It’s all in the contract

Recently, or so it seems to me, there has been a rash of reports of buyers of apartments “off the plan” being left either with nothing or with something less than they thought they were buying. The most outrageous has probably been the move by a developer associated with Auburn’s Mr Mehajer to reconfigure the apartments in a block which has already sold off the plan pursuant to a power in the contract to do so. What a developer can do under such a provision must surely be a matter of degree and one might think that some representations in trade and commerce which will have been made in the bruiting of the plan may well come into play, but we’ll have to wait and see more of the detail of that.

Meanwhile, a recent judgment by Stevenson J exposes the risks to purchasers of “sunset” clauses in off-the-plan contracts. Sunset clauses are clauses which allow either the purchaser or the developer to call the deal off if the building is not completed by a specified date.

Ostensibly, these are symmetrical provisions, in the sense that they apply to both sides equally. They do offer some kind of protection to the purchaser, in that if the building is late completing you don’t have to wait – you can just ask for your money back. That could also be opportune if it looks like you paid too much.  But things look different if you pause and think that normally, if you contract as a consumer with someone to sell you something, the seller bears the risk of not being able to deliver. Normally you might therefore expect a builder to be responsible for completing the building for the price offered within the stipulated time. After all, this makes sense so far as the builder is the party you might expect to know about the site and the building it plans to put up.

When, as recently in Sydney, there is a rising real estate market, sunset clauses expose purchasers and developers to a “moral hazard” because if developers do not complete by the stipulated date, they may well be able to sell the property to a new purchaser at a better price. If the date is approaching, the building still not finished and the market is rising, who would not be tempted to go slow or at least not make unseemly haste?

The protection offered to purchasers against this moral hazard is a requirement that the developer use “reasonable endeavours” to finish the job. Finishing is usually defined as getting the strata plan registered, the earliest point when there would be specific properties in existence capable of being conveyed. By then the building should be complete with relevant certificates issued.

The problem is that it is one thing to suspect and another to prove. If you want to prove a legal case, you will be shooting in the dark. The developer will be the one who has been on the ground and can give more detailed evidence about what was actually happening.

All of this is amply demonstrated by Stevenson J’s judgment in Wang v Kaymet Corporation Pty Ltd [2015] NSWSC 1459.

Between November 2009 and April 2010 the plaintiffs (all but two apparently ethnically Chinese) bought “off the plan” a total of 34 of 94 apartments proposed to be constructed by Kaymet on a site at Lusty Street, Wolli Creek. In each case the stipulated date (entitling either side to rescind) was 30 months after the date of the contract. Between March 2013 and April 2014, at all times when the strata plan was still not registered, Kaymet (and the other parties on its side of the contract) rescinded the plaintiff’s contracts. The plaintiffs sued to hold Kaymet et al to the deal – that is, they still wanted to be able to purchase the flats.

According to Stevenson J at [71] ff, the plaintiffs faced the following burden:

71 …for the plaintiffs to succeed, they must establish that the defendants failed to use their reasonable endeavours to cause the Strata Documents to be registered by the Date for Completion.

72 To show that such a breach is material, the plaintiffs must also show that, had the defendants used their reasonable endeavours, the project would have reached the stage where the Strata Documents could have been registered by the Date for Completion relevant to each plaintiff’s contract: that is, by 23 May 2012 at the earliest …and 1 October 2012 at the latest ….

73 If any of the plaintiffs can establish these matters, it would follow that the defendants were not entitled to rescind the contracts, that the contract or contracts in question remain on foot, and that the particular plaintiff or plaintiffs is or are entitled to specific performance.

74 Determination of the actual date on which the defendants could have caused the Strata Documents to be registered is complicated. Although I asked counsel several times for guidance as to precisely what was necessary for the defendants to achieve in order to register the Strata Documents, I was provided with no clear answer. The fact is that the Strata Documents are still not registered.

75 However, there is no suggestion in the evidence that the Strata Documents could have been registered by 1 October 2012 (the last of the Dates for Completion). Indeed, the evidence suggests that the project was nowhere near that stage on 1 October 2012. On 9 October 2012, Washington Brown (quantity surveyors engaged by Westpac Banking Corporation, the defendants’ financier) reported that work was only 69 per cent complete and that the then forecast completion date was 21 March 2013. On 28 June 2013, Washington Brown reported to Westpac that work was then 98 per cent complete and that the forecast completion date was 26 July 2013. An interim Occupation Certificate was issued on 19 July 2013 and a final Occupation Certificate on 2 July 2014.

76 As best I can make out, it would not have been possible for the defendants to cause the Strata Documents to be registered until, at least, around this time; that is, some 14 months after the earliest Date for Registration and some 9 months after the latest Date for Registration. Thus, the plaintiffs must show that the delay caused by the defendants’ failure to use reasonable endeavours was in that order.

If you read the judgment you will see that his Honour dismissed all of the plaintiff’s claims that delays were caused by a failure to make reasonable endeavours by the defendants except for in relation to a six-week period in late 2010. He found the defendants’ principal witness “impressive;” expert reports relied on by the plaintiffs failed to hit the mark because they were made in ignorance of what had actually happened.

Quite a lot of the claimed delay went back to a decision taken by the developers some time between 2009 and February 2010 (see [113][114] of the judgment) to defer the resolution of the issue of underground water on the site until excavation was commenced.

Excavation commenced shortly after the last contract was signed.  After that, the developers took an approach which one of their experts described as more “economical.”  Although there were some delays in implementing a solution, the judge did not consider that any of these were the result of a failure by the developers to make reasonable endeavours other than for the six-week period I have already mentioned.

What is perturbing about all of this is that really only one of the other claimed delays arose from any intervening cause – a court case (possibly involving Rockdale Council) which led the developers to shop around for a new approving authority who would calculate the building height on a basis more favourable to them (they had to shave a little off the dimensions of some levels for this but not the whole storey at the top which the Council’s foreshadowed approach would have required). It is perturbing enough that developers can do this but this must be left to another day. Everything else seems to have basically been within the range of what might always have happened.

If that’s the case, the contracts the purchasers signed really were never worth anything much unless the market fell rather than rose because it was always on the cards that the building would take more than the 30 months allowed so that the developers would be able to get out of them and resell the properties.

Why isn’t the offering of such contract a Trade Practices (now Australian Consumer Law) case in itself? Surely if as a developer you put out contracts with a date 30 months in the future you should have some reasonable basis to consider that this date will be able to be met. What changed?

Not, I should add, that the plaintiffs attempted to make such a case. Perhaps the possibility has been squashed on the head by judges at some time in the past. Perhaps the risk was too high that impressive witnesses will be believed when they say they thought they could meet the date. Alternately, it may be that the return of the deposit on rescission is sufficient to preclude any Trade Practices claim, given that these have traditionally (but not always more recently) been limited to reliance rather than expectation interests.

One thing is clear, and that is that if you sign an “off the plan” contract, even with a “reasonable endeavours” clause, you are putting a lot of trust in the developer.

Perhaps it would be possible to have more complicated rescission clauses which provide more nuanced protection for purchasers in the event that even reasonable endeavours by the developer don’t result in completion by the stipulated date. Good luck with that: in a sellers’ market it will be hard to obtain such clauses.

It must be remembered that developers also face risks if projects become more complicated or even merely more protracted. The last thing you want is for your developer to go bust (and it does happen). The references to reports to Westpac in the evidence suggest that the developers had their bankers breathing down their neck.

This is a pie with many fingers in it.   Developers often need off-the-plan purchasers to reassure banks who advance the costs of the project. It may well not be a coincidence that the excavation only began after the off-the-plan sales program was completed: financiers typically require a certain number of such purchasers as a condition of advancing funds for construction.

All you can really hope for is that the developers will care for their reputation when they deal with you.

Postscript:

I’ve since been talking to solicitors and there’s a lot of this about. The more I think about it, the more this seems an area where some kind of consumer protection is necessary. Momentum is building.

PPS:

For the would-be/sometime/off-the-plan purchasers, there is a sting in the tail.

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6 Responses to “It’s all in the contract”

  1. David Tennis Pro Wang Says:

    Well said Counsel!

  2. Anthony Gherghetta Says:

    Alan Jones has now entered the debate about Kaymet Corporation

    https://www.rewindradio.com/2gb/alan-jones-talks-to-nsw-minister-victor-dominello-about-kaymet-corporation-and-development-sunset-clawback-clauses

  3. anon Says:

    its a very hot topic right now in Sydney, I would like to discuss this issue/judgement with you further if its something you would consider.

  4. Dave Says:

    If the developer is the one who initiated the rescind of contracts and they are the ones required to exercise reasonable endeavour, wouldn’t they be the ones left to prove the existence of reasonable endeavour before they are even entitled to cancel the contract?
    These “impressive” builders didn’t need a “formal program” to build a block of 94 apartments. Truly impressive!
    Now, what happens to these 34 families left homeless and broke? Justice!?

    • anon Says:

      my thoughts exactly, although these contracts are have clearly evolved over time (dating back to 1919) from all the learnings of developers like this one where things have gone wrong, they have been able to build on what has gone wrong in the past to protect their (the developers) interests via the addition and variation of clauses over a rather long time. the buyer often also has little say in amendments to the contents of these contracts. they can request but they would likely be refused.

    • marcellous Says:

      Dave, it is difficult to understand how a judge could be so impressed by builders who had kept no records of their own program to complete the building.

      The problem is that the judge may well be quite right that, from the date of the contract on, the purchasers could not prove that the builders had not made all reasonable endeavours.

      To me, on the judge’s findings the developers’ unreasonableness was in entering into contracts where at the outset (and certainly in hindsight) they do not seem to have had a reasonable basis for expecting to be able to complete before the sunset clause kicked in.

      Perhaps they will say that is exactly why they needed the sunset clause. Mind you, if they had said candidly to the buyers “We are putting this clause in because we don’t know for sure when we are going to finish this project and can’t guarantee it will be finished by any particular date. We might just have to give you back your deposit a few years down the track and sell the properties to somebody else when we can finish them” would the purchasers have signed up for it?

      Who knows? And even if the developers never said that, the purchasers’ lawyers may well have warned them of this risk.

      I’m not sure if reversing the onus of proof would have made much difference in this case, except that the developers might have had to put up a better explanation for the delays up-front (though I expect they did put on affidavit evidence) rather than leaving the buyers in a position where they must have had to test on-the-run in cross-examination explanations, some of which may well have only emerged at that point, when, for example, the developers had no records of their own to test what they said against.

      Law is not necessarily justice. This is a good example.

      I have spoken with a few solicitors who act on conveyancing who have said they refuse to act for purchasers if the sunset period is too long, or that a sunset clause should be negotiated to have progress dates where if certain stages are not met the purchasers can get out earlier if they want to. The problem is that even then purchasers may not want to get out because the price at which they purchased was too attractive and they might prefer to hope that the job will be finished and the developer will deliver in what the purchasers believe to be the spirit of the deal. And it will not be beyond the wit of developers to string such a hope along for as long as the purchasers’ contracts are important to them in securing their financiers’ support.

      This is really an area where consumer protection of some sort is necessary because purchasers are vulnerable to brushing aside any warnings they might be given of the risks of such off the plan sunset clauses because they want to believe that they have managed to get their foot on the property ladder. And in a seller’s market they may well be unable to negotiate a better clause. Even after this case people are probably still signing off-the-plan contracts with sunset clauses.

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