Do we require greater protection in South Australia?

By Erin Freebairn & Jennifer Novak

Sunset date clauses in “off-the-plan” contracts are intended to offer security and protection for both developers and buyers, but there has been increasing misuse of these clauses, whereby developers unreasonably terminate contracts during the construction process. This is particularly problematic where developers are taking advantage of buyers and the growing buoyancy of the property market by terminating off-the-plan contracts before the sunset date to on-sell at a higher price.

In response to these concerns, NSW, VIC and, more recently, QLD have introduced legislation restricting developers from invoking sunset clauses to terminate off-the-plan contracts. If a developer seeks to terminate a contract, the onus is on the developer to obtain written consent from the buyer to proceed. The developer must explain as to why the project cannot be completed. If the buyer does not accept the reason for the delay and subsequent termination, the developer can seek an order from the Supreme Court permitting the rescission under the sunset clause.

These new changes are intended to strengthen protection for buyers in the current challenging market.

What is a sunset date?

Buying off-the-plan is when a buyer enters into a contract to acquire property before the completion or construction of the dwelling and/or registration of the plan of subdivision. A sunset date is typically the maximum time permitted in the contract by which the developer must complete the project. If the project is not completed by the sunset date, then either party can usually terminate the contract without penalty and the deposit refunded to the buyer.

As a result, off-the-plan contracts are typically completed before the sunset date to ensure a buyer does not terminate during the development. However, the sunset date is also generally conservative, allowing additional time for unforeseen delays and to appease the risk requirements of financiers.

Allowing for this additional time as a safety mechanism, sunset dates can be quite some time after the exchange of contracts, anywhere from 2 to 5 years. Interestingly, the property’s price is locked in at the time of contract and remains the same until settlement. This is irrespective of any changes in the market.

Although this is often a great result for a buyer, in the current market where the cost to build has continued to rise as market values rise, developers can be faced with projects that no longer make sufficient profit or, in some cases, may make a loss. In such cases, developers may seek a trigger to vary contractual terms (and increase price) or terminate the contract.

Developers taking this action would seek to protect themselves from those rising costs with builders (which they often cannot get out of) and take advantage of the new market value of their property. Effectively achieving a revised price increases revenues to offset the increased expense, returning the developer to the original profit forecasts intended. This is vital for a developer.
However, as the team at Commercial and Legal has personally experienced, where developers do have this legitimate option and exercise it, this creates disappointment for innocent buyers who have been waiting patiently for the completion of their properties, and in some cases, buyers may lose out on the recent homebuilder grants or, given the rise in market value, struggle to get back into the property market. It is natural to expect those buyers to dispute a developer’s rights to terminate their contract, and they often will try, however from experience in most cases the contract favours the developer.

What could sunset date clause reform mean for buyers and developers in South Australia?

If South Australia introduces legislation similar to other Australian jurisdictions, innocent buyers will be afforded greater protection when buying off-the-plan in an already uncertain property market.

Nevertheless, whilst legislation introduced in other jurisdictions aims to protect buyers, bringing these reforms to South Australia could potentially cause delays and increase costs for developers.

From a developer’s perspective, the flexibility created in off-the-plan contracts will be significantly reduced. In our experience, sunset clauses are typically drafted broadly to allow the developer to invoke the sunset clause under any circumstances. For example, if a development application is refused, labour shortages or sufficient funding cannot be procured. While the buyer retains the right to terminate the contract under a sunset clause, developers’ rights are restricted by requiring the buyer’s consent.

If South Australia considers legislation reform, developers must ensure the development is feasible within the sunset timeframe to avoid substantial costs and risks. If the development cannot proceed, the developers will have more difficulty relying upon the sunset clause under the contract.

While there have been concerns about the misuse of sunset clauses, there is an argument that South Australia does not need reform proposals. According to Chief Executive Liam Golding from the Urban Development Institute of South Australia (UDISA), “sunset clauses protect both purchase and the builder, and for a long time, sunset clauses have, on the whole, been working well”.

The South Australian Government’s focus is to increase the supply of new housing, and the UDISA states that a “framework of certainty and stability” is required, which is not achievable with change to South Australian legislation.

Key Points

• Government Stance: The South Australian government’s position on off-the-plan contracts remains undisclosed, creating uncertainty compared to other states.
• Balancing Act: Striking the right balance between the varied rights of buyers and developers is crucial in the current market.
• Developer’s Termination Option: We advocate retaining the developer’s option to terminate contracts if sunset dates are unachievable to avoid potential insolvency risks.
• Public Interest: Eliminating termination options solely for profit raises concerns; a delicate balance is needed to protect developers and public interests.
• Buyer Awareness: Buyers should thoroughly understand contract sunset dates to navigate implications effectively.
• Developer Preparedness: Developers should factor in the possibility of future legislative changes, enhancing resilience in planning and decision-making.
• Collective Vigilance: Stakeholders are urged to stay informed and adaptable, fostering a collaborative understanding of off-the-plan contract dynamics in South Australia.