Wednesday, May 25, 2022

New protections for off-the-plan purchasers

New protections for off-the-plan purchasers

Supreme Court provides guidance on new protections for off-the-plan purchasers

In its first substantive decision on recently-introduced protections afforded to purchasers of off-the-plan developments, the Supreme Court of NSW has provided valuable guidance on when, and on what terms, it will permit rescission of an off-the-plan contract where a sunset date has passed.

In DGF Property Holdings Pty Ltd v Butros & Ors [2018] NSWSC 344, the Court has sent a strong signal to developers that the Supreme Court will hesitate to permit rescission of off-the-plan contracts under section 66ZL, even where the vendor’s conduct cannot be said to be in bad faith or unreasonable.

Protecting purchasers: background to section 66ZL

Most contracts for the purchase of lots in a proposed plan of subdivision contain clauses which entitle each party to rescind if the subject lot is not created by a date set in the contract (commonly termed ‘sunset clauses’). The recently added section 66ZL of the Conveyancing Act 1919 varies that contractual right.

Section 66ZL was introduced to restrict a vendor’s right to rescind an off-the-plan contract under a sunset clause if the subject lot has not been created by the sunset date, but only if each purchaser under the contracts consents to the rescission or if the vendor has obtained an order of the Supreme Court under section 66ZL permitting it to rescind the contract under the sunset clause.

Even if a sunset clause explicitly provides for automatic rescission, it is to be read as if it instead permits the contract to be rescinded in accordance with section 66ZL. As a result, rather than requiring purchasers to commence proceedings against vendors to enforce a contract where a sunset date has passed, the burden is shifted to the vendor.

To be successful in an application to permit it to rescind the contract under a sunset clause, a developer must satisfy the Court that making such an order ‘is just and equitable in all the circumstances’. This requires the Court to take into account a shopping list of criteria including:

  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.

Parliament made clear that section 66ZL was introduced to protect purchasers. In the second reading speech for the amendment, it was noted that it would ‘counter the conduct of some developers using the sunset clause in off-the-plan contracts to disadvantage purchasers’ and to obtain ‘an unjust enrichment at the expense of home buyers’ by reselling lots at a higher price, with the purchasers (after having their deposit tied up for a long period of time) missing out on any capital appreciation of their lot.

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

Read related: Off-the-plan GST changes hurt mum and dad buyers

The facts in this case

In July 2010, Fairfield City Council approved a development application permitting the subdivision of three lots to create 12 residential lots. The three lots were the subject of a joint venture agreement between various parties – including the plaintiff, DGF Property Holdings (DGF), which owned one of the lots, and Mr and Mrs Di Federico (Di Federicos), who owned another. Throughout 2014, DGF entered into contracts for the sale of eight of the 12 proposed lots (Contracts) with various persons (Purchasers). Each of the Contracts contained a special condition to the effect that if the proposed plan of subdivision was not registered within (variously) 6 or 12 months of the date of the Contract, either party had a right to rescind.

There was a dispute between the Di Federicos and DGF in relation to various events (primarily, the brining of unauthorised fill onto the Di Federicos’ land) which, it was said by DGF, delayed the registration of the plan of subdivision and creation of the lots that the Purchasers had contracted to buy. That conduct was the subject of a stop work order issued by Fairfield City Council on 3 July 2015.

The sunset dates passed and DGF commenced proceedings under section 66ZL, seeking an order from the Court permitting it to rescind the Contracts. The Purchasers opposed that order on the basis that rescission would not be just and equitable in all the circumstances. It was common ground between the parties that the subject lots had increased significantly since the dates of the respective Contracts (from $725,000 – $880,000 per lot to $1.25 million – $1.35 million per lot).

What the Court found in this case

Most relevantly, the Judge in this case, Justice Emmett AJA, found that DGF’s conduct of the development generally was less than entirely sufficient and competent, but fell short of it acting in bad faith or unreasonably. However, none of the Purchasers were informed of the possible risks that the disputes between DGF and the Di Federicos would impact upon whether or not the proposed plan of subdivision was registered before the sunset dates.

As a result, the Judge found that it would be just and equitable to permit DGF to rescind each of the Contracts, only if it proffered an undertaking that it would, within 60 days, do all things necessary to procure the registration of the proposed plan of subdivision, coupled with an offer to the Purchasers to enter into a new contract with each of the for the sale and purchase of the proposed lot on the same terms as the rescinded Contract, with a slight increase in the purchase price to account for interest from 16 May 2017 (equating to approximately $60,000 per lot). If DGF refuses to give this undertaking or make the offer, then the rescission will not be permitted.

The key take aways for purchasers and developers

This decision, which represents a very favourable outcome to the Purchasers, is significant in sending a strong signal to developers that the Supreme Court will hesitate to permit rescission of off-the-plan contracts under section 66ZL. This is the case even where the vendor’s conduct cannot be said to be in bad faith or unreasonable. If the Court is prepared to allow rescission, there is considerable flexibility in the terms which may apply to such an order in reaching an outcome that is ‘just and equitable in all the circumstances’ and may include (as it did in this case) a novel approach by the Court to finding a solution that benefits the Purchasers but also doesn’t unfairly penalise a developer.

Therefore, a developer must be in a position to demonstrate, with precision, the effect that the Court’s refusal to permit rescission will have on it – particularly the financial detriment that has been, and will continue to be, suffered by the developer. A developer should also turn its mind to the question of whether any third party is (wholly or partly) to blame for any delay in registration of a proposed plan of subdivision, as the Court may consider it appropriate that the third party bear primary responsibility for compensating the developer for any detriment suffered by it – rather than purchasers.

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