Developers take heed - Sunset clauses are no longer an excuse to wiggle out of contracts

Dean Claughton

Jobema Developments Pty Limited v Zhu & Ors

The addition of section 66ZL of the Conveyancing Act dealing with sunset dates (“New Sunset Clause Law”) has attracted a lot of attention, particularly in light of the recent decision of Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3. 

A sunset clause within a Contract of Sale specifically addresses the final date (“sunset date”) a developer has to complete the project. The inclusion of this clause protects developers who may experience common delays such as problematic weather and financial availability. If the developer has failed to complete the project by the Sunset date, each party is given the opportunity to rescind the contract within 14 days. 

Prior to the New Sunset Clause Law, developers were well within their rights to rescind a contract on the expiration of the sunset date. Some property developers exploited this loop hole by rescinding contracts for off-the-plan purchases, only to re-list the same property later at the significantly higher current market price. The new law seeks to protect buyers by placing certain requirements on developers in respect of rescinding the contract. Developers must now express their intention to rescind the contract in writing, by no later than 28 days before the sunset date, including detailed reasons as to why they wish to rescind. If both parties can’t agree to rescind, developers must then obtain a court order from the Supreme Court. 

Before granting an order, the courts will consider factors such as the terms of the contract, whether the Vendor acted in bad faith and the reasons for the delay in project completion. Courts will also consider the likely completion date of the development, whether the development has increased in value since the commencement date of the contract, and above all else, the likely effect that rescission will have on purchasers. 

The Government’s response was recently tested in the matter of Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3, and appears to have been successful in protecting buyers from tricky developers.

Background facts

Mr Wu was one of many buyers who entered into a contract with the Developer, Xycom, on 6 December 2013. A sunset date of 31 December 2015 was set for the registration of the Strata Plan. Having carried out minimal work on the project despite having Development Approval, Xycom sold the entire development to the plaintiff, Jobema Developments, in early January 2015. Jobema commenced work instantly, predicting that the project would be completed in April 2017 with registration to take place in July of that same year. The plaintiff approached Mr Wu and other buyers to see if they would agree to rescind the contract - Mr Wu rejected this offer. Complying with their new obligations as per the New Sunset Clause Law (specifically 66ZL(4)), Jobema issued Mr Wu a Notice of Intent to rescind the contract on 1 December 2015. Mr Wu and Jobema failed to mutually agree to rescind the contract and consequently, Jobema made an application for an order from the Supreme Court of New South Wales. 

Questions for the court to consider

Is it just and equitable for the court to grant leave to rescind the Contract of Sale between Mr Wu and Jobema?

Ruling

Jobema argued they weren’t responsible for Xycom’s lack of progress in the project which resulted in the failure to have the Strata Plan registered by the sunset date of 31 December 2015. The Court struck out this argument, claiming that Jobema assumed the responsibilities of Xycom when it acquired the development. 

Jobema also argued that the New Sunset Clause Law took effect after they acquired the development and that the change in legislature was unforeseeable. The court refuted this claim with Justice Black stating “I am not convinced that the particular possibility that the legislature might intervene, to protect the interests of off the plan purchasers of strata plan units, was unforeseeable, but in any event it seems to me that legislative change generally is a foreseeable risk of business activity.”

The court ruled against Jobema, unsatisfied that granting the application was just and equitable in respect of 66ZL of the Conveyancing Act 1919. If you’re a developer, it’s a reminder that you shouldn’t rely on sunset clauses as a means to rescind a contract.

If you have any questions regarding sunset clauses or rescinding a Contract of Sale, please contact:

Dean Claughton, Lawyer
Phone: +61 9895 9276 
Email: dclaughton@colemangreig.com.au