Recent Cases on Restrictions on Vendor’s Right to Rescind in Off the Plan Contracts

Sunset clauses are common in off the plan contracts or other contracts where the vendor has obligations to satisfy conditions precedent to complete (Contract).

Off the plan contract means a contract for the sale of a residential lot (subject lot) that has not been created at the time that the contract is entered into. A sunset clause in an off the plan contract means a provision that provides for the Contract to be rescinded if the subject lot (on registration of a strata or subdivision plan) (Plan) is not created by the sunset date.

Normally, those Contracts will require the vendor developer to use reasonable or best endeavours to register the Plan required to create the subject lot by the sunset date. If the developer cannot register the Plan by the sunset date (or any extended sunset date if the developer has a right to extend), the Contract will normally provide that the developer has a right to rescind the Contract. 

 

Legislative restriction

The developer’s right to rescind in an off the plan contract for failing to achieve registration of the Plan to create the subject lot is limited by legislation. Under section 66ZL Conveyancing Act 1919 (NSW), the developer must give notice to each purchaser of its intention to rescind and must obtain the consent of each purchaser to do so or in the alternative must apply to the Court for an order allowing rescission.

 

Non-legislative restriction

The question of whether the developer is entitled to exercise its right to rescind the Contract under the sunset clause is also affected by case law. Two recent cases illustrate the position.

 

Cases

ABOURJAILY V PARKVIEW ESTATE PTY LTD [2017] NSWSC 1256

 In this case, the developer failed to achieve registration of the Plan by the sunset date and rescinded the Contracts. Twelve purchasers challenged the validity of the developer’s rescission under the sunset clause on the ground that it had failed to use all reasonable (or in 1 Contract best) endeavours to have the Plan registered by the sunset date.

 …a reminder to vendor developers in off the plan contracts of the importance to be diligent…

The Court found in favour of the purchasers. One of the principles on which the Court relied was that a party to a contract is not entitled, as against the other party, to rely on an event that results from its own default. That is, if the developer failed to use its reasonable endeavours to achieve registration of the Plan by the sunset date, then it was not entitled to exercise its right of rescission. The Court found that the vendor developer had not used its reasonable endeavours to achieve registration of the Plan by the sunset date, so any purported rescission by the vendor was not valid and amounted to a repudiation of the Contract. In assessing whether the developer’s conduct had materially contributed to the non-registration of the Plan, the Court took into account the following matters:

  1. Developer’s delay in payment of outstanding invoices to contractors which resulted in delay in contractor’s release of essential reports to the development.
  2. Prolonged negotiations with neighbours regarding access to and carrying out of stormwater works in adjoining lands.
  3. Developer’s failure to exercise its right under s88K of the Conveyancing Act 1919 (NSW) and Access to Neighbouring Land Act 2000 (NSW) to expedite the stormwater work although the developer was made aware of such rights.
  4. Delay in providing instructions to contractors which resulted in delay in commencement of works.

 

TAMANNA V ZATTERE; THAKORLAL V ZATTERE; RABAC PTY LTD V ZATTERE [2017] NSWSC 1388

This case also concerned the validity of the developer’s right to rescind Contracts under the sunset clause in effectively similar circumstances. In this case the vendor developer had issued notices of rescission of the Contracts and subsequently entered into new Contracts with new purchasers. The original purchasers challenged the validity of the rescissions.

 

The Court considered the following when determining whether the vendor developer had fulfilled its obligations under the Contract:

  1. Developer’s ongoing and failed negotiations with adjoining land owners regarding access to carry out drainage works.
  2. The developer did not exercise its right under s88K of the Conveyancing Act 1919 (NSW) to seek an easement for the drainage works although it was aware, or ought to have been aware that drainage consent was required in order to obtain the necessary consents from the Council in order to obtain a Construction Certificate.
  3. Reliance on consultants to discharge the developer’s obligations.

The Court held that, had the vendor developer diligently pursued those matters necessary to satisfy the conditions of development consent and otherwise to do what was necessary to proceed with the development, there was at least a substantial chance that registration of the Plans would have occurred by the sunset date. As a result, the vendor developer had failed to use its reasonable endeavours to achieve registration of the Plan by the sunset date and was not entitled to rely upon non-registration of the Plan by the sunset date as a basis to rescind the Contract.

The vendor’s attempted rescission was in fact found to be a repudiation of the Contracts and the vendor was ordered to pay the affected purchasers damages. The purchasers convinced the Court they were ready, willing and able to complete the Contract, so the purchasers were entitled to:

  • accept the vendor’s repudiation;
  • terminate the Contract; and
  • seek damages for loss of bargain.

 

Lessons for vendors in off the plan contracts

The similar outcome in the above cases serves as a reminder to vendor developers in off the plan contracts of the importance to be diligent in using its reasonable or best endeavours obligations to take the actions necessary to achieve registration of the Plan by the sunset date.

For example:

  1. Don’t cause the works to be delayed through non-payment or otherwise.
  2. If rights over adjoining land are required for temporary or permanent works or for permanent rights, then commence negotiations early. If negotiations fail then initiate proceedings early under s88K of the Conveyancing Act 1919 (NSW) or Access to Neighbouring Land Act 2000 (NSW).
  3. Conditions of a development consent should be pursued diligently.
  4. Payments to authorities to enable works to proceed or the project to proceed to registration should be made promptly.
  5. Identify a practical and flexible action plan and time schedule to achieve the target registration by the sunset date.

 

If you have any questions about this article, please contact Mike Ellis [Tel: +61 2 9261 5900 | Mob: +61 428 153 501 | Email: mike.ellis@vincentyoung.com.au] or Yanlie Leung [Tel: +61 2 9261 5900 | Email: yanlie.leung@vincentyoung.com.au]