The new laws relating to a vendor’s ability to rescind a contract have again been tested in the Supreme Court. This time in relation to a matter where a vendor sought to rescind without a court order, simply by giving a notice stating the contract is rescinded.
• Sunset Date laws for residential properties: s 66ZL
As many people are aware, the NSW Government brought in new laws in November 2015 which govern a vendor’s ability to rescind an off-the-plan residential land contract under a sunset date clause.
The new laws (found at s 66ZL of the Conveyancing Act 1919 NSW) provide that there are only three methods available to a vendor.
The three methods are as follows:
(a) s66ZL(4) Notice with consent of the Purchaser. This method involves the Vendor serving a notice in accordance with s66ZL(4) of the legislation indicating the vendor wishes to rescind the contract in 28 days’ time, and the reason for the delay in creating the subject lot. The resission will then, and only then, be effective if the Purchaser agrees to the rescission after a ’66ZL(4)’ Notice is given by the vendor.
(b) Court Order. Where the Vendor has not obtained the purchaser’s consent to rescind in accordance with method 1, the Vendor can seek an order of the Supreme Court rescinding the contract. The Supreme Court can only allow a vendor to rescind where to do so would be “just and equitable in all the circumstances” [s 66ZL(6)]. A list of certain considerations for the court is also set out in the legislation.
For a further explanation, see this author’s previous article:
(c) Regulations. The Regulations may from time to time specify other grounds/ways the vendor can rescind.
It is that first method that this article, and the case of Klein v McMahon, are concerned with.
• Procedures required by s66ZL(4)
Subsection (4) of the relevant section imports the following term into all off the plan residential contracts:
“a vendor who is proposing to rescind the contract under a sunset clause must serve each purchaser under the contract notice in writing at least 28 days before the proposed rescission that specifies why the vendor is proposing to rescind the contract and the reason for the delay in creating the subject lot.”
What happens if the vendor fails to serve the 28-day notice setting out the reasons for the delay in creating the subject lot, which the purchaser accepts? This was the very issue considered in Klein v McMahon (2018) NSW ConvR ¶56-391.
• Klein v McMahon (2018) NSW ConvR ¶56-391
Mr Klein entered into a contract to purchase, from the McMahons, Lot 1 in a two-lot residential subdivision in Picton for $350,000.
The Date of Contract was 2 July 2016, and the Sunset Date was 6 months after (i.e. 2 January 2016).
The plan of subdivision was not registered by the Sunset Date. Council only issued their sub-division certificate on 17 August 2016 and the plan of subdivision was finally accepted for registration on 23 December 2016.
Before the plan was registered, the McMahons’ lawyer issued a “Notice of Rescission” on Mr Klein dated and served 25 August 2016. The McMahons’ Lawyer’s Notice did not comply with s 66ZL(4), in that is sought to rescind the contract with immediate effect rather than provide 28 days’ notice. Nor did it set out the reasons for the delay in creating the subject lot. Nor could it have been valid until the purchaser accepted.
Mr Klein’s conveyancer replied confirming the Mr Klein did not agree to the rescission, and quite rightly pointed out that the notice did not comply with the procedures set out in s 66ZL(4).
[Side note: Mr Klein’s conveyancer did arguably make a mistake by further then demanding for half of the deposit (released unconditionally the vendor under clause 7 of the contract) to be returned by the agent. The McMahon’s lawyer then sought to jump on this as a “repudiation of contract” and terminate the contract on that basis. Ultimately this claim was abandoned by the McMahons, and His Honour Darke J commented this was the correct thing to do as the demand did not quite amount to repudiation].
Mr Klein then engaged a lawyer. The lawyer responded to the McMahons’ lawyer rejecting the Notice of Termination relating to the reclaiming of the deposit, and further confirming that Mr Klein still rejected the Notice of Rescission relating to the Sunset Date.
It was the McMahons’ turn to change representation. Their new lawyer issued a second Notice of Rescission. This notice was very similar to the first notice. It purported to operate with immediate effect and did not give the 28-day notice. Nor were the other requirements of s 66ZL(4) [reasons for the lot not being created and the purchaser’s acceptance of the rescission notice] satisfied.
Mr Klein commenced proceedings in the Supreme Court for an order for specific performance of the contract.
In the Defence filed for the McMahons, the ground that the contract had been terminated after Mr Klein had asked the half deposit to be returned to the agent was abandoned. But the McMahons pressed that the contract was rescinded either on the first Notice of Rescission or the second.
• Did the vendor validly rescind?
Put simply, both attempted Notices of Rescission were rejected by the court.
Both such Notices neither gave 28 days’ notice, nor set out the reasons the subject lot was not created in time, nor did the purchaser give their consent to the rescission.
His Honour Darke J, with respect to the vendor, had no trouble in dismissing these rescission notices in as straight forward a manner as one usually sees in a Supreme Court matter.
With the vendor failing to satisfy that method of rescission, and in the absence of a Court Order obtained by the vendor to rescind the contract or any current Regulation allowing the Vendor to rescind, His Honour held that the contract was accordingly on foot.
In the circumstances, an order for specific performance was made in favour of the purchaser, meaning the vendor had to complete the contract. The purchaser was also given a costs order.
This case serves as a useful reminder of how the courts will apply the Sunset Date legislation for the purpose Parliament intended, and also of how the legislation is clear in setting out the only ways that a vendor can rescind under a residential sunset date clause.
This case is further a useful reminder that s66ZL applies to all residential off-the-plan matters; whether they be a 60 storey tower or a two-lot subdivision.
Vendors need to take great care in reading and understanding the legislation, otherwise they may end up on the losing side of a Supreme Court matter should they attempt to rescind in a manner not permitted by the legislation. Purchasers in turn should be aware of their rights.
For expert property advice, contact Maclarens Lawyers on 9682 3777.