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Coming out alive: how to deal with sunset clauses

1 Mar 2024

| Author: Joanna Pidgeon

When the market was rising in 2020 and 2021, property developers were trying to use sunset clauses as a tool to tip buyers out of sale-and-purchase agreements so they could on-sell the property to someone else at a higher price. But times have changed. With a drop in property values over the past couple of years, we are seeing developers desperately trying to hold onto their purchasers. In some cases, sunset clauses have been amended to allow developers to extend these clauses.

 

The definition

A sunset clause is a clause in an agreement for the sale and purchase of a property off-the-plans. It gives a party the ability to cancel the agreement by notice if a specific event has not occurred by a certain date. Usually, the specific events are the issue of title or a code compliance certificate if the premises is being built. And sometimes it might be practical completion. These clauses may be for the benefit of purchasers or vendors, or both.

In Ling v Northwest Developments Ltd [2019] NZCA 630, the Court of Appeal said: “[28] … The interpretative exercise in this case must proceed on the basis of the known purpose of a sunset clause, which was to protect both parties in the event that title does not issue by the agreed date. This risk is common knowledge, given the uncertainties inherent in the subdivision process.

As Mr Jones explained in his evidence, a sunset clause  helps to ensure that a developer endeavours to complete the project within time while allowing some flexibility where, for unforeseen reasons, titles do not issue within the agreed time but it also ensures that the purchaser is not committed to a contract that runs on perpetually. This is done by the parties agreeing that if title has not issued by a specified date, either party can cancel. This right may, as it was in this case, be subject to a proviso allowing the vendor to extend the time for cancellation, but with an ultimate ‘drop dead’ date, in this case six months from 31 March 2018.”

 

Who benefits from a sunset clause?

A purchaser often does not want to be kept indefinitely in a contract if the vendor takes too long to complete the build. Property values can rise and fall, interest rates may fluctuate and life circumstances may change, with relationship breakdowns, relocations and job losses over an extended period of time.

A developer will usually set the terms of the sunset clause, which usually need to be approved by its financier. The developer will usually be unable to cancel a contract without its financier’s approval. It may want the sunset clause to benefit only itself or for the clause to be mutual, rather than being for the purchaser’s benefit.

A couple of years ago, as developments were delayed by covid-19 and materials and labour shortages and with costs and property values going up, many developers sought to cancel and resell for higher amounts to recover these additional costs and/or to make higher profits. This was devastating for purchasers who had been kept in contracts for extended periods but were tipped out and left unable to repurchase at higher prices which had outpaced their ability to save.

 

Disputes over clause terms

A bare right of cancellation is the clearest in meaning. The clause needs to be specific as to what needs to happen and by what date, and who may cancel for non-fulfilment. Usually however it will be expressed as a condition subsequent. Is there an ability to waive this condition? It is important to remember that clause 9.10(2) of the Eleventh Edition (3) ADLS/REINZ agreement for sale and purchase of property if it is in the agreement states that: The party or parties for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.

Therefore, if a vendor deliberately delays progressing a subdivision in a rising market to try to tip a purchaser out of a contract to sell for a higher amount, the purchaser may be able to use this clause to stop it from happening. The Supreme Court noted in Melco Property Holdings (NZ) 2012 Ltd v Hall [2022] NZSC 60 that: A party whose breach of the contract has contributed materially to non-fulfilment of the condition may not rely on such non-fulfilment to avoid a contract. When considering the situation where both parties have contributed to some extent in the non-fulfilment of a condition, in other words the contribution to the non-fulfilment is shared, it will be necessary to construe ‘material’ as meaning ‘substantial and operating’.

It can be difficult to prove that delay as the developer vendor will have the information required to establish that timeline. However, if the developer has sought to vary the consent or delayed in lodging documentation with council, there may be some third-party evidence available to establish those grounds. When acting for a purchaser trying to find information about the project timeline up front, this evidence may also be helpful in establishing whether there has been a deliberate delay at a later date.

Ideally, a purchaser would want a sunset clause to benefit him or her solely, which can put pressure on developers, particularly when there were covid delays or materials shortages. Developers can mitigate these risks by giving themselves the ability to extend the sunset date on notice if certain events happen. Or they might have a force majeure extension clause, allowing the extension of the sunset date if events happen outside of the developers’ control.

 

Specified event/force majeure

As the market has softened and property values have dropped, we are more likely to see developers trying to hold purchasers in contracts. If they sought to resell in the current market, they would be selling at a lower price.

We have seen the development of “specific event” and force majeure clauses which often give a developer more flexibility should an event outside of the reasonable control of the vendor occur. These are often worded along the following lines: Specified event means war, civil disorder, monetary or economic developments, acts of government or other factors beyond the reasonable control of the vendor, whether similar or not;

Specified event/force majeure

Specified event: In the event that a specified event prevents the vendor from commencing or continuing and completing the development or renders it impracticable for the vendor to commence or continue and complete the development, then the vendor may by notice in writing to the purchaser advise of the specified event and either: (a) cancel this agreement, bringing this agreement to an end on receipt of such notice; or (b)advise the purchaser that the sunset date is extended by the period that the specified event caused the delay in completion of the subdivision, provided that any such extension does not exceed 12 months in total.

Extension of sunset date: If the vendor chooses to extend the sunset date pursuant to clause (b), then the sunset date will be so extended by the period notified.

Event of cancellation: If the agreement is cancelled pursuant to clause (a), the purchaser will be entitled to a refund of any deposit paid and net interest.

When acting for a purchaser, to limit the developer’s powers under this clause you should consider inserting a requirement that the vendor must notify the purchaser in writing within a reasonable time that the specific event has happened, even if the vendor doesn’t know yet the period of delay (that can be notified at a later date).

All extensions should be limited to 12 months in total so there cannot be multiple delays claimed of up to 12 months each. Consider whether there should also be a requirement for the developer to be reasonable and provide evidence, as well as a mechanism for dealing with a dispute under the clause.

I would suggest that when contracts were entered into during covid, with delays and materials shortages already known generally, a clause like this must relate to specific delays for actual lockdown and materials unavailability, rather than general market conditions without actual specificity.

 

Section 225 Resource Management Act 1991 (RMA)

Regardless of whether clause 9.9 of the Eleventh Edition (3) ADLS/REINZ agreement for sale and purchase of property is in the agreement or not, s 225 of the RMA is implied as a condition into all agreements where a vendor enters into an agreement to sell land which is yet to be subdivided and before the appropriate survey plan is approved.

The key provision relating to sunset clauses is s 225(2)(b) which states: That the purchaser may, at any time after the expiration of 2 years after the date of granting of the resource consent or 1 year after the date of the agreement, whichever is the later, by notice in writing to the vendor, rescind the contract if the vendor has not made reasonable progress towards submitting a survey plan to the territorial authority for its approval or has not deposited the survey plan within a reasonable time after the date of its approval.

The purchaser’s statutory right of cancellation is for the sole benefit of the purchaser. In AAA Development (Ormiston) Ltd v Ormiston Group Ltd (2010) 12 NZCPR 329, Clifford J described s 225(2)(b) in this way: This can also be seen as including a ‘no fault’ right of cancellation for the purchaser. That is, the right arises by reference to an objective assessment as to whether or not ‘reasonable progress’ has been made towards submitting the survey plan, irrespective of whether or not the vendor has taken the necessary reasonable steps. Put very simply, a vendor may have taken such steps but, for example due to the inefficiency of the local council, reasonable progress may not have been made. At the same time, the lack of reasonable progress may be attributable to the fault of the vendor.

Where a vendor is selling a property off-the-plan before the survey plans have been approved, s 225 of the RMA provides only limited protection, with an ability for a purchaser to cancel an agreement. It is important to note that the ability in s 225(2)(b) to cancel if reasonable progress has not been made within two years after the issue of a resource consent has been held by the courts to refer to subdivision consent and not land-use consent. So if the developer takes some time to apply for its subdivision consent in the first place, the time to utilise the clause will be extended.

When acting for a purchaser, if the agreement is signed with no subdivision consent in place, consider whether there should be a clause inserted, requiring application by a certain date so this clause can be used.

Assessing what is “reasonable progress” can lead to lengthy arguments between parties and can depend on the facts, but the purchaser often does not have detailed access to these. If the purchaser invalidly cancels the agreement under s 225 of the RMA, this could amount to repudiation and exposure to consequences such as forfeiture of deposit and compensation to the vendor on resale for losses and damages.

 

Variations

Some sunset dates have a window of time within which the termination must happen or the ability to cancel is waived. This protects the other party from being kept dangling over an extended period and being unsure as to whether the other party will cancel or not. Consideration should be given as to whether this should be included.

 

Australian legislation

In some Australian states, legislation has been passed to prevent a developer from unreasonably rescinding an off-theplan contract for a residential property under a sunset clause. A developer can rescind an off-the-plan contract pursuant to a sunset clause only if:

  • written consent from the purchaser is obtained as follows:

(a)the developer has sent the purchaser a prescribed notice in writing at least 28 days before the proposed rescission that specifies why the vendor is proposing to rescind the contract and the reason for the delay in creating the subject lot; and

(b) the purchaser, after being served with the notice, consents in writing to the rescission; or

  • the Supreme Court of New South Wales makes an order permitting the vendor/developer to rescind the contract on the basis that it is just and equitable in all of the circumstances.

The Supreme Court of New South Wales considered and applied these provisions in Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3. Justice Black refused to grant the developer an order allowing it to rescind the contract in question as it was not just and equitable in the circumstances.

The following matters were considered as prescribed under the legislation:

  • the terms of the relevant contract;
  • whether the developer has acted reasonably or in bad faith;
  • the reason for delay in creating the subject lot;
  • the date on which the lot will be created; and
  • whether the lot had increased in value.

 

Conclusion

There does not seem to be any political appetite to address the issue of sunset clauses with any consumer protection legislation, so solicitors acting for purchasers need to try to protect their clients from being either held captive under contracts for an unreasonable period of time or tipped out if the property market improves.

Due diligence on the developer and its experience and performance under previous contracts is also important. ■

 

Joanna Pidgeon is a Director of Pidgeon Judd, the convenor of the Documents and Precedents committee and a member of the Property Law committee

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