Off-the-plan contracts and the impact of the rising market
Key takeaways from the Civil Law (Sale of Residential Property) Bill 2021
On 9 November 2021, the Legislative Assembly passed the Civil Law (Sale of Residential Property) Bill 2021 (the Bill) amending the Civil Law (Sale of Residential Property) Act 2003 (the Act) with effect from that date and affecting all existing off-the plan contracts retrospectively. These changes introduce new requirements for compliance by developers where a developer seeks to rescind an off-the-plan contract in certain circumstances. In turn, the changes enhance consumer protections to buyers to safeguard against inappropriate use of certain rescission clauses in a rising property market.
The Bill specifically addresses rescission rights with respect to ‘sunset clauses’ and ‘delayed development clauses’ which are not currently limited by the Act. To date, these rights in off-the-plan contracts have been determined by the terms of each respective contract allowing the parties to mitigate the risk of delays and increased costs from building material and labour shortages by providing a mechanism by which to terminate the contract where the development is taking too long or the developer is unable to proceed due to factors beyond its control.
Sunset clauses are clauses which provide for a ‘drop-dead-date’ entitling a party to agree to rescind the contract if the contract has not been completed by that agreed date. The drafting of the Bill identifies a number of events as ‘sunset events’ to which a sunset date could apply being the registration of a units plan or crown lease and the issue of a certificate of occupancy or a certificate of compliance.
Delayed development clauses similarly provide for a mechanism for a party to rescind where certain developments have been delayed including obtaining any required approvals. The Bill defines ‘delay events’ as including events delaying or preventing construction of a building or other related works and delays in obtaining any approval, registration, permission, exemption, insurance or any other thing necessary for completion of the contract.
The Bill does not impact other rescission rights provided by the Act including rights of rescission by either party where there is damage or destruction to the unit or residence prior completion or the buyer’s rights to rescind where the units plan is not registered in time or where the developer has provided inaccurate or incomplete information in relation to the mandatory disclosure of details of the proposed owner’s corporation.
Changes for developers
The changes to the Act will mean that where a developer seeks to rescind an off-the-plan contract under a sunset clause or a delayed development clause, it may only do so in two circumstances:
where the buyer has consented (having been given prior notice); or
if the Supreme Court has made an order allowing the developer to rescind.
In the first instance, the developer must provide the buyer with 28 days written notice of the proposed rescission. The notice must including the following:
the reason for the proposed rescission;
a statement that the buyer may but is not required to consent to the proposed rescission; and
an explanation of the effect of sections 19B and 19D(4) of the Act. These sections set out the circumstances in which the developer is able to rescind and specify the developer must pay the costs of the buyer in relation to a Supreme Court proceeding unless the developer can satisfy the court that the buyer unreasonably withheld consent to the rescission.
Where the buyer has withheld its consent to the rescission, the developer can apply to the Supreme court for an order allowing the rescission. The Supreme Court must determine that it is just and equitable to make such an in order and in doing so will consider a number of factors including the impacts on both the buyer and developer. Significantly, the court must consider whether the value of the unit or the land which is the subject of the contract has increased. The Bill also specifies that the court must consider whether factors beyond the developer’s reasonable control have affected the developer’s ability to complete the contract or the viability of the developer’s business and provides the following examples of these factors:
disruption to supply of building materials;
significant increase in cost of goods and services; and
inability to obtain or retain finance for development.
Rights for buyers
Buyers now have increased protections where a rescission is sought by a developer under a sunset or delayed development clause. Where a buyer does not believe that a developer is exercising its rights genuinely, it may refuse consent to a proposed rescission and the court will make the determination on its behalf. This provides comfort to the consumer in a market where a developer may seek to rescind a contract in order to secure a higher purchase price given the sharp increase in land values.
Buyers should ensure that they obtain clear legal advice on the provisions of any sunset or delayed development clauses in an off-the-plan contract they are seeking to enter into and should seek to negotiate a reciprocal right to rescind an off-the-plan contract if development is significantly delayed. Additionally, a prudent buyer should seek regular updates from the developer in relation to the progression of the development and diarise any relevant sunset dates in the off-the-plan contract.
But buyer beware ----- Where a buyer is served with a proposed rescission notice, it should seek legal advice as to whether it is reasonable to withhold consent. Where proceedings are brought in the Supreme Court and a buyer is found to have acted unreasonably in withholding consent, the developer may be in a position to seek a costs order against the buyer.
What about the banks?
In providing funding for developments, banks and financiers will need to ensure that their facility agreements contain a mechanism for oversight of the rescission of any off-the-plan contract to ensure that the developer complies with the Act. While this is currently standard practice, lenders will now need to ensure that they have step in rights where a proposed rescission becomes the subject of Supreme Court proceedings. While the Bill provides some assurance to lenders that off-the-plan contracts will be completed by removing the ability of developers to rescind in bad faith, it also presents additional risk by requiring developers to comply with onerous obligations where a rescission may be necessary, commercial and justified.
Please note that the purpose of this article is to provide an informative update on these changes and you should not rely solely on this information if you are pursuing an on-sale of land transaction.
If you would like further information and advice tailored to your situation, please contact our property team at Terracon Legal on (02) 6128 0755 or send us an email at admin@terraconlegal.com.au.
We would be happy to assist you.
