reason for the delay;
• The likely date the lot will be created
• Whether the subject lot has increased in value;
• The effect of rescission on each Purchaser;
• Any matter prescribed by regulations; and
• Any other matter the court considers being relevant.

In the Second Reading Speech Victor Dominello highlighted that a major issue to be considered by the Court, is the increase in value of the subject lot. He suggested “if the value of the lot has increased significantly, the exercise of the sunset clause is prima facie unfair.”

Burden of Proof
The new legislation challenges the recent decision of Kaymet v Wang, where the court affirmed that the onus of proof is on Purchasers to establish that a Vendor’s delay in registering plan documents is unreasonable. The legislation reverses the onus of proof, requiring the Vendor to now substantiate the delay as opposed to the Purchaser.

Costs
The Vendor is obliged to pay the Purchaser’s costs for the application to the Supreme Court, unless it can be proven that the Purchaser’s refusal to consent to the rescission was unreasonable.

Commencement of the new provisions

The Conveyancing Amendment (sunset Clauses) Act 2015 applies retrospectively to any rescission that occurs on or after the 2 November 2015.

 

If you would like to discuss purchasing a property, please contact us on (02) 8076 4539.

 

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written, which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.

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