Residential developers beware: the sun has set on sunset clauses

The Sale of Land Act 1962 was amended on 4 June 2019.

Included in those amendments are restrictions on the use of sunset clauses in certain off-the-plan contracts that will significantly impact residential developers.

Sunset clauses are provisions in off-the-plan contracts that have typically allowed either the vendor or the purchaser to rescind an off-the-plan contract by simply giving notice to the other party if:

  • The relevant plan of subdivision in respect of the lot has not been registered by the sunset date; or
  • An occupancy permit has not been issued in respect of the lot by the sunset date.

As a result of the recent property boom, some less reputable developers have exploited sunset clauses by intentionally delaying building projects to avoid sales of lots that have quickly increased in value, thus allowing them to re-sell those lots for a higher amount.  The Victorian Government has sought to stamp out this practice by introducing these amendments to the Sale of Land Act 1962.

The amendments only apply to residential off‑the-plan contracts, which are off-the-plan contracts where the lot being sold is proposed to be used for residential purposes.

The pertinent change for developers is that they can no longer terminate a residential off-the-plan contract under a sunset clause without obtaining either:

  • The purchaser’s written consent; or
  • A Supreme Court order.

To obtain a purchaser’s consent to terminate a residential off-the-plan contract under a sunset clause, a vendor must now give written notice to the purchaser at least 28 days prior to the proposed termination setting out:

  • The reason why the vendor is proposing to terminate the contract; and
  • The reason for the delay in the registration of the plan of subdivision or the issuing of the occupancy permit; and
  • That the purchaser is not obliged to consent to the proposed termination.

If a purchaser refuses to consent, a vendor can apply to the Supreme Court for an order permitting the vendor to terminate the contract.  However, the Court will need to be satisfied that making the order is just and equitable in all the circumstances.  In deciding whether to issue a termination order, the Court will have regard to a wide range of factors, including whether the lot has increased in value.

In applying to the Supreme Court, a vendor also risks an order being made that it must pay compensation to the purchaser on termination of the contract.  Supreme Court applications are also costly and the vendor must wear those costs unless the Court is satisfied that the purchaser unreasonably withheld consent to the termination.  Therein lies one of the possible problems with these amendments, as savvy purchasers may seek to extract compensation from a vendor in return for their consent to terminate.

Included in these amendments to the Sale of Land Act 1962 are requirements to include additional notices in residential off-the-plan contracts.  This requires that sunset clauses in such contracts include a statement that:

  • The vendor is required to give notice of a proposed rescission of the contract under the sunset clause; and
  • The purchaser has the right to consent to the proposed rescission of the contract but is not obliged to consent; and
  • The vendor has the right to apply to the Supreme Court for an order permitting the vendor to rescind the contract; and
  • 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.

If you are a residential developer of you are selling any residential property off-the-plan, we encourage you to contact Tim Wills to ensure that your sale contract is updated accordingly.

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.