If you are a property developer who is thinking of using a sunset clause to rescind an off the plan contract for a property which has risen in value, think twice because the Sunset Clause Law can come back to bite.
In the recent decision of Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) (the Principal Decision), Justice Darke in the NSW Supreme Court dismissed an application by Silver Star Fashions (the property developer) for permission to rescind nine off the plan Contracts for the sale of residential apartments in what is now ironically called the “Harmony” Apartments at 22 Mary Street, Surry Hills.
To add insult to injury, Justice Darke ordered Silver Star Fashions to pay some of the purchasers’ legal costs on an indemnity basis – Silver Star Fashions Pty Ltd v Dal Broi (No 2) [2018] NSWSC 1697 (8 November 2018) (the Costs Decision).
This is summary.
The Facts
Between 13 June and 28 October 2014, Silver Star Fashions (the vendor) entered into the nine Contacts for the sale of apartments in a mixed use development with retail space at ground level and 16 residential units on the six levels above. Each Contract contained a sunset clause, that either vendor or purchaser could rescind if the Strata Plan was not registered by 31 December 2016.
At the time, the period of 2 ½ years was considered more than adequate to complete the building.
On 28 January 2017, Silver Star served notice of rescission of the Contracts, giving as its reason external events which caused delays in completion of the development, and giving notice that an application would be made to the court for permission to rescind.
The building was completed in late 2017 and the Strata Plan was registered on 23 January 2018.
The Law
The Sunset Clause Law is s 66ZL of the Conveyancing Act 1919 (NSW) which states that a vendor cannot rely on a sunset clause to automatically rescind an off the plan contract for the sale of a residential lot when the sunset date has passed.
Instead, the vendor must apply to the court for permission, and satisfy the court that it is just and equitable in all the circumstances to rescind the Contract (s 66ZL (3), (4), (5) & (6)).
Over the course of the 4 day hearing, the main issue was whether the vendor was responsible for the delay, or were external events to blame. Note: Special condition 54.2 of the Contract (cl 54.2), imposed an obligation on the vendor to carry out the building work with ‘all due expedition’:
The Vendor must cause the Development Activities to be carried out with all due expedition in a proper and workmanlike manner substantially in accordance with the Development Approval and the Plans.
The Decision
How has s 66ZL changed the law?
s 66ZL took effect on 2 November 2015. It was introduced to give a purchaser protection against a vendor rescinding an off the plan contract. According to Justice Darke, it works in this way:
s 66ZL relieves a purchaser under an off the plan contract from needing to challenge the exercise by the vendor of a right of rescission under a sunset clause. For example, it is no longer necessary [to] establish that breaches by the vendor relevantly caused the event that gave rise to the right to rescind [in this case, it was not necessary to show a failure to comply with cl 54.2]. [paragraph 121]
The Seven Factors in s 66ZL(7)
Justice Darke provided this overview:
Section 66ZL(7) specifies matters that must be taken into account. It does not specify the weight, or relative weight, that ought be given to those matters. Those issues are left to the discretion of the Court, which must be exercised judicially [paragraph 124]
Factor 1: s 66ZL(7)(a) the terms of the off the plan contract
Were the delays within the vendor’s control (in breach of cl 54.2), and did they cause the strata plan to not be registered by the sunset date? Justice Darke said:
In my opinion, at least some of the delays that occurred in the carrying out of the development can be seen to have been caused by failures on the part of the vendor to cause the Development Activities to be carried out with all due expedition as required by cl 54.2. [paragraph 135] [but]
I am unable to conclude that breaches by the vendor of cl 54.2 relevantly caused the failure to have the Strata Plan registered by 31 December 2016. [paragraph 147]
Factor 2: s 66ZL(7)(b) whether the vendor has acted unreasonably or in bad faith
Did the vendor act unreasonably in sending letters to the purchasers before the sunset date which presented a gloomy account of future progress and invited the purchasers to rescind (which led to the other 7 of the 16 purchasers agreeing to rescind). Justice Darke said:
[the letters and notices] contained misleading statements [paragraph 163] and
[the vendor] acted unreasonably … by failing to discharge its obligations under cl 54.2 of the contracts, with the result that the development was significantly delayed. [paragraph 164]
Factor 3: s 66ZL(7)(c) the reason for the delay in creating the subject lot
Justice Darke said:
delays totalling about 9 months can be attributed to [the vendor’s] failures. That is a significant delay in the context of a project which in July 2014 was estimated to involve a construction period of little more than 12 months. [paragraph 166]
Other delays were caused by external events outside of the vendor’s control, particularly a 5 month delay attributable to the builder being placed into external administration in January 2016.
Factor 4: s 66ZL(7)(d) the likely date on which the subject lot will be created
The fact that the subject lots have been created is relevant in that the Contracts can be completed
Factor 5: s 66ZL(7)(e) whether the subject lot has increased in value
The subject lots had increased in value since the date of contract to July 2018 by between $165,000 and $321,000. The total over the nine contracts was about $1.86 million.
Factor 6: s 66ZL(7)(f) the effect of the rescission on each purchaser
Justice Darke said:
[if the contracts were rescinded, each purchaser] would lose the benefit of a contract to purchase the subject lot for a price well below the current market value of the lot. The purchaser would instead receive a refund of the deposit paid, together with interest earned upon the deposit. [paragraph 171]
losing the benefit of the contract would also cause considerable disappointment … the purchasers have waited a long time for the building to be constructed. [paragraph 172]
For a number of the purchasers, this was their first property purchase. Many of the purchasers are concerned that if their contract is rescinded they will face greater difficulty in finding a suitable replacement now that the market has moved higher. [paragraph 173]
[as against the vendor’s argument the purchasers were sophisticated purchasers] for most of the purchasers, the contract was more than a financial transaction … entry into the contract was rather a means of pursuing social as well as economic goals, or what might be referred to as “lifestyle” choices. In a society where property ownership is highly valued and affords status to those who attain it, these considerations cannot be dismissed as insignificant or trivial. [paragraph 175]
Factor 7: s 66ZL(7)(g) other relevant matters
One relevant matter in this case was that after the builder failed, the vendor entered into a Project Delivery Agreement in August 2016 under which a third party undertook to pay the vendor an agreed amount, took the risks of completing the development including costs, and took the benefit of the higher sale prices for lots if Contracts were rescinded. It was the third party which sought to rescind and undertook the proceedings (in the name of the vendor).
Conclusion – Is it just and equitable in all the circumstances to order that the vendor may rescind?
This was Justice Darke’s conclusion:
In my opinion it would not be just and equitable to permit the vendor to rescind any of the contracts, particularly in light of the vendor’s conduct that made a considerable contribution to the delay in the development, the loss to the purchasers of the valuable benefit of the contact if rescission was permitted, and the fact that the vendor would not itself suffer any financial detriment if rescission was not permitted. [paragraph 195]
Legal Costs
s 66ZL(8) provides that the vendor pays the legal costs of the purchaser if the purchaser is successful in the proceedings.
The normal order is to pay legal costs on an ordinary basis, which exclude solicitor/client costs (incurred for advice, settlement negotiations, etc.).
In this case, the purchasers succeeded in obtaining an order that the vendor pay legal costs on an indemnity basis (i.e. including solicitor/client costs) as from 23 March 2018, on the basis of a Calderbank offer of compromise which included an offer to pay 15% of the uplift in value for the apartments to settle the proceedings. The Court considered that it was unreasonable for the vendor to have rejected that offer.
Analysis
This is only the second decision by the NSW Supreme Court since the Sunset Clause Law was introduced 3 years ago. Other applications have been threatened or made to the court, but these settled, possibly because purchasers were prepared to pay a little more, and possibly because the purchasers and the vendors wanted to avoid the uncertainty, risks and legal costs of litigation.
In this case, the purchasers offered to settle by paying a little more than the Contract price. But it is not known why the property developer decided not to settle.
Perhaps the property developer was confident that it could show that it was ‘a victim of circumstances’, that external events delayed the project beyond the sunset date. That confidence was well placed in that the Court accepted that this was not a case where a developer had manipulated events or manufactured delays so as to obtain a commercial advantage.
But the deciding factor in this case was not delay. It was the adverse effect on the purchasers if the Contracts were to be rescinded, not only because they had economic value, but also social benefits.
The property developer did not counter this by tendering evidence that by completing the contracts, it would be at adversely affected financially.
And so, the Court decided it was just and equitable to refuse permission to the property developer rescind, which allowed the purchasers to complete their Contracts.