Off the Plan Contracts: The Sun sets on Sunset Clauses

Posted: 06/10/2010 In the aftermath of Justice Bongiorno’s decision in Solid Investments Australia Pty Ltd v Clifford & Anor [2009] VSC 223 (“Clifford”), developers must be careful to ensure that contracts for the sale of “off the plan” real estate in Victoria specify a deadline for the registration of the plan of subdivision. The decision in Clifford was appealed in the Victorian Court of Appeal where it was upheld that a special condition allowing a vendor to extend the date for registration of the plan of subdivision contravened section 9AE of the Sale of Land Act 1962 (Vic) (“SLA”) because it was open-ended and created uncertainty for the purchaser. Section 9AE (2) SLA allows a contract to specify ‘another period’ instead of the 18 month statutory period, after which time a purchaser may rescind the contract if the plan remains unregistered. The other “period” referred to in the section, referred to as the “sunset clause” will typically be dictated by the party preparing the contract but may ultimately be agreed between the contracting parties. As a result of Clifford, a vendor cannot extend the sunset clause beyond the date specified in the contract once it is executed. The Clifford decision ensures that the contract establishes a “certain, identifiable period of time at the time the contract is entered into”. The decision provides some protection for purchasers of “off the plan” property insofar as providing them with a right to rescind a contract where the plan of subdivision is not registered within the specified time. But what happens if the purchaser does not wish to rescind? The decision in Clifford affords the purchaser no further protection than that already afforded. There are several reasons why a purchaser may not wish to rescind the contract. These include the loss of: • The opportunity to own the property; • Stamp duty concession; • (depending on the circumstances) increased first home owners’ grant; • Increase in property value from the contract date to the rescission date; • Opportunity to save throughout the development process; and • Opportunity to purchase an alternative property at a comparable price between the contract date and the rescission date. “Off the plan” contracts prepared on behalf of a vendor will generally provide the vendor with a right to rescind the contract if the plan of subdivision cannot be registered within a specified time. Typically such a contract will also avoid imposing a positive obligation on the vendor to register the plan of subdivision. A vendor may therefore rescind the contract if the plan of subdivision cannot be registered within the specified time, for any of the following reasons: • Unforeseen construction delays; • Contractual disputes with builders; • Failure to obtain registration at the Titles Office; or • Amendments to the plan of subdivision. A potential source of abuse of this right might be the opportunity for the vendor to financially gain from reselling the property on the open market at a greater price. For this reason, purchasers should insist upon (a) the plan of subdivision being registered within a fixed timeframe rather than leaving it open ended and (b) The vendor having a positive obligation to use its best endeavours to register the plan of subdivision as soon as practicable.