Changes to Sunset Clauses in Off-the-Plan Contracts
In September the Victorian Parliament passed the 'Sale of Land Amendment Bill 2018', which made significant changes to the way sunset clauses in off-the-plan contracts for residential properties operate. Under these changes, the protections for purchasers have been strengthened considerably and developers' rights to invoke the sunset clause have been curtailed extensively.
What is an off-the-plan contract?
If you are buying or selling land in an unregistered plan of subdivision, settlement can only occur once the plan has been registered and a title has issued for the block, unit or apartment you are buying or selling. However, developers can and often do sell land in an unregistered plan, subject to registration of the plan within a certain time frame. This is called an off-the-plan contract.
Being able to enter into an off-the-plan contract has benefits for both developers and purchasers. For example:
- a developer may need to pre-sell a certain percentage of lots in a plan before his bank will release funds to undertake the construction work; and
- it allows a purchaser to lock in a price, sometimes years before the settlement, which can be beneficial in a rising property market.
What is a sunset clause?
The sunset clause will set out the timeframe in which the plan must be registered and allow for the contract to be ended if the plan is not registered within that timeframe.
In the past, most sunset clauses allowed both the purchaser and the vendor to end the contract unilaterally.
The sunset clause protects a purchaser if there are delays with the development and the purchaser's circumstances change or property values go down, as a purchaser may then no longer be able to secure finance to complete the purchase.
Sunset clauses also afford a vendor protection where delays are out of the vendor's control and cause the costs of the project to spiral, or if the project is not economically viable.
Reason for the changes
Developers have been accused of invoking sunset clauses in bad faith by delaying registration of the plan past the due date and then terminating contracts, especially where property prices have risen significantly, and the lots could be resold at much higher prices.
Under the past regime, purchasers had to make an application to the Supreme Court of Victoria and show that the vendor acted in bad faith to try and enforce the Contract.
Following on from similar changes introduced in New South Wales in 2015, the Victorian parliament decided that this situation was unsatisfactory and that purchasers needed greater protection.
The new regime
The main changes include:
1) Only purchasers can unilaterally end the Contract
Purchasers still have the right to end the contract if the plan is not registered within the timeframe stated in the contract. However, vendors now need to give a purchaser 28 days notice of their intention to end the contract and need to set out:
- the reason why the vendor is proposing to end the contract;
- the reason for the delay in registration of the plan or issuing the occupancy permit; and
- that the purchaser is not obliged to agree to the proposed termination of the Contract.
In effect, the vendor now has to ask for the purchaser's consent to end the Contract.
2) Changes are retrospective
The new regime applies to new off-the-plan contracts, as well as contracts entered into before 23 August 2018, which have not settled yet.
3) Vendor can apply for order from Supreme Court to end the Contract
If the purchaser does not consent to the vendor ending the contract under the sunset clause, the vendor can make an application to the Supreme Court for permission to end the Contract. This turns the previous regime on its head, as it is now up to the vendor to prove that it has acted reasonably, the reason for the delay is out of the vendor's control and other matters the court may think are relevant.
The new regime also requires the vendor to pay the purchaser's costs for the court proceedings, even if the vendor is successful. The only exception is if the vendor can prove that the purchaser acted unreasonably in not agreeing to the termination of the contract in the first place.
Information to be included in sunset clauses
The sunset clauses in new off-the-plan contracts must now include a statement setting out that:
- the vendor is required to give notice of a proposed termination of the contract;
- the purchaser has the right to consent, but is not obliged to do so;
- the vendor has a right to apply to the Supreme Court for permission to end the contract; and
- the Supreme Court may grant that right if it is satisfied.
If you have entered into an off-the-plan contract or are about to enter into one, or if you are a developer selling lots off the plan and want to know more about how these changes affect you, please contact our experienced property team for more information and advice.