When off-the-plan doesn’t go to plan: Part 2 of 2

Carrie has been saving for her deposit for several years, determined this is the year she will purchase a property in Melbourne.

Don’t be left in the dark: Know your sunset 

Carrie has been saving for her deposit for several years, determined this is the year she will purchase a property in Melbourne. As a potential first home owner, Carrie is excited about the stamp duty savings and first home owner grant now available to her when buying an apartment off the plan. She visited an estate agency and was instantly dazzled by the beautiful display suite, excited that she gets to select the floor plan and colour schemes to her tastes on her, brand new apartment. The estate agent told Carrie the apartment will be completed within eighteen (18) months. With excitement Carrie proceeds to sign the Contract.

Unbeknown to Carrie, one of the most common problems with off-the-plan sales is a blow-out in the time between paying the deposit and settlement of the Contract of Sale. The original eighteen (18) months as scheduled often stretches to three (3) or four (4) years, depending on the sunset clause stipulated in the Contract.

What is a sunset clause?

A sunset clause is a statement in the Contract of Sale that refers to the maximum time the Developer has to complete the project. It is common to see Contracts include a sunset clause that states the project will be completed within thirty-six (36) or forty-eight (48) months (or longer) from the day of sale. Generally, the project will be completed well within this timeframe however the exaggerated timeframe is to allow for any delays the Developer may experience, such as unforeseen construction delays, failure to obtain registration at the land titles office, or disputes with builders.

Can a sunset clause be extended?

Not by the Developer. In accordance with Section 9AE(2) of the Sale of Land Act, if the Developer fails to register the plan of subdivision at the end of the sunset period, the Purchaser may, prior to the registration of the plan, rescind the Contract.

The case of Clifford v Solid Investments Australia Pty Ltd [2009] VSC 223 dealt with this issue. The Developer sought to extend the sunset date indefinitely due to delay from authorities in providing any necessary approvals for the development, burglary or shortage of supply of materials. The court held that a sunset clause must specify the time for registration in explicit terms and this time cannot be subsequently extended by the Developer. As this special condition contravened s9AE(2) of the Sale of Land Act and was therefore of no effect, the Purchaser successfully rescinded from the Contract and was entitled to a return of deposit monies.

This principle was again examined in Harofam Pty Ltd v Scherman [2012] where the Developer included a special condition to allow extension of the sunset date by a further six (6) months, in addition to their original sunset provision of twenty-four (24) months. The court applied the reasoning in Clifford and despite the difference in facts, the court held that there was no material distinction between the two cases. The sunset date must be fixed and it was held that the Purchaser had the right to rescind the Contract after twenty-four (24) months as the plan had not been registered.

Lessons for Developers:

Prior to marketing the properties for sale, we recommend that Developers discuss with the builder regarding the proposed timeframe required under the building contract to complete construction. When determining a sunset date, take into account potential delays for weather. We also recommend that Developers discuss with their estate agents about the timeframe they require to sell the property for funding purposes. It would also be useful to speak with financiers regarding the appropriate sunset period required for the Contract to be compliant.

Lessons for Purchaser:

Purchasers should seek legal advice and understand the risks of purchasing an off-the-plan property in order to obtain certainty on the sunset clause and special conditions stipulated in the Contract of Sale prior to signing. Furthermore, Purchasers should also be aware that financiers may tighten their lending criteria and interest rates may rise at the date of completion. The value of the property may also be affected should there be any amendments to the plan of subdivision.

For more information on this area, please contact us to discuss further.

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