A 'sunset provision' is a clause that entitles one party (usually the developer) to end a sale contract due to a condition not being satisfied before a nominated date. Typically "off-the-plan" contracts will contain at least one sunset provision which permits the developer to end the contract if the plan of subdivision is not registered within an extended period (up to four years) from the signing of the contract.
With extended and unprecedented delays expected to the commencement and completion of development projects resulting from the current economic climate, it is likely that a number of developers and purchasers will be looking to these sunset provisions in order to end their off-the-plan contracts. Now more than ever, it is critical to understand the developer's and the purchaser's entitlement to exercise their rights under a sunset provision, as the Sale of Land Act 1962 (Vic) (Sale of Land Act) was amended in May 2019 with these changes being applied retrospectively.
Contracts signed before 23 August 2018
For off-the-plan contracts entered into prior to 23 August 2018, the right to terminate the contract under a sunset provision will generally be in accordance with the specific terms of that specific contract. These contracts will usually include provisions enabling either party to end the contract if the plan is not registered, or the building works are completed (and a certificate of occupancy issued) prior to a key date generally called a "sunset date" (usually determined by a period of time following the date of the contract, for example, 36 months from the contract being executed) (Sunset Provisions).
In the past some developers sought to terminate a contract under a Sunset Provision by simply 'running the clock down' until the relevant date and then resell the property for a significantly higher price due to the rising property market.
Such action was not within the 'spirit' of a Sunset Provision, however the only option to the purchaser was to commence legal proceedings to show the developer's actions were in appropriate. In order to better protect purchasers from such rogue actions, the Sale of Land Act was amended to limit the ability of a developer to end a contract under a Sunset Provision.
Contracts signed on or after 23 August 2018
With the passing of the Sale of Land Amendment Act 2019 (Vic), the rights of purchasers and developers has changed dramatically in respect of Sunset Provisions in residential off-the-plan contracts of sale.
Purchaser ending the contract
If a purchaser elects to end the contract pursuant to a Sunset Provision, they are still entitled to do so in the same manner as mentioned above.
Developer ending the contract
For a developer to end a residential off-the-plan contract pursuant to a Sunset Provision, the developer must now seek the purchaser's written consent to do so and must provide the purchaser with the following:
(a) the reason why the developer is proposing to end the contract;
(b) the reason for the delay in satisfying the condition (i.e. the registration of the proposed plan of subdivision or the issuing of the occupancy permit); and
(c) confirmation that the purchaser is not obliged to consent to the contract ending.
This effectively reverses the burden of proof to show why a Sunset Provision should be enacted.
If the purchaser rejects the reasons for the developer wanting to end the contract or does not respond to such request, the developer must apply to the Supreme Court of Victoria for an order to end the contract under the Sunset Provision. The Supreme Court will only grant the developer's request if it is satisfied that it is "just and equitable" in the circumstances having regard to key considerations relating to the contract and the conduct of the developer and the purchaser.
The developer must approach this process with caution as unless the purchaser has unreasonably withheld consent to end the contract, the developer will be liable to pay the costs of the purchaser in respect of the proceedings. Also, it is open for the Court to award the purchaser with compensation if it considers it just and equitable to do so.
What is "just and equitable"?
Unfortunately, there is no definitive approach of what is or is not considered "just and equitable" as the assessment is a question that can only be determined on a case by case basis by examining all competing considerations. To assist, section 10E of the Sale of Land Act details what the Court must take into consideration in its assessment, which includes the following:
(a) the terms of the off-the-plan contract;
(b) whether the developer has acted unreasonably or in bad faith;
(c) the reason for the delay in registering the proposed plan of subdivision or in an occupancy permit being issued;
(d) the likely date on which the relevant plan of subdivision will be registered or the occupancy permit will be issued;
(e) whether the lot that is the subject of the residential off-the-plan contract has increased in value;
(f) the effect of the rescission on each purchaser; and
(g) any other matter the Court considers to be relevant.
Section 10F disclosure in contracts signed on or after 1 March 2020
From 1 March 2020, all residential off-the-plan contracts with a Sunset Provision must contain the information provided in section 10F of the Sale of Land Act. Failing to do so does not necessarily invalidate the contract, however, the developer faces significant fines if the contract does not contain this information (up to $39,552.80 for an individual or $198,264 for a company).
Take home message
The procedure to follow when terminating under a Sunset Provision will depend on the date the contract was signed. So it is critical to be aware of the difference processes involved.
It is also essential that all residential off the plan contracts with Sunset Provisions contain the necessary information detailed in the Sale of Land Act.
We would like to acknowledge the contribution of Ashesh Jalota to this article.