Virtually all off the plan sale contracts exchanged in NSW allow either the developer or the purchaser to rescind the contract should the development not be completed by a sunset date.
The developer, taking into account the construction program will nominate a sunset date, being a date which is significantly later than the date of expected practical completion.
Whilst sunset dates are normal in many types of contract and operate for the benefit of either party, there has been media focus of late on developers rescinding only to resell in a rising market.
In September this year the NSW Government opened public consultation on the use of sunset clauses in off the plan property contracts.
At the end of the consultation period the NSW Government announced an intention to introduce legislation later this month. The new legislation provides that:
- A vendor who wishes to exercise a rescission right following a sunset date expiry must first seek consent from the purchaser;
- Should the purchaser not consent, the contract will continue in effect unless the vendor applies to the NSW Supreme Court for an order allowing the rescission to take place.
The reforms are intended to create a more level playing field between well resourced developers and purchasers of off the plan apartments ‑ who are generally “mum & dad” investors or first home owners.
Ultimately though any litigation will involve significant costs, regardless of whether a party is the instigator of the litigation or not.
Whilst the entire reform package is not yet known, it would be beneficial if the reforms obligate at the time the developer seeks the purchaser’s consent ‑ both parties to disclose records which they propose to rely upon should the matter proceed to litigation. Early disclosure of key documents may assist to avoid the dispute becoming litigious.
The proposed legislation may make it more difficult to sell a distressed development with expired sunset date contracts, as a new developer will need to incur legal/court costs unless a negotiated resolution with the purchasers can be achieved.
It will be interesting to see the detail of the legislation and whether there are any exemptions for projects where there has been an insolvency event and a lender has stepped in to take control of the project.
As the reform does not appear to be retrospective, it is worthwhile having a brief look at the existing law.
Ordinarily an off the plan or pre-sale contract will place an obligation on the developer to use its reasonable endeavours to complete the building and register the plan of subdivision by the sunset date.
Whether the developer has used reasonable endeavours will largely be a question of fact and will depend on the circumstances of each individual case. The court will not usually penalise a developer for delay which was beyond its control. This may include failures of the appointed builder or other contractors, noting that there is still a responsibility on the developer to oversee the builder’s performance of the building contract.
It is important to note the onus is initially on the purchaser to establish that the developer has not used reasonable endeavours to obtain registration of the plan. In many cases the purchaser is unable to provide adequate evidence to satisfy the court.
One such case was last month’s NSW Supreme Court case of Wang v Kayment Corporation Pty Limited.
In that case a number of purchasers had come together to run a quasi class action against the developer. The purchased placed importance on a quantity surveyor’s report which had been commissioned by the developer’s financier. The report identified the “delays to date” as being 46 weeks. However the report hardly featured in the judgment. This was because under cross examination the quantity surveyor conceded that the report was comparing the development against cash flow projections rather than the actual construction program against the planned program.
Taking into account the current state of the law and beyond, developers should keep thorough records throughout the development of any delays and what has caused them, even though this is not a contractual requirement. If a rescission is disputed the validity of the rescission will depend upon the evidence that a developer can present showing that all reasonable endeavours were made.