Off-the-plan buyers gamble that construction of the apartment building will be completed before the time limit expires in the sunset clause. The buyer loses the gamble if construction delays mean that the developer cancels the off-the-plan contract using the ‘sunset clawback’ and re-sells at a higher price.

This apparently unjust result from the buyer’s perspective was the outcome in Wang v Kaymet Corporation Pty Ltd [2015] NSWSC 1459 (8 October 2015), a decision of Justice Stevenson of the Supreme Court of New South Wales.

He concluded that the developer was not responsible for the construction delays and so was entitled to rescind the off-the-plan contracts because the strata plan was not registered within the agreed time limit of 30 months. Whether or not 30 months was an unreasonably short a time limit was not argued.

As a result, the 34 buyers who pursued the proceedings to enforce their contracts were refunded their deposit, but were not compensated for the loss of opportunity to purchase an apartment which had risen in value since they entered into the fixed-price purchase contract.

In this article, Wang will be examined, as will the way sunset clauses are regulated around Australia.

The Wang’s timeline

This timeline of events illustrates how the situation unfolded:

2008 – Developer purchased the site at Lusty Street, Wolli Creek (near Sydney Airport)

20 August 2008 - Kogarah Council granted Development Consent for an eight storey apartment block containing 94 residential apartments.

23 November 2009 to 1 April 2010 – The 34 buyers who sued (Wang was the lead plaintiff) exchanged off-the-plan purchase contracts.

15 March 2010 to 2 August 2010 – construction commenced with a CSM Retaining Wall, followed by the installation of dead-man anchors.

7 September to 11 October 2010 – site excavation was carried out.

11 October 2010 to 7 January 2011 – piling – 6 weeks delay was attributable to the developer.

November 2010 to 10 March 2011 – no work done due to the need to clarify that the effective height of the building was less 25 metres (to avoid installation of fire sprinklers throughout).

January to 29 June 2011 – slabs above lower basement poured.

10 November 2011 to 24 April 2012 – concrete structure completed – some delay caused by restricted crane radius and needing steel cages to be prefabricated offsite.

23 May 2012 to 1 October 2012 – the 30 month sunset clauses expired.

18 March 2013 to 10 April 2014 the developer rescinded the off-the-plan contracts.

The interim Occupation Certificate was issued on 19 July 2013, and the strata plan would have been registered not long afterwards (had it been lodged). All told, it took 40 months to complete the construction.

The Wang sunset clause

The off-the-plan contracts contained a “Registration of Strata Documents” clause which operated as the sunset clause. It took the form that most sunset clauses take. It was:

52.1 Completion of this contract is subject to and conditional on the registration of the Strata Documents [the strata plan, etc] ... on or before the Date for Registration [30 months after the contract is entered into]. The vendor will use its reasonable endeavours to register the draft Strata Documents by the Date of Registration. If the Strata Documents are not registered by the Date for Registration ... the vendor is not in breach of this contract and the purchaser’s only right is to rescind this contract ...

52.4 If the draft Strata Documents are not registered by the Date for Registration ... for any reason, either party may rescind this contract by serving written notice on the other party at any time before the Strata Plan is registered.

The Court made these observations on the sunset clause:

  • Using the words reasonable endeavours instead of the more onerous all reasonable endeavours did not make any difference to the developer’s obligations in this case.
  • It was not necessary for the developer to extend the Date for Registration by up to 6 months, as it was entitled to do under the contract if there was a delay outside of the developer’s control, before rescinding the contract.
  • The purchasers have no right to sue for damages under the purchase contract.
  • As at 1 October 2012 (30 months after the last contract was entered into) the work was 69% complete. The purchasers would have needed show at least 9 months delay caused by the developer’s failure to use reasonable endeavours, which they did not show. All they had shown was 6 weeks delay.
  • Therefore, the developer was not in breach of the sunset clause, and was entitled to rescind the off-the-plan contracts of the 34 purchasers. It was not alleged that the developer had deliberately delayed work on the project so as to be able to re-sell in a rising market.

Government regulation and reforms

New South Wales - Over the past year, a number of property developers in Sydney have taken advantage of sunset clauses to rescind off-the-plan contracts for strata apartment developments. Buyers see this as unfair because they have lost the opportunity of purchasing at the agreed price, and have lost their capital gain available in the rising Sydney real estate market. There are currently no restrictions on this practice in NSW.

The NSW Government considers that developers who do this are misusing sunset clauses, and is currently considering these consumer-oriented reforms to the Conveyancing Act 1919:

  • Allowing only the purchaser to rescind off the plan contracts; and
  • Requiring a vendor who terminates a contract under a sunset clause, and re-sells the same unit, to pay damages to the purchaser equal to the difference on the sale price between the two contracts.

“Purchasing a property is a life-changing decision and we need to ensure consumers are protected against exploitative practices,” said Mr Dominello MP [Minister for Innovation & Better Regulation].

Other Australian States deal with sunset clauses in these ways:

Western Australia – The purchaser has the right to rescind an off-the-plan contract for purchase of a strata apartment, if the sunset date expires and the plan is not registered (see s.70 Strata Titles Act 1985). In its explanatory brochure, Buying land or property off-the-plan (April 2014), the WA Government advises buyers to decide whether the time frame is acceptable before entering into the contract, and that buyers may have a remedy under the Australian Consumer Law ‘if their contract includes a clause which limits their rights to claim damages where a developer cancels a contract’.

Victoria – Off-the-plan housing contracts must contain a “warning notice” which states:

A substantial period of time may elapse between the day on which you sign the contract of sale and the day on which you become the registered proprietor of the lot.

The value of the lot may change between the day on which you sign the contract of sale of that lot and the day on which you become the registered proprietor.

(see Form 1 - reg 5 Estate Agents (Contracts) Regulations)

There are no rights given to purchasers if developers rescind using the sunset clause.

Queensland – A developer can specify a maximum time period of 5 ½ years for a sunset clause. Previously it was 3 ½ years (see s. 28 Land Sales Act 1984). It is up to the purchaser to negotiate the time period, which can be shorter, or be extended by mutual agreement.

Final comments

Developers who use short sunset periods can profit by rescinding if the market rises. Anecdotally it is said that the home units at Wolli Creek (Wang) have appreciated by between $150,000 and $200,000 each, $5 million in total.

But it is not all windfall profit in a rising market because construction delays mean increased costs. Some developers are offering purchasers a trade-off – they will not rescind if the purchaser pays an increased price which covers the extra costs. This is a commercial solution.

There is scope for the Courts to declare the vendor’s right to rescind and / or to not pay compensation under a sunset clause is unfair and therefore void because the developer set the time period too short. See the unfair terms provisions of sections 23 to 28 of the Australian Consumer Law. This argument was no made in Wang because the contracts were entered into before 1 January 2011.