The sun sets on developers using Sunset Clauses

Developers are in the firing line again as the Victorian Government seeks to restrict the ability of developers to terminate an “off the plan” contract of sale.

The Sale of Land Amendment Bill 2018 (Vic) (Bill) was introduced to the Parliament by the Minister for Consumer Affairs on 21 August 2018.  The Bill seeks to make various amendments to the Sale of Land Act 1962 (Vic) (Act) which critically for developers include:

• a developer must obtain the consent of a purchaser to terminate an “off the plan” contract of sale due to the sunset date expiring; and
• if a developer cannot obtain the consent of the purchaser, they will have to apply for, and obtain, an order from the Supreme Court allowing the developer to terminate.

The proposed changes, whilst aimed at protecting purchasers from “dodgy” developers, could potentially cause delays and increase costs for developers, and could also be used by purchasers to extract financial compensation from developers.

The Bill also seeks to amend and introduce provisions relating to terms contracts, rent-to-buy agreements and options to purchase land under land banking schemes.

What is a sunset clause?

A “sunset clause” is a condition in an “off the plan” contract of sale which allows the vendor or the purchaser (or both) to terminate the contract if:

• the plan of subdivision has not been registered by the specified date (being the sunset date); or
• an occupancy permit has not been issued by the sunset date.

A purchaser’s right to terminate an “off the plan” contract for failure of the vendor to procure registration of the plan of subdivision is set out under Section 9AE of the Act.  However, it is usual for “off the plan” contracts of sale in Victoria to including contractual provisions extending this right to the vendor and to include a right to terminate if the occupancy permit has not been issued by the sunset date.

Why the change?

Following a number of cases in NSW and increasing concerns that some developers were terminating residential “off the plan” contracts of sale under a sunset clause as the property had substantially increased in value and then re-selling the property for financial gain, the NSW government introduced new legislation in November 2015.  The NSW legislation requires the vendor to obtain the purchaser’s consent or an order from the Supreme Court before the vendor can terminate an “off the plan” contract of sale under a sunset clause.

The changes to the Act proposed by the Victorian Government mirror the NSW legislation.

Proposed changes in Victoria

Purchaser’s consent

On and from 23 August 2018, a vendor cannot terminate a residential “off the plan” contract of sale under a sunset clause unless the vendor has obtained the purchaser’s written consent.  The restriction applies retrospectively to all residential “off the plan” contracts of sale, so it applies to residential “off the plan” contracts of sale entered into prior to 23 August 2018.

If a vendor seeks to terminate a residential “off the plan” contract of sale under a sunset clause, the vendor must give at least 28 days prior written notice to the purchaser setting out the following:

• the reason why the vendor is proposing to rescind the contract of sale;
• the reason for the delay in registering the plan of subdivision or issuing of the occupancy permit; and
• that the purchaser is not obliged to consent to the vendor’s proposed rescission of the contract of sale.The parties cannot contract out of the provisions requiring the vendor’s notice and the purchaser’s consent.

The parties cannot contract out of the provisions requiring the vendor’s notice and the purchaser’s consent.

Supreme Court order

If the purchaser does not consent, then the vendor can apply to the Supreme Court (Court) for an order allowing the vendor to terminate a residential “off the plan” contract of sale under a sunset clause.  The Court can make such an order if it considers it just and equitable to do so in all circumstances, taking into account various factors including whether the vendor has acted unreasonably or in bad faith, whether the lot purchased under the “off the plan” contract of sale has increased in value, and the effect of the termination on the purchaser.

The Court also has the right to make an order for the vendor to pay reasonable compensation to the purchaser for rescinding the contract of sale.

The vendor is also liable for the purchaser’s costs in the Court proceeding unless the Court is satisfied that the purchaser unreasonably withheld its consent.

Vendor’s notice

The Bill also proposes that all residential “off the plan” contracts of sale must include a statement which sets out that:

• the vendor is required to give notice of a proposed rescission of the contract of sale;
• the purchaser has a right but is not obliged to give consent to the proposed rescission;
• the vendor has a right to apply for a Supreme Court order allowing the rescission; and
• the Court can make an order allowing the rescission if it is just and equitable to do so.

Penalties will apply if a vendor fails to include the statement in the contract of sale.

Practical implications

From a developer’s perspective, flexibility in residential developments will be significantly reduced if the Bill is passed.  Whilst the purchaser retains the right to unilaterally terminate residential “off the plan” contracts of sale under a sunset clause, developers will no longer be able to do so.

If purchasers’ consent is required, there is also a risk that purchasers may leverage the vendor’s proposed rescission or inability to register the plan of subdivision to obtain a payout or compensation from the vendor.

To minimise the need to rely on a sunset clause and in light of the proposed amendments, developers may wish to opt for a longer period between the day of sale and the sunset date, to allow sufficient time for obtaining all approvals from the relevant authorities and completing all works required for registration of the plan of subdivision.

Developers should also be wary about going to market too early and should ensure that the development is feasible and achievable within the sunset timeframe to avoid costs and delays if the development cannot proceed and the sunset clause needs to be relied on.

Authored by:
Brihony Boan, Partner
Karena Leung, Lawyer