Buying Off the Plan - Sunset Clauses

Buyers often enter into a contract with a developer to buy real estate in a development which is yet to be built.

This is known as “buying off the plan”.


What is a Sunset Clause?

A Sunset Clause is a term in the Contract for Sale of Land in an off the plan development setting the date the developer has to finish the development. If the property is not finished by this date, either party can walk away from the contract and the purchaser will receive their deposit back in full.

Sunset Clauses are usually included in the contract to protect the interests of both parties when it comes to a sale.

This can help buyers by giving them the right to end a contract and pursue other property options, if the building project is delayed. However, some purchasers have allegedly had their contracts rescinded by developers exercising a sunset clause, only to find out that their proposed lot has been re-sold for a higher price shortly after.

While a purchaser will get their deposit back, the market may have improved in the meantime and property values may have risen above their means.


New Legislation

In NSW, legislation was amended in late 2015 to provide protection for persons who have purchased property off the plan.

The intent of the legislation is to prevent developers from unreasonably rescinding off the plan contracts under a sunset clause for financial gain.

Under the amended legislation, a developer must give at least 28 days’ notice in writing to the purchaser before terminating the contract. The notice must state:

1. why the developer proposes to end the agreement; and

2. give reasons for the delay.

For the contract to be terminated, the purchaser must agree. If the purchaser does not agree, the developer is required to obtain an order from the Supreme Court of NSW to rescind the contract. A key difference in the new legislation is that the onus of proof shifts from the purchaser to the developer to explain why the contract should be rescinded.

The new rules will also retrospectively apply to existing off the plan contracts as at 2 November 2015.


Application of the New Law

The new legislation has recently been tested in the Equity Division of the Supreme Court of NSW in the matter of Jobema Developments Pty Limited v Zhu & Ors [2016]. In this matter, Justice Black refused the developer’s application to rescind an off the plan contract as he ruled is was it was not “just and equitable” in the circumstances to allow the developer to do so.

It is apparent from this decision the Court will consider whether the developer has acted reasonably and in good faith, the reason(s) for delay and whether the lot has increased in value.

This is a new and evolving area of law in New South Wales. If you are a purchaser or developer involved in an off the plan development and you wish to find out about your rights and responsibilities, it is important that you seek the advice of an experienced property lawyer. For more information, please use our contact form whereupon we will contact you as soon as possible or phone us on 1300 171 898 for a confidential discussion.

Author:            Michael Twemlow
Published on:   24 May 2016