How Sunset Clauses Affect New South Wales Off-The-Plan Development Contracts

Introduction

Sunset clauses are a standard inclusion in many New South Wales off-the-plan development contracts. These provisions within the contract traditionally set a ‘sunset date’, allowing rescission if the property development isn’t completed by that time, impacting both purchasers and developers involved in the conveyancing process.

However, recent New South Wales (NSW) legislation, specifically the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) which introduced section 66ZL into the Conveyancing Act 1919 (NSW), has significantly altered vendor rights regarding sunset clause rescission in an off-the-plan contract. This guide provides essential information for developers on navigating these conveyancing rules, understanding the restrictions, and managing the risks associated with sunset clauses in off-the-plan contracts.

Understanding Sunset Clauses in New South Wales Off The Plan Contracts

Defining the Sunset Clause and Sunset Date

A sunset clause is a specific provision within an off-the-plan contract for the sale of a residential lot in NSW. Section 66ZL(1) of the Conveyancing Act 1919 (NSW) defines it as a term allowing the contract to be rescinded if the subject lot is not created by the specified sunset date.

The sunset date represents the latest date stipulated in the contract by which the lot must be created, potentially subject to extensions outlined within the agreement. This clause establishes a timeframe within which the vendor must meet certain conditions before settlement can proceed.

It’s important to note that NSW legislation does not prescribe a standard sunset date; instead, the date is determined by the terms agreed upon in the individual off-the-plan contract.

Common Preconditions and Purpose

Sunset clauses in off-the-plan contracts typically hinge on the vendor fulfilling specific preconditions before settlement. Common preconditions often include:

• Registration of the plan: The plan of subdivision creating the individual lot must be officially registered.
• Provision of an occupation certificate: A certificate confirming the building is suitable for occupation must be issued.

The fundamental purpose of a sunset clause is to protect both the purchaser and the developer from indefinite delays where neither party is necessarily at fault. It provides a mechanism for either party to exit the contract if the development is not completed within the agreed timeframe, which is usually set generously to allow for construction contingencies.

For purchasers, it offers a way out if the project stalls significantly, while for developers, it provides some assurance against purchasers withdrawing before completion.

Vendor Rights Regarding Sunset Date Extensions

Many off-the-plan contracts include provisions allowing the vendor (developer) to extend the original sunset date. These extensions are typically permitted under specific circumstances, often related to delays encountered that are beyond the vendor’s reasonable control. Examples of such delays might include:

• Adverse weather events
• Unexpected disruptions in the supply of building materials

It is crucial for purchasers to carefully review the terms governing these extensions within the development contract. The contract should clearly define the conditions under which an extension can be claimed and place appropriate limits on the number and duration of possible extensions.

Without such limits, a purchaser might find themselves bound to the contract for a much longer period than initially anticipated.

New South Wales Legislative Controls on Sunset Clause Rescission

The Shift Away from Automatic Rescission

Significant legislative changes in NSW have altered how sunset clauses operate in off-the-plan contracts for residential lots. Under Section 66ZL(5) of the Conveyancing Act 1919 (NSW), introduced by the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW), a sunset clause can no longer automatically terminate an off-the-plan contract if the sunset date passes.

Instead, any clause purporting to allow automatic rescission is now interpreted as permitting rescission only in accordance with the specific procedures outlined in Section 66ZL. This means vendors cannot simply rely on the passing of the sunset date to end the contract unilaterally.

Mandatory Notice Requirements for Vendor Rescission

Before a vendor can attempt to rescind an off-the-plan contract under a sunset clause, they must adhere to strict notice requirements. Section 66ZL(4) of the Conveyancing Act 1919 (NSW) mandates that the vendor provide each purchaser with written notice at least 28 days prior to the proposed rescission date.

This notice is not a mere formality; it must contain specific information. The vendor is required to clearly state:

• Why they are proposing to rescind the contract
• The reason for the delay in creating the subject lot (e.g., registering the plan) by the sunset date

Failure to provide this detailed notice invalidates any subsequent attempt at rescission under the sunset clause, unless purchaser consent or a court order is obtained.

The Need for Purchaser Consent or Court Approval

Following the legislative amendments, a vendor’s ability to rescind an off-the-plan contract using a sunset clause is significantly restricted. Even after providing the mandatory 28-day notice, the vendor cannot proceed with rescission unless one of two conditions is met, as outlined in Section 66ZL(3) of the Conveyancing Act 1919 (NSW).

The vendor can only rescind if:

• Every purchaser under the contract provides their explicit consent in writing after receiving the vendor’s notice, or
• The vendor successfully applies to the Supreme Court of NSW for an order permitting the rescission (this is only necessary if any purchaser withholds consent)

Without either written purchaser consent or a court order, the vendor cannot lawfully rescind the contract under the sunset clause.

Supreme Court Process for Sunset Clause Rescission

Applying to the Court When Consent Is Withheld

If a purchaser does not provide written consent to a vendor’s proposed rescission under a sunset clause, the vendor cannot terminate the off-the-plan contract based on that clause alone. Instead, the vendor must take their case to the NSW Supreme Court if they wish to pursue rescission.

Under section 66ZL(6) of the Conveyancing Act 1919 (NSW), the vendor must apply for a court order permitting the rescission. This formal legal process ensures that purchasers are protected from arbitrary contract terminations.

Key Factors Weighed by the Court

When evaluating a vendor’s application to rescind an off-the-plan contract under a sunset clause, the Court must determine if granting the order is “just and equitable in all the circumstances.” Section 66ZL(7) of the Conveyancing Act 1919 (NSW) requires the Court to consider several specific factors, including:

• The specific terms outlined within the off-the-plan contract
• Whether the vendor’s actions leading up to the application were unreasonable or demonstrated bad faith
• The specific reasons provided for the delay in creating the subject lot (e.g., registering the plan)
• The anticipated date when the subject lot is likely to be created
• Whether the value of the subject lot has increased since the contract was signed
• The potential impact and consequences of the rescission on each purchaser involved
• Any other matters the Court deems relevant to the situation
• Any additional matters prescribed by regulations (though none were prescribed at the time of the Jobema decision)

The Court’s thorough examination of these factors ensures a balanced assessment of both vendor and purchaser interests.

Court Assessment of Vendor Conduct and Delays

The Court meticulously examines the vendor’s conduct throughout the development process. This includes assessing whether the vendor acted unreasonably or in bad faith, as well as evaluating the legitimacy of reasons cited for delays in creating the lot.

The case Jobema Developments Pty Limited v Zhu [2016] NSWSC 3 provides valuable insights into this assessment process. In this case:

• Jobema (the vendor) had taken over the development from a previous developer (Xycom)
• Jobema assumed Xycom’s contractual obligations via a deed
• Although initial delays were caused by Xycom, the Court found Jobema could not rely solely on these past delays to justify rescission
• The Court acknowledged Jobema had been diligent since acquiring the site
• However, this diligence did not negate the impact of Xycom’s earlier lack of diligence
• The Court interpreted the deed as a novation, meaning Jobema stepped entirely into Xycom’s shoes regarding the contract with the purchaser

This case demonstrates how the Court considers the full history of a development when assessing rescission applications.

Financial Considerations and Purchaser Impact

Financial aspects play a significant role in the Court’s decision-making process. The Court considers whether the subject lot has increased in value, as specified in section 66ZL(7)(e) of the Conveyancing Act 1919 (NSW).

Importantly, an increase in value often works against the vendor’s application. This reflects a primary goal of the legislation: preventing developers from rescinding contracts simply to resell at a higher price for financial gain.

The Court also carefully evaluates the effect of the rescission on the purchaser, as required by section 66ZL(7)(f) of the Conveyancing Act 1919 (NSW). In the Jobema case:

• The vendor argued that increased construction costs and difficulties securing finance without higher sale prices necessitated rescission
• The Court rejected this argument, noting that:
  • Financial risk is inherent in property development
  • Evidence suggested finance was already secured
• The potential negative impact on the purchaser if rescission were allowed was a key consideration in the Court’s decision

Cost Implications of Court Applications

Seeking a court order for rescission carries potential cost implications for the vendor. Section 66ZL(8) of the Conveyancing Act 1919 (NSW) stipulates that the vendor is generally liable for the purchaser’s legal costs associated with the court proceedings.

There is one exception to this rule: the vendor may avoid paying the purchaser’s costs if they can satisfy the Court that the purchaser unreasonably withheld their consent to the rescission proposed under the sunset clause. This places the burden on the vendor to demonstrate that the purchaser’s refusal was unreasonable in the circumstances.

Strategic Implications and Risks for Developers

Understanding the Risk of Intentional Delay Accusations

Developers must be aware that the legislative changes surrounding sunset clauses in NSW were largely driven by concerns about intentional delays. There was a perception that some developers might deliberately slow down projects associated with an off-the-plan contract to trigger a sunset clause rescission.

This strategy would potentially allow them to:

• Relist the property at a higher price in a rising market
• Secure a financial gain at the purchaser’s expense

The Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW), which introduced section 66ZL into the Conveyancing Act 1919 (NSW), directly aimed to curb this practice.

Consequently, developers must act reasonably and in good faith throughout the development process. Any attempt to rescind an off-the-plan contract using a sunset clause will be scrutinised, particularly regarding the reasons for delay, to ensure it is not merely a strategy for financial advantage.

Managing Delays and Setting Realistic Sunset Dates

Effective project management is crucial when dealing with off-the-plan contracts containing sunset clauses. Developers should set realistic sunset dates from the outset, factoring in potential contingencies.

Since NSW legislation does not prescribe a standard sunset date, the timeframe relies entirely on the terms negotiated within the development contract. Contracts often permit developers to extend the sunset date due to delays beyond their reasonable control, such as:

• Adverse weather conditions
• Unexpected supply chain disruptions

It is vital that the development contract clearly defines:

• The specific circumstances allowing for an extension
• Appropriate limits on the number and duration of any extensions

Thorough documentation of any legitimate delays is essential should a dispute arise or if court approval for rescission becomes necessary. Additionally, proactive communication with purchasers regarding progress and potential delays can help manage expectations.

Financial Risks and Court Application Costs

Developers face significant financial risks associated with sunset clauses in off-the-plan contracts. Attempting to rescind a contract without purchaser consent necessitates applying to the NSW Supreme Court, which involves inherent costs and uncertainties.

The Court considers several factors in these cases:

• The financial impact on the purchaser
• Whether the property value has increased (often viewing an increase as a factor against permitting rescission)

Furthermore, financial hardship or increased construction costs for the developer may not be sufficient grounds for the Court to permit rescission, as financial risk is considered an inherent part of property development.

Under section 66ZL(8) of the Conveyancing Act 1919 (NSW), the developer is typically liable for the purchaser’s legal costs related to the court application. The only exception is if the developer can prove the purchaser unreasonably withheld their consent to the proposed rescission.

Scope and Application of New South Wales Sunset Clause Rules

Extended Definition Beyond Plan Registration

The legal definition of a sunset clause under NSW law has been broadened beyond simply the failure to register the plan of subdivision by the sunset date. Amendments introduced via the Conveyancing Legislation (Amendment) Act 2018 (NSW) extended the scope to include other critical events that might trigger termination of an off-the-plan contract.

This expanded definition means that a clause allowing rescission is also considered a sunset clause if other milestones are not met by a specified date, such as:

• The issuance of an occupation certificate

Consequently, such clauses are subject to the same legislative controls under section 66ZL of the Conveyancing Act 1919 (NSW).

Retrospective Application to Existing Contracts

The stringent requirements governing vendor rescission under sunset clauses, as outlined in section 66ZL of the Conveyancing Act 1919 (NSW), apply broadly. These rules are not limited to new off-the-plan contracts entered into after the legislation commenced.

Specifically, the provisions introduced by the Conveyancing Amendment (Sunset Clauses) Act 2015 (NSW) apply retrospectively. This means they cover all relevant off-the-plan contracts for residential lots, regardless of when the contract was signed, provided that:

• The contract was signed before, on, or after 2 November 2015
• The contract had not already settled or been completed

Any rescission attempted by a vendor under a sunset clause on or after 2 November 2015 must comply with these requirements.

Inability to Contract Out of Obligations

Developers cannot circumvent the legislative protections afforded to purchasers regarding sunset clauses in an off-the-plan contract. Section 66ZL(11) of the Conveyancing Act 1919 (NSW) explicitly states that any provision within an off-the-plan contract is void if it is inconsistent with this section.

This means developers cannot include terms in their development contracts that attempt to:

• Override, exclude, or modify the mandatory notice periods
• Remove the requirement for purchaser consent
• Circumvent the necessity of obtaining a Supreme Court order for rescission under a sunset clause

The statutory obligations take precedence over conflicting contractual terms.

Conclusion

NSW legislation significantly restricts a developer’s ability to rescind an off-the-plan contract using a sunset clause, requiring either purchaser consent or a Supreme Court order based on specific ‘just and equitable’ criteria. Developers must navigate mandatory notice periods, potential court scrutiny regarding delays and conduct, and the inability to contract out of these obligations when managing development contracts.

Contact LawBridge today, for trusted expertise in navigating the complexities of sunset clauses and NSW property law. Our property and planning lawyers provide tailored guidance to help developers manage risks and ensure compliance with off-the-plan contract regulations.

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