The ACT came a step closer to protecting buyers earlier this month with several bills introduced in the Assembly designed to prevent developers from rescinding ‘off the plan’ contracts.
Attorney General Shane Rattenbury introduced the Civil Law (Sale of Residential Property) Amendment Bill 2021 (the first bill). Peter Cain MLA also tabled a similar bill being the Civil Law (Sale of Residential Property) Amendment Bill 2021 [No 2] (the second bill).
Both bills intend to prevent developers from utilising a rescission clause under the contract unless the buyer agrees, or the Supreme Court considers it is just and equitable, for the contract to be rescinded. Interestingly, the commencement date for the first bill is the date the bill was first introduced into the Assembly. This means that if the first bill passes later this year, it will have been deemed to have come into effect, retrospectively, from 9 November 2021. The proposed changes will also apply to all current contracts, even contracts exchanged prior to 9 November 2021 and are still awaiting completion.
A sunset clause in the contract permits the seller and (usually) the buyer to rescind the contracts if the seller has not registered the units plan by the sunset date specified in the contract. The sunset date is not the expected date for completion of construction of the development, but rather a conservative estimate with a buffer of around 12 months. Notwithstanding this, if there are significant delays, a seller could potentially exploit the sunset date by delaying construction and rescinding the contracts.
Delay Event Clauses
In addition to a sunset clause, most contracts are subject to an approvals clause or an impediment to works clause. These clauses permit the developer to rescind if they have not been able to obtain approvals to commence construction (for example, development approval or finance approval) or if there is an impediment to construction (shortage of materials, change in building regulations, or other unforeseen issues (for example the COVID-19 pandemic)).
The Proposed Changes
Both bills propose several significant amendments to the Civil Law (Sale of Residential Property) Act 2003. It is likely the bill introduced by the Attorney General will be debated and will form the basis for any changes before the bill passes, and as such, we will only focus on the proposed changes in the first bill.
Under the proposed changes, if a seller seeks to rescind an off the plan contract by giving formal notice to the buyer, the notice must give the buyer not less than 28 days to respond and include:
- The reason for the seller’s proposed rescission;
- A statement the buyer is not required to agree to the rescission;
- A statement explaining the seller may apply to the Supreme Court for an order permitting the seller to rescind and that the seller must pay the costs of the buyer concerning a proceeding for the order unless the seller satisfies the Supreme Court that the buyer unreasonably withheld consent to the rescission of the off the plan contract under the rescission provision.
The proposed changes also prevent the Supreme Court from granting an order permitting the seller to rescind unless it is just and equitable to do so. In considering whether rescission is just and equitable, the Supreme Court must look at:
- the terms of the off the plan contract and whether a term is intended to avoid the operation of the new proposed changes;
- whether the seller has acted unreasonably or in bad faith;
- whether factors beyond the seller’s reasonable control have affected the seller’s ability to complete the contract or the viability of the seller’s business;
- whether the seller has taken reasonable actions to avoid the rescission;
- whether the unit or land the subject of the contract has increased in value;
- the effect of the rescission on the buyer;
- whether the buyer has been performing their obligations under the contract;
- the effect of completing the contract on the seller;
- any other matter prescribed by regulation.
Examples are given for what the Supreme Court might consider when assessing whether there are factors outside the seller’s reasonable control that have affected the seller’s ability to complete the contract (item 3 above). These include:
- disruption to supply of building materials;
- significant increase in cost of goods and services;
- inability to obtain or retain finance for the development;
- changes in the law affecting the development, building standards etc;
- imposition of conditions on development approval that require significant changes to the development.
Although the proposed changes aim to prevent sellers from rescinding contracts, the bills do give scope for a seller to rescind in certain circumstances, most notably if there is a disruption to supply of and/or increase in the cost of building materials. Interestingly, many developers have rescinded contracts in the ACT, citing increased costs and shortage of materials raising significant questions over whether the bills (in their current form) will protect buyers as intended. This, coupled with the fact the buyer must not act unreasonably in agreeing to a rescission, might see developers still pushing for rescissions under threat of a costs order being made against a buyer for failing to agree to the seller’s request.
However, instances of sellers rescinding contracts by exploiting clauses where they are acting bad faith or attempting to gain a windfall from an increase in the value of the units are likely to be caught by these changes.
In any event, if the bill (in one form or another) does pass in the Assembly, it will undoubtedly add a welcome extra layer of protection to buyers.