If the Victorian government’s Sale of Land Amendment Bill 2018 (Bill) is passed, property developers will have to obtain the purchaser’s consent to rescind the contract under a ‘sunset clause’ in a residential off-the-plan contract of sale for land (Contract).
If developers cannot obtain the purchaser’s consent, then developers seeking to end a Contract under a sunset clause will need to obtain a rescission order from the Supreme Court of Victoria.
As the Bill effectively kills off any benefit to developers of sunset clauses as we know them, we have set out the practical implications of the Bill and what we expect to see in Contracts in the future.
The Bill defines a ‘sunset clause’ as a clause that allows the Contract to be rescinded if either:
- the plan of subdivision is not registered; or
- occupancy permit has not been issued,
by a specified ‘sunset date.’
Sunset clauses are standard to almost all Contracts. Purchasers already have a legislated right to rescind a Contract by the sunset date. It is common practice for developers to have the same rights under a Contract.
The Bill mandates the process for a developer to rescind a Contract under a sunset clause.
The developer must give the purchaser 28 days written notice of the reason for the proposed rescission, and the reasons for the delay.
A developer will no longer be permitted to end the Contact without the purchaser’s written consent.
Application to the Court
If the developer is unable to obtain the purchaser’s consent, then a developer may apply to the Supreme Court of Victoria for an order to rescind the Contract.
The Court must be satisfied that that rescission is “just and equitable in all the circumstances.”
The Bill sets out factors that the Court must consider in making this determination, including:
- whether the developer has acted unreasonably or in bad faith;
- the reasons for the delay;
- if the lot has increased in value; and
- the effect of the rescission on each purchaser.
This is a very hard test for the developer to pass.
The Bill is similar to the relatively new legislation in NSW. Initial NSW court decisions suggest that the court will not readily agree to rescind and will look closely at the actions and conduct of the developer.
In one instance, the court ordered that upon rescission, the developer must offer to enter into a new contract with each purchaser with a court-mandated increase to the sale price. The developer also had to pay the purchasers’ legal costs.
The Bill is yet to be debated in the upper house of the Victorian parliament. However, if passed in its current form, the Bill effectively prevents any developer seeking to rescind a Contract under existing sunset provisions in a Contract after 23 August 2018 from doing so without first obtaining the purchaser’s consent, or a court order.
The Bill also requires certain notification statements regarding sunset clauses to be included in Contracts from 1 December 2019 (unless the relevant section of the Bill is proclaimed to apply earlier than that date). Accordingly, developers do not need to change their contracts just yet.
In our experience, developers are already very cautious about the use of existing sunset clauses to end Contracts. Sunset clauses are usually relied upon as an absolute last resort.
Certainly, there are a few well-publicised instances of rogue developers taking unfair advantage of sunset clauses. Unfortunately, instances of developers not exercising sunset clause rights and progressing with their developments (often at a higher cost to the developer), are less well-publicised or known.
While the government’s intent is to target “dodgy” developers, all residential developers, and existing and new off-the-plan residential contracts, are caught by this consumer-friendly Bill.
The Bill does not provide any vendor safeguards against purchasers using a sunset clause to rescind contracts in a falling property market.
What you can do about it - practical considerations
1) Contracts should still include a sunset clause with a sunset date acceptable to the developer. Without such a provision, purchasers have the statutory right to rescind a Contract 18 months after the Contract is signed if the property is not completed within that time frame.
2) Developers could address project risk through tailored rescission provisions in the Contract. For example, the Contract could give the developer the right to rescind a Contract if:
(a) the relevant authority does not grant the necessary permits; or
(b) the permits, when granted, contain conditions which are not acceptable to the developer; or
(c) a certain number of sales have not occurred by a specified date; or
(d) finance for the project cannot be obtained.
3) If a sunset clause must be relied upon, developers could consider offering a financial incentive to the purchasers in order to procure the purchasers’ consents. This would avoid costly application to the Court to seek the necessary consent orders.
If you would like advice on how these changes may affect your development, and how to guard against future project risk, please contact us.
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