Insights

In the January edition of the Kells Report, I reported on the introduction of new legislation designed to protect “off the plan” purchasers. That legislation prevents a developer from rescinding under a “sunset clause” unless they obtain either the consent of the purchaser or the permission of the court.

The first case to consider the legislation has now come before the courts (Jobema Developments Pty Ltd v Zhu & Ors [2016] NSWSC 3).

Background

Jobema Developments Pty Ltd (“Jobema”) acquired a development site in Hurstville from another developer, Xycom, who had been unable to complete the development. As part of the acquisition, Jobema took over a number of “off the plan” contracts with purchasers of strata units in the development, including Mr Wu.

Mr Wu’s contract provided that if, despite the vendor’s reasonable endeavours, the strata plan could not be registered before 31 December 2015, then either party could rescind.

The strata plan was not registered in time and Jobema proposed to rescind.  As required by the new legislation, notice of the proposed rescission was served on Mr Wu and the notice cited several reasons for the delay and the proposed rescission.  These included:

  • Xycom’s failure to advance the project prior to Jobema taking over;
  • that construction costs had increased significantly since the contract was entered into; and
  • that the contract no longer met the lending requirements of the project financier.

Mr Wu did not consent to the rescission and so Jobema applied to the court for permission.

The Decision

In order to grant permission, the Court needed to be satisfied that doing so would be just and equitable in all the circumstances and had to consider matters including:

  • the terms of the contract;
  • whether the vendor had acted unreasonably or in bad faith;
  • the reason for the delay;
  • the likely date the lot would be created;
  • whether the lot had increased in value;
  • the effect of the rescission on the purchaser;
  • any other factors considered relevant.

After considering the matters required by the legislation, the Court rejected Jobema’s application.

The evidence before the Court was scant.  In particular, there was no evidence establishing that construction costs had in fact increased.  Nor was there evidence establishing that the contract did not meet the requirements of the project financier.  In any event, the Court considered that this was arguably a risk that Jobema had taken when it assumed Xycom’s obligations.

While the Court found that Jobema had been diligent in progressing the development, it could not rely on Xycom’s inaction to justify rescinding the contract. This was because Jobema knew that very little had been done at the time it acquired the site, but still assumed the obligation to complete the project by the sunset date.

Interestingly, while there was no evidence establishing an increase in the value of the strata unit, the Court considered that any such increase would have tended against the grant of permission.

Finally, the Court rejected an argument by Jobema that it had taken on Xycom’s obligations on the assumption that it would have the ability to rescind.  In the Court’s view, the introduction of the new legislation was a business risk that Jobema had taken when assuming Xycom’s obligations.

Reflection

While the evidence before the Court was scant, the decision provides guidance for both developers and purchasers on how particular factors will be treated by a court when considering such an application.

In particular, it is not unusual for development sites to change hands while the development is underway.  The case demonstrates that the inaction of a previous owner cannot be relied upon when seeking the court’s permission to rescind under the new legislation.

The author acknowledges the valuable contributions of Kareena Spiteri and Kyle Bridge towards this article.