Sunset clauses and off-the-plan contracts – clouds on the horizon for developers

The Victorian Government has introduced the Sale of Land Amendment Bill 2019 (Bill) to Parliament, which proposes to amend the Sale of Land Act 1962 (Vic) (Act). The Bill, if passed, will affect vendors under existing and future off-the-plan contracts.

An initial version of the Bill first surfaced in 2018, but it was shelved due to the State election. The intent of the Bill is to limit vendors’ rights to use sunset clauses to terminate contracts of sale, which would ostensibly allow for the re-sale of land at a higher price (which, in the current market, is questionable).

Sunset clauses in off-the-plan sale contracts allow for a contract to be rescinded if the plan of subdivision has not been registered, or an occupancy permit has not been issued before the ‘sunset date’.

Under the current law, it is possible for vendors to purposely delay work in order to invoke the sunset clause so that the vendor can rescind a contract and potentially capitalise upon rising property prices by re-selling the property for a higher price.

Vendor looking to rescind? An umbrella for purchasers

The 2019 Bill provides that before terminating a residential off-the-plan contract under a sunset clause, the vendor must obtain the written consent of each purchaser to the rescission after giving each purchaser, at least 28 days before the proposed rescission, written notice setting out—

  1. the reason why the vendor is proposing to rescind the contract;

  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 consent to the proposed rescission.

If the vendor wishes to rescind a contract under a sunset clause without the purchaser’s consent, it must obtain an order of the Supreme Court, in which case the vendor will need to prove that the rescission is ‘just and equitable in all the circumstances’, having regard to circumstances including the following:

  1. the terms of the contract,

  2. whether the vendor is acting in good faith;

  3. the reason for the delay in registering the relevant plan of subdivision or occupancy permit being issued;

  4. whether the particular residential lot has increased in value; and

  5. the effect of rescission on the purchaser.

The vendor must pay the purchaser’s costs if a Supreme Court order is sought. A new addition to the 2019 Bill is that a vendor’s purported rescission of a residential off-the-plan contract in contravention of the provisions is taken to be a breach of that contract (thus entitling the purchaser to the usual remedies for breach of the contract).

The amendments do not apply to off the plan contracts for land that is not proposed to be used for residential purposes.

Future sunset clauses – a cloudy forecast

The Bill also provides that mandatory terms describing the parties’ rights in relation to sunset clauses must be included in applicable residential off-the-plan contracts.

The Bill provides that a residential off-the-plan contract must include a ‘statement’ that:

  1. the vendor is required to give notice of a proposed rescission of the contract under the sunset clause;

  2. the purchaser has the right to consent to the proposed rescission of the contract but is not obliged to consent;

  3. the vendor has the right to apply to the Supreme Court for an order permitting the vendor to rescind the contract; and

  4. the Supreme Court may make an order permitting the rescission of the contract if satisfied that making the order is just and equitable in all the circumstances.

Penalties  will apply for non-compliance. The sunset clause ‘statement’ requirement would apply to all contracts entered into upon the day of operation if the Bill is enacted and royally assented. The Bill also provides that any inconsistent terms in existing contracts will have no effect.

The changes will be retrospective:

Crucially, the Bill provides that amendments made to the Act apply to existing residential off the-plan contracts signed prior to commencement of the Bill (other than the obligation to include the ‘statement’ in a contract).

It is important that vendors using sunset clauses in residential off-the-plan contracts monitor the progress of the Bill, and if enacted:

  1. ensure that they comply with the sunset clause ‘statement’ requirements in new contracts, and

  2. follow the requirements prescribed by the Bill before attempting to terminate a residential off-the-plan contract.

Non-compliance with the sunset clause requirements could see vendors exposed to significant financial consequences and an inability to satisfy lending pre-conditions in relation to qualifying pre-sales. 

For more information on the sunset clause amendments or for property law and development advice, please contact:

Victor Di Felice
Sladen Legal
T +61 3 9611 0162  l M +61 419 515 010   
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Joshua Hunter
Principal Lawyer
Sladen Legal
T +61 3 9611 0128
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Shenelle Teunissen
Senior Associate
Sladen Legal
T +61 3 9611 0157 | M +61 438 667 363
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

William Gubbins
Sladen Legal
+61 3 9611 0173
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia