Recently the Victorian government formally passed the Sale of Land Amendment Act 2019. The Act has substantial impacts on the sunset clause in off-the-plan Contracts.
What is a Sunset Clause
Sunset Clause is commonly included in residential off-the-plan contracts. As the development of residential properties encounter multiple uncertain factors, a sunset clause allows both the Purchaser and the Vendor flexibility to terminate and Contract of Sale and for the purpose of protecting the legitimate interest of both parties.
What is a Sunset Date
The sunset date in each and every contract differs and can range from 24 months to 48 months, or even further.
Under what circumstances can a Contract be rescinded
Prior to the enactment of the Sale of Land Amendment Act 2019, either the Vendor or the Purchaser may rescind the Contract:
- If the Vendor is unable to complete the registration of the Plan of Subdivision prior to the sunset date of the contract; or
- If the Vendor is unable to obtain the Occupancy Permit for the property prior to the sunset date.
While it may seem that sunset clauses are unfair, it is also a common tool that benefits the developer at its disposal. For example:
A purchaser entered into a off-the-pan contract to purchase a residential property at $750,000.00, the sunset date being 36 months after the date of the contract – i.e. March 2018. Soon after, the property market surges and, prior to the sunset date, the market value of the property increased to over $900,000.00. It is possible that developer may delay the registration of the Plan of Subdivision or in obtaining the Occupancy Permit. Thereby passing the sunset date and be entitled to rescind the Contract.
After the rescission of the Contract, the developer could then enter into a new Contract of Sale with some other purchaser at the new market value and earn more substantially than it would have with the previous 2015 contract.
Impact of the Sale of Land Amendment Act 2019
Pursuant to the Act, starting from 23 August 2018, a Vendor may only rescind a contract pursuant to the sunset clause if the purchaser agrees in writing.
In furtherance, the Act is retrospective and applies to all off-the-plan contracts signed before 23 August 2018.
Purchaser’s written consent
If the Vendor proposes to rescind the Contract pursuant to the sunset clause, the Vendor must provide a written notice to the Purchaser 28 days before such proposed rescission date. The Notice must include below:
- That the Vendor proposes to rescind the Contract;
- The reason for which the Plan of Subdivision registration and/or Occupancy Permit could not be obtained prior to the sunset date;
- The Purchaser is not obliged to agree to the Vendor’s rescission proposition.
By requiring the rescission of a contract being mutually agreed by both parties, these requirements now take into consideration the interests of the purchaser.
In addition, if any of the sunset clause does not comply with the requirements set out in the Act, then such sunset clause will be deemed void.
Is there no other way a Vendor could rescind the Contract if the Purchaser does not agree?
If the Vendor is unable to obtain the Purchaser’s written consent, the Vendor may apply to the Supreme Court of Victoria for approval to rescind the contract pursuant to the sunset clause.
When determining whether or not to allow the Vendor to rescind the Contract, the Court shall take into consideration the following:
- Whether the Vendor undertook any unreasonable or bad faith act to delay completion date;
- The property market;
- Whether delay in the completion is resulted from force majure;
- Whether the Purchaser’s interest is jeopardised; etc.
If the Purchaser’s interest would be jeopardised, then the Court may allow the Contract to be rescinded subject to the Vendor compensating the Purchaser. Unless the Vendor could prove that it is unreasonable for the Purchaser to refuse to rescind the Contract, the Vendor may even be ordered to be responsible for the litigation cost.
All in all, the Act enhances the supervision of, and imposes further obligations on, the Vendor.
If you have entered into an Off-The-Plan Contract in which the sunset date has lapsed, then your Contract is likely to be affected by the Act. We recommend that you contact your legal representative to seek further legal advice. If you do not have a legal representative, please do not hesitate to come to us.