In recent years we have seen housing prices in New South Wales skyrocket, and as such the popularity of purchasing off-the-plan developments has increased.
While purchasing a brand-new property off-the-plan is incredibly appealing to potential buyers, there are risks, of which all purchasers should be made aware.
The current building market has seen an unprecedented rise in the cost of construction within the past year. As a result of the increase cost of building materials we are seeing developments come to a halt unless, the purchaser agrees to vary the contract.
In 2015 the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) (the Act) was passed by the NSW Government which aimed to protect purchasers from the implications of unscrupulous builders relying on Sunset Clauses.
A Sunset Clause is commonly included in contracts for off-the-plan developments. These clauses provide a specific timeframe within which the development is to be completed. This timeframe is generally quite lengthy and usually exceeds one year allowing for more than enough time for the development to be completed.
A Sunset Clause permits either party to the contract to rescind the contract if the development is not completed during the stipulated timeframes. This type of clause protects purchasers and developers from delays where neither party is at fault and allows them to exit the contract.
It also provides a developer with security that a purchaser cannot back out of a contract before it is complete.
With property prices soaring there is scope (and even incentive) for some property developers to intentionally delay a development for the purpose of rescinding under the Sunset Clause. Rescinding the contract allows the developer to re list the property for sale and receive a higher market price in today’s market.
This issue came before the Supreme Court in Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445. In 2014, 12 purchasers had made deposits for off-the-plan developments in an apartment building. The developers acted in a way which delayed the completion of the development and sent a series of letters to the purchasers with the intention to scare them into rescinding the contract.
Within the time the purchasers had made their deposits, and the time the Sunset Clause came into effect the developers would have gained approximately $200,000.00 extra on each apartment. The Court found the developers actions in attempting to rescind the contracts amount to them not acting justly or equitably. The attempt to rescind the contracts was dismissed.
In light of the 2015 changes to the Act, a developer’s ability to rescind a contract for residential developments is limited.
Where the Sunset date passes and the development is not complete the developer must now provide notice to the purchaser, along with an explanation for the delay, and the proposed reasons for rescission.
The purchaser must be provided with 28 days’ notice of the intention to rescind. For the rescission to occur, the purchaser must consent.
In the event the purchaser and developer cannot come to an agreement, the legislation has now put the onus on the developer to prove to the Court that rescinding the contract is just and equitable under the circumstances and the particular reasons for the delay.
The Act has not prohibited Sunset Clauses from off-the-plan development contracts. It has put a focus on protecting the rights of a purchaser and aims to reduce the risk purchasers face when entering into a contract.
The shift in dynamic that the Act has caused is not an effort to burden developers. It reduces developers’ ability to affect a Sunset Clause for reasons which are unjust and inequitable and aims to hold them accountable.
If you are looking to enter into a contract for an off-the-plan development or your development is being affected by a Sunset Clause, one of our team will be able to assist you.
