Protections for off-the-plan purchasers

Posted on Aug 15, 2018 by Jason Dunn   |   Categories: Property & Conveyancing

The Supreme Court of NSW has provided valuable and much needed guidance on when, and on what terms, it will permit the rescission of an off-the-plan contract by a developer pursuant to a sunset clause.

The recent decision in DGF Property Holdings Pty Ltd v Butros & Ors [2018] sends a strong message to developers that the Court is somewhat reluctant to permit the rescission of off-the-plan contracts under section 66ZL of the Conveyancing Act 1919, even where the vendor has not acted in bad faith or unreasonably.

By way of background, most contracts for the purchase of properties off-the-plan contain clauses which entitle one or both parties to rescind if the subject lot is not created by a date set in the contract (commonly known as ‘sunset clauses’). Section 66ZL of the Conveyancing Act 1919 varies that contractual right.

Section 66ZL was introduced in 2015 in response to some developers using sunset clauses to disadvantage purchasers and applies to off-the-plan contracts regardless of when the contract was entered into. Section 66ZL restricts a vendor’s right to rescind an off-the-plan contract under a sunset clause unless:

1. each purchaser under the contracts consents to the rescission; or

2. the vendor has obtained an order of the Supreme Court under section 66ZL permitting it to rescind the contract.

 

As a result, rather than requiring purchasers to commence proceedings, the burden is shifted to the vendor. This was a significant reform when introduced and went a long way toward balancing the power between vendors and purchasers.
To be successful in such an application a developer must satisfy the Court that making an order for rescission ‘is just and equitable in all the circumstances’. This requires the Court to take into account:

1. whether the vendor has acted unreasonably or in bad faith;

2. the reason for the delay in creating the subject lot;

3. the likely date on which the subject lot will be created;

4. whether the subject lot has increased in value;

5. the effect of the rescission on each purchaser; and

6. any other matter that the Court considers to be relevant.

 

The NSW Parliament made it quite clear at the time that section 66ZL was introduced for the protection of purchasers.

In order to even the balance of power between vendors and purchasers even further, section 66ZL also requires the vendor to pay the costs of a purchaser in relation to proceedings for the rescission of a contract, unless the vendor satisfies the Court that the purchaser unreasonably withheld consent to the rescission of the contract.

The Supreme Court of NSW has now made final orders in the DGF Property Holdings case, which provides some insight on how the Court may resolve future applications under section 66ZL.

The Court has ordered the developer to do all such acts and things necessary to procure the registration of the proposed plan of subdivision as soon as reasonably possible. More importantly, the developer was also ordered to offer a new contract to each of the purchasers on the same terms as the rescinded contract, except that:

1. the purchase price under the new contract would be the price payable under the rescinded contract, plus ‘interest’ on the balance of the purchase price payable under the rescinded contract from 10 June 2016 until the date of acceptance of the offer at the rate of 4.75% per annum, less the costs that the developer was ordered to pay each purchaser; and

2. any provision relating to rescission of the new contract by reason of a sunset clause was to be deleted.

 

It should be noted that the date of 10 June 2016 was the date on which the developer’s notice of rescission pursuant to section 66ZL expired and the rate of 4.75% per annum was determined by the Court to be an appropriate bank lending rate for residential properties.

The purchasers were also awarded a ‘lump sum’ costs order, the amount of which was off-set against the ‘interest’ to be paid when calculating the new purchase price under the new contracts.

Interestingly, although it was found that DGF was not entirely efficient or competent in carrying out the development, their conduct was not seen to have been in bad faith or unreasonable. Despite this fact the proceedings still resulted in a very favourable outcome for the purchasers. The orders also demonstrate the enormous flexibility the Court has under section 66ZL in reaching an outcome that is ‘just and equitable in all the circumstances’ and provides greater comfort to buyers who wish to commit to an off the plan purchase.