The Victorian Government has proposed laws to eliminate suspect use of sunset clauses in residential off-the-plan contracts.
Introduced on 23 August 2018, the Sale of Land Amendment Bill 2018 (Vic) (Bill) makes changes to the Sale of Land Act 1962 (Vic) (Act) regarding residential off-the-plan contracts, terms contracts, rent-to-buy arrangements and options to purchase land under land banking schemes.
The change to sunset clauses in residential off-the-plan contracts is intended to restrict the use of sunset clauses by developers without legitimate consideration of the purchaser.
What caused these changes?
Sunset clauses gave property developers the option to withdraw from a contract if a subdivision was not registered (and an occupancy permit not obtained, if relevant) within a set period under the contract (or 18 months under the Act). Despite developers returning a purchaser’s deposit, this left many homebuyers in a distressed state, as rising housing prices made it impossible for them to buy another property at the same price.
In a rising market, some developers allegedly delayed construction timeframes so they could evoke these sunset clauses. Developers have claimed that the reasoning behind the sunsetting practice is to reclaim lost profits because of unforeseen delays.
Power of vendors to rescind a residential off-the-plan contract
Before a vendor can rescind a residential off-the-plan contract, under the proposed new section 10B(3), the vendor must inform all purchasers and obtain written consent from each purchaser. The vendor must give each purchaser at least 28 days written notice that the rescission will take place. This notice must include the following:
(a) reason(s) why the vendor is proposing to rescind the contract;
(b) reason for the delay in subdivision or issuing of occupancy permit; and
(c) advice that the purchaser is not obliged to consent to the proposed rescission.
Once the Bill is passed by the Parliament, it will cover both existing residential off-the-plan contracts and all future ones.
What are the next steps if a purchaser refuses the rescission?
Under the proposed section 10D, the vendor may apply for an order of the Supreme Court of Victoria permitting the vendor to rescind the residential off-the-plan contract under the sunset clause. The Court can then decide to issue an order once they are satisfied it is just and equitable for all parties involved in the contract.
How does the Supreme Court decide to rescind?
Under the proposed section 10D(3), the Supreme Court of Victoria must have regard to:
(a) the terms of the residential off-the-plan contract;
(b) if the vendor has acted unreasonably or in bad faith;
(c) why the subdivision or occupancy permit was not completed in time;
(d) the estimated date the subdivision or occupancy permit will be approved;
(e) whether the value of the off-the-plan property has increased;
(f) how voiding the contract will affect each of the purchasers; and
(g) any other matter that the Court considers to be relevant.
Under this proposed section, the Court will reserve the right to issue any order that will make this decision just and equitable. This includes awarding reasonable compensation to a purchaser.
Under the proposed section 10D(5), the vendor will be liable to cover the costs of a purchaser in relation to the proceeding for an order unless the vendor satisfies the Court that the purchaser unreasonably withheld consent to the rescission of the residential off-the-plan contract under the sunset clause.
Statement in residential off-the-plan contact
Under the proposed section 10E(1), the vendor must include in their residential off-the-plan contract a statement that:
(a) the vendor is required to give notice when proposing rescission under the contract;
(b) the purchaser has the right to consent to the proposed rescission of the contract but is not obliged to;
(c) the vendor has the right to apply to the Supreme Court of Victoria to rescind the contract; and
(d) the Supreme Court of Victoria has the right to permit the rescission of the contract should they feel the decision is just and equitable in all circumstances.
Under this proposed section, the penalties applied would be 240 units for a natural person and 1200 for a body corporate.
The changes in the proposed section 10E(1) do not apply to off-the-plan contracts signed before this Bill becomes law.
Whilst the new legislation is important, it only relates to one type of delay clause. It seems quite simple to draft around the proposed legislation, and in fact most off-the-plan contracts would already allow Vendors to achieve similar results, without having to apply to the Supreme Court under the sunset date clause.