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Wind back three years and you could pick up an average apartment in the inner Sydney suburb of Ultimo for around $560,000.

Flip that today and you would get around $760,320.

Those in nearby Surry Hills could have also done well, as the average apartment which would have set you back $572,000 back then will now fetch $790,000 (data from realestate.com.au).

This means many who have purchased apartments ‘off the plan’ in recent years and are now reaching settlement stand to benefit from significant capital appreciation in the value of their property since the time in which they entered into the original purchase contract.

Unfortunately, however, not all have been able to realise that gain. Indeed, there have been some instances whereby unscrupulous developers have sought to take advantage of the gain themselves.

This they do via a ‘sunset clause’ which allows either party to terminate the contract where certain conditions have not been met be a specified date. Essentially, the developer might delay completion of the project in order to stretch beyond the sunset date, invoke the clause to terminate a contract which has potentially been entered into years earlier and instead list the apartment for sale at today’s sky-high prices.

Self-funded retirees John and Suzy Zeal, for example, were forced to endure endless promises that an inner-city apartment they had purchased off-the-plan for their retirement would be ready ‘in six weeks’ (as described in a September 2015 report on ABC). When they received correspondence from their developer’s lawyer in July 2015 informing them that the sunset date had been reached months earlier in April and that their contract would be terminated, they were understandably devastated.

Peter Franke, a property lawyer and director of law firm Stacks Heard McEwan, stresses that the majority of developers do the right thing and that the many off-the-plan transactions proceed through to settlement without difficulty. Indeed, he says, he has seen cases where completion of the project proceeded beyond the settlement date but developers honoured contracts nonetheless.

Nevertheless, he says that the difference in price between today’s market and that of two to three years ago might tempt some developers to push back completion of the contract in order to terminate and take advantage of today’s hotter market. This is especially the case whereby projects run up close to completion dates at any rates. In such circumstances, he says developers may be tempted not to hustle in regard to contract completion.

“There are unscrupulous people who have been attempting to do it and have probably done it,” Franke said. “It is very tempting for a developer/vendor to try and do it just so they can cash in on today’s prices. I wouldn’t say that it’s commonplace, but it is happening and has happened.”

In response, the New South Wales government has introduced laws which require developers to provide 28 days’ notice of their intention to terminate and reasons for that termination. Where buyers do not agree to the termination, the developer has to apply to the Supreme Court in order to have the termination proceed.

Essentially, Franke says, the vendor will write to the purchaser or their representative indicating their intention to give 28 days’ notice and rescind the contract. Where the purchaser agrees, the contract is terminated, deposits are refunded and the vendor is free to do what they like with the dwelling.

Where the purchaser does not agree, the vendor can either complete construction and proceed to fulfil their obligations under the original contract or apply to the Supreme Court to have the contract terminated. In determining whether or not the to grant the termination, Franke says the legislation gives the Court wide ranging discretion to take into consideration any matter it deems relevant. Most likely, he says, court would look at reasons for any delay (rain delays, finance or construction issues) which have caused contract completion to extend beyond the settlement date.

The new protections apply retrospectively and thus apply irrespective of when the contract was entered into. It should also be noted that the onus rests upon the developer to make the case that the termination is indeed warranted rather than on the buyer to argue that termination should not be granted.

That said, where cases do go to court, Franke says the cost of legal proceedings can be prohibitive for some buyers.

In terms of what buyers should do, Franke said it is important to have the contract reviewed by a lawyer and to ensure that your representative had a good understanding of the agreement. Also, it is prudent to conduct research on the developer and understand more about who you are dealing with.

Finally, it is important to ensure that the sunset clause is set at a realistic date. Where a contract involving a 100-unit apartment complex upon which ground was yet to be broken had a settlement date which was only12 months after the day of the contract, he said that would indicate that something might be amiss.

As apartment prices rise, temptations for developers to try to profit from termination of off-the-plan contracts is there.

In NSW at least, it seems buyers now have better protection from this sort of thing.

 
  • Whilst the law should protect the innocent from the unscrupulous, sunset clauses and their like are generally pretty clear and ought to be a serious consideration when paying around half a million dollars (albeit via a deposit) for an off-plan apartment. The buyer is not powerless and the clauses and conditions offered can (and should) be negotiated to reflect the buyer's appetite for risk and its ultimate intention with regards to purchase, i.e. home or investment property.

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