Off-the-plan sales in Victoria now in jeopardy
A landmark decision of the Victorian Supreme Court handed down earlier this month has the potential to threaten existing off-the-plan property developments in Victoria. The decision is likely to lead to financiers reconsidering their position on lending for off-the-plan developments.
Background
In Clifford v Solid Investments Australia Pty Ltd [2009] VSC 223, two purchasers of luxury apartments in a development in Geelong sought to rescind their off-the-plan contracts of sale on the basis that the contracts did not comply with section 9AE of the Sale of Land Act 1962 (Vic) (“Act”).
Section 9AE of the Act is concerned with the rescission of an off-the-plan contract of sale. In particular, section 9AE(2) confers a power of rescission on a purchaser if the plan of subdivision is not registered within 18 months after the date that the contract of sale is entered into, or, if the contract of sale specifies another period, before the end of that specified period (commonly referred to as the “Plan Registration Date”).
As is the customary practice for off-the-plan contracts of sale in Victoria (albeit a practice that will now undoubtedly change), each of the contracts of sale in the Clifford case entitled the vendor to extend the Plan Registration Date if registration of the plan of subdivision was delayed by specified causes. The vendor issued three separate notices to the purchasers extending the Plan Registration Date. The purchasers gave notice rescinding the contracts of sale, relying on section 9AE of the Act.
The decision
Justice Bongiorno held that the purpose of section 9AE of the Act was to create certainty for purchasers of lots on an unregistered plan of subdivision. Accordingly, contractual provisions which entitled the Plan Registration Date to be extended beyond the period either specified in the Act or in a contract of sale, do not comply with section 9AE of the Act. His Honour, in reaching this decision, relied heavily on his interpretation of the purpose behind section 9AE: namely, to provide purchasers in off-the-plan contracts of sale with certainty as to the date upon which the purchaser would be entitled to exercise his or her right to rescind if the plan of subdivision had not been registered. Without such certainty, vendors would be able to transfer the risk of certain delays in completion of the project to purchasers.
The Court held that the purchasers were entitled to rescind the contracts of sale and to receive a refund of the deposits paid.
Consequences of the decision
Off-the-plan contracts of sale in Victoria will no longer be able to provide the Vendor with a right to extend the Plan Registration Date if the plan of subdivision is not registered by the date specified in the contract of sale (or 18 months after the date of the contract of sale if no such date is specified in the contract). Given that delays in construction projects are common place, often for reasons beyond the control of the vendor, it is likely that the periods for registration of plans of subdivision specified in off-the-plan contracts of sale will be extended significantly beyond the statutory period of 18 months. However, purchasers, particularly in a buyer friendly market, will be unlikely to sign up to contracts of sale which could not settle for a number of years.
The Clifford decision is also likely to lead to financiers imposing much stricter requirements on developers in terms of completion of developments given that finance for off-the-plan developments usually requires a minimum level of pre-sales. If those pre-sales can be easily terminated by purchasers, financiers may, particularly in times of economic uncertainty such as at present, consider that lending on off-the-plan developments is too risky. At the very least, the cost of finance for such developments may increase because of this decision.
One of the attractions of off-the-plan sales for purchasers is the savings in stamp duty. However, if contracts of sale are rescinded, and substantial works have been completed between the date of the original sale and any resale, those stamp duties savings will not be available on any resale.
We expect that developers with current off-the-plan developments in Victoria will now be seeking advice as to the ability of purchasers to terminate their contracts of sale.
If you would like further information about the effects of this decision, please contact a member of our Property Services Team.
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This article was produced by Herbert Geer. It is intended to provide general information in summary form on legal issues. The contents do not constitute legal advice and should not be relied upon as such.