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New law on sunset clauses in off-the-plan contracts

David Wang | | Property Law, Disputes, Conveyancing, Domestic Building Disputes

The Sale of Land Amendment Bill 2018 (Bill) was introduced on 21 August 2018 proposing to amend the operation of sunset clauses in off-the-plan contracts by amending the Sale of Land Act 1962 (Vic) (Act).

The purpose of the amendments is to protect purchasers in off-the-plan contracts by limiting the use of sunset clauses by vendors to get out of the contract. In such event a purchaser has no right to require a vendor to complete the contract.

The Bill it yet to be formally proclaimed but certain amendments have already came into operation.

Current law

Currently, both the vendor and the purchaser have the right to unilaterally terminate an off-the-plan contract under a sunset clause if either of the following occurred:

  1. the plan of subdivision is not registered by the sunset date; or
  2. an occupancy permit is not issued by the sunset date.

The period between the contract date and the sunset date is usually between two to four years. The sunset clause is intended to give both parties the flexibility to end the contract due to the uncertainties in property developments.

However, the government is now concerned with the misuse of the sunset clause by vendors who would intentionally delay development and re-sell the property at a higher price (the housing price has been rising in the recent years). The purchasers, in that circumstance, may not be able to afford to purchase another property due to the housing price rise.

New law

Under the new law, a vendor will need the purchaser’s written consent to rescind a contract pursuant to the sunset clause.

Purchaser’s consent

The proposed operation of the new law will be as follows:

  1. The vendor must, at least 28 days prior to the proposed rescission, provide a written notice to each purchaser and seek their written consent to the rescission.
  2. The notice must set out:
    1. the reason of the proposed recession;
    2. the reason for the delay in the registration of the plan of subdivision or the issuing of the occupancy permit; and
    3. that the purchaser is not obliged to provide consent.
  3. A sunset clause will be invalid to the extent that it is inconsistent with the new law.

This part of the new law has already came into operation from 23 August 2018.

Vendor may apply to court

If the purchaser does not provide consent, the vendor will need to apply to the Supreme Court for an order permitting the rescission.

The Court will only make such order if it is satisfied that it is just and equitable to do so. The Court will consider (among other things) whether the vendor has acted unreasonably or in bad faith, whether the property has increased in value and the effect of rescission on each purchaser.

If the Court makes an order to permit rescission, the Court may also make an order for reasonable compensation of the purchaser.

The vendor will be liable for the purchaser’s costs in relation to the proceedings unless the vendor can show that the purchaser withheld the consent in an unreasonable way.

This part of the new law will come into operation on the day after the Bill receives Royal Assent.

The vendor’s obligation to disclose

For all contracts that are entered after the new law comes into operation, the vendor’s solicitors or conveyancers should also ensure that their sunset clauses contain a statement in accordance with the proposed new section 10E of the Act (which advises the purchaser of the above new law), failing which the vendor will be exposed to significant fines.

What does it mean to vendor and purchaser?

Under the new law, it appears to be extremely difficult for vendors to rely on sunset clauses. In the event that a purchaser does not consent to the rescission of contract, a court application will be inevitable. This will create additional costs and uncertainties in property development projects.

For purchasers, the new law protects them from an unconscionable use of a sunset clause by the vendors to terminate the contact. However, purchasers should not unreasonably withhold consent as litigation is unpredictable and they may be liable for costs. Purchasers should also be aware of any other special conditions in the contract which may give vendors a right to terminate the contract.

If you have any queries about the new sunset clause law or need assistance with property development in general, please contact us on +61 3 9890 3321.

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