In its first substantive decision on recently-introduced protections afforded to purchasers of off-the-plan developments, the Supreme Court of NSW has provided valuable guidance on when, and on what terms, it will permit rescission of an off-the-plan contract where a sunset date has passed.

DGF Property Holdings Pty Ltd v Butros & Ors [2018] NSWSC 344 sends a strong signal to developers that the Supreme Court will hesitate to permit rescission of off-the-plan contracts under section 66ZL, even where the vendor’s conduct cannot be said to be in bad faith or unreasonable.

Section 66ZL – Rescission under sunset clauses

Most contracts for the purchase of lots in a proposed plan of subdivision contain clauses which entitle each party to rescind if the subject lot is not created by a date set in the contract (commonly termed ‘sunset clauses’). Section 66ZL of the Conveyancing Act 1919 varies that contractual right.

Section 66ZL was introduced by the Conveyancing Amendment (Sunset Clauses) Act 2015 and applies to off-the-plan contracts regardless of when the contract was entered into. Section 66ZL restricts a vendor’s right to rescind an off-the-plan contract under a sunset clause if the subject lot has not been created by the sunset date, but only if:

1. each purchaser under the contracts consents to the rescission; or
2. the vendor has obtained an order of the Supreme Court under section 66ZL permitting it to rescind the contract under the sunset clause.[1]

Even if a sunset clause explicitly provides for automatic rescission, it is to be read as if it instead permits the contract to be rescinded in accordance with section 66ZL.[2] As a result, rather than requiring purchasers to commence proceedings against vendors to enforce a contract where a sunset date has passed, the burden is shifted to the vendor.

To be successful in an application to permit it to rescind the contract under a sunset clause, a developer must satisfy the Court that making such an order ‘is just and equitable in all the circumstances’.[3] This requires the Court to take into account, inter alia:

1. whether the vendor has acted unreasonably or in bad faith;
2. the reason for the delay in creating the subject lot;
3. the likely date on which the subject lot will be created;
4. whether the subject lot has increased in value;
5. the effect of the rescission on each purchaser; and
6. any other matter that the Court considers to be relevant.[4]

Parliament made clear that section 66ZL was introduced to protect purchasers. In the second reading speech for the amendment, it was noted that it would ‘counter the conduct of some developers using the sunset clause in off-the-plan contracts to disadvantage purchasers’ and to obtain ‘an unjust enrichment at the expense of home buyers’ by reselling lots at a higher price, with the purchasers (after having their deposit tied up for a long period of time) missing out on any capital appreciation of their lot.

In order to even the balance of power between vendors and purchasers further, 66ZL also requires the vendor to pay the costs of a purchaser in relation to proceedings for rescission of a contract under that section, unless the vendor satisfies the Court that the purchaser unreasonably withheld consent to the rescission of the contract.[5]

Factual background

In July 2010, Fairfield City Council approved a development application permitting the subdivision of three lots to create 12 residential lots. The three lots were the subject of a joint venture agreement between various parties – including the plaintiff, DGF Property Holdings (DGF), which owned one of the lots, and Mr and Mrs Di Federico (Di Federicos), who owned another. Throughout 2014, DGF entered into contracts for the sale of eight of the 12 proposed lots (Contracts) with various persons (Purchasers). Each of the Contracts contained a special condition to the effect that if the proposed plan of subdivision was not registered within (variously) 6 or 12 months of the date of the Contract, either party had a right to rescind.

There was a dispute between the Di Federicos and DGF in relation to various events (primarily, the brining of unauthorised fill onto the Di Federicos’ land) which, it was said by DGF, delayed the registration of the plan of subdivision and creation of the lots that the Purchasers had contracted to buy. That conduct was the subject of a stop work order issued by Fairfield City Council on 3 July 2015.

The sunset dates passed and DGF commenced proceedings under section 66ZL, seeking an order from the Court permitting it to rescind the Contracts. The Purchasers opposed that order on the basis that rescission would not be just and equitable in all the circumstances. It was common ground between the parties that the subject lots had increased significantly since the dates of the respective Contracts (from $725,000 - $880,000 per lot to $1.25 million - $1.35 million per lot).

DGF also commenced proceeds against the Di Federicos seeking damages for breach of various agreements relating to the proposed subdivision, which was heard with the proceedings against the Purchasers. At trial, those damages were limited to holding charges incurred during the times when DGF asserted that it would have received the proceeds under the Contracts but for the Di Federicos’ conduct.

Commenced proceedings

In his Honour’s judgment, Emmett AJA held:

• The conduct of the Di Federicos constituted a breach of the agreements between them and DGF and such conduct caused delay in the completion of the subdivision.But for that conduct, DGF would have completed the requirements for the subdivision certificate.
• However, there was no reason why the subdivision could not have proceeded after 16 May 2017 (when the Council approved the unauthorised fill brought onto the Di Federicos’ land).On that basis, DGF was entitled to damages from the Di Federicos to compensate it for holding charged incurred during the period 3 July 2015 to 16 May 2017.
• DGF must satisfy the Court that making orders permitting rescission of any one of the Contracts under section 66ZL would be just and equitable in all of the circumstances.However, the effect of refusing or of permitting rescission could be arbitrary or unfair.Accordingly, ‘in many circumstances, the making or refusing of an order permitting rescission would be just and equitable only if the making or refusing of the order were to be on terms or conditions’.[6]For example, if may be just and equitable where there is a mechanism for the price of a subject lot to be increased, such that, if the purchaser failed to pay that price, it would be just and equitable to permit the vendor to rescind.
• While the records as to DGF’s financial position from commencement of the development up to the hearing were unclear, his Honour accepted the evidence of DGF’s sole director that investor loans were the sole source of funding for the development and that investors were to be rewarded by the payment of interest at the rate of 8% per annum.
• DGF’s conduct of the development generally was less than entirely sufficient and competent, but fell short of it acting in bad faith or unreasonably.However, none of the Purchasers were informed of the possible risks that the disputes between DGF and the Di Federicos would bear upon whether or not the proposed plan of subdivision was registered before the sunset dates.
• It would be just and equitable to permit DGF to rescind each of the Contracts, only if it proffered an undertaking along the following lines:
  • ­DGF will, as soon as reasonably practicable (and, in any event, no later than 60 calendar days) do all such acts and things as may be necessary to procure the registration of the proposed plan of subdivision.
  • ­At the same time as giving notice of rescission of any of the Contracts, DGF must make an offer to the relevant Purchaser/s to enter into a new contract for the sale and purchase of the proposed lot on the same terms as the rescinded Contract, save that:
    • The purchase price will be the price payable under the rescinded Contract, plus a sum calculated on the balance of the purchase price payable under the rescinded Contract from 16 May 2017 until the making of a new contract at an appropriate rate (for example, DGF’s ‘investor rate’ of 8% per annum – equating to approximately $60,000 per lot);
    • Any provision relating to rescission of the contract by reason of the proposed plan of subdivision not being registered will be deleted; and
    • The amount of the deposit payable under any new contract will be the amount paid under the rescinded Contract.

Take away

This decision, which represents a very favourable outcome to the Purchasers, is significant in sending a strong signal to developers that the Supreme Court will hesitate to permit rescission of off-the-plan contracts under section 66ZL. This is the case even where the vendor’s conduct cannot be said to be in bad faith or unreasonable. If the Court is prepared to allow rescission, there is considerable flexibility in the terms which may apply to such an order in reaching an outcome that is ‘just and equitable in all the circumstances’.

A developer must be in a position to demonstrate, with precision, the effect that the Court’s refusal to permit rescission will have on it – particularly the financial detriment that has been, and will continue to be, suffered by the developer (which was described by Emmett AJA as ‘an important, and perhaps necessary, component of [DGF’s] case’). [7] A developer should also turn its mind to the question of whether any third party is (wholly or partly) to blame for any delay in registration of a proposed plan of subdivision, as the Court may consider it appropriate that the third party bear primary responsibility for compensating the developer for any detriment suffered by it – rather than purchasers.