Terminating off the plan contracts and bargain damages

Articles, Procedure + Litigation

In the judgment of Scott v Ennis-Oakes [2019] NSWSC 1257, the Supreme Court of New South Wales considered a claim for loss of bargain damages in the context of an off-the-plan contract where a vendor purports to rescind the contract pursuant to a “sunset clause” and operation of 66ZL of the Conveyancing Act 1919 (NSW) (Act).

Section 66ZL

When a contract is for the purchase of a lot which is not yet created (also known as an off-the-plan contract), the contract will often feature a clause commonly referred to as a “sunset clause” which allows either party to rescind the contract if the subject lot is not registered by the date specified in the clause.

Section 66ZL of the Act restricts a vendor’s right to rescind an off-the-plan contract under a sunset clause if the lot has not been created by the sunset date. In summary, section 66ZL of the Act provides that a vendor may only rescind an off-the-plan contract if:

  1. the purchaser consents to the rescission of the contract; or
  2. the vendor has obtained an order from the Supreme Court under section 66ZL allowing them to rescind the contract under the sunset clause; or
  3. the regulations otherwise permit the vendor to rescind the contract under the sunset clause.

Irrespective of the wording, the sunset clause is to be read in accordance with section 66ZL of the Act. Where contracts used to provide that either party could terminate, the introduction of section 66ZL of the Act has shifted the onus to the vendor to commence proceedings and make an application to the Court to permit the rescission of a contract. When making an order, the Court must be satisfied that it is just and equitable to rescind the contract.

The Facts

Ms Ennis-Oakes, as vendor (Vendor), and Mr and Mrs Scott, as purchaser (Purchaser), entered into a contract for sale on 9 June 2015 (Contract) for the sale of an off-the-plan property (Property) for $750,000. The Property was part of a proposed subdivision of a parcel of land.

Completion of the Contract was to occur 42 days from the date of the Contract or 21 days of receipt by the Purchaser’s solicitor of notice of registration of the plan of subdivision, whichever was the later. If registration was not effected within 12 months, the Contract provided that either party could terminate.

The plan of subdivision was not registered within 12 months and the Vendor, by her conveyancer, sent a letter to the Purchaser on 12 April 2017 requesting the consent of the Purchaser to rescind the contract. The Purchaser did not consent to the proposed rescission, drawing attention to the provisions of section 66ZL of the Act in their response.

On 14 June 2017, solicitors for the Vendor sent a letter to the Purchaser’s solicitors stating that the Vendor had complied with the Contract, done everything reasonable to register the plan within the 12 months stipulated by the Contract, and had been unable to achieve registration due to delay and untenable conditions imposed by the local council.

On 10 July 2017, the the Purchaser’s solicitor sent a letter to the Vendor’s solicitor stating that the Contract was still on foot and requiring the Vendor to complete. The Vendor’s solicitor responded stating their client did not accept that the Contract was on foot and made arrangements for return of the deposit.

The Purchaser commenced proceedings seeking an order for specific performance of the Contract. Following commencement of the proceedings, the Vendor sent a notice to the Purchaser purporting to rescind the Contract. The Purchaser filed an Amended Statement of Claim in the proceedings seeking, in the alternative to specific performance, damages for breaches of the Contract.

The Purchaser subsequently accepted the notice rescinding the Contract was valid and abandoned their claim for specific performance.

Issues at hearing

The Purchaser contended that the Vendor repudiated the Contract by failure to register the plan of subdivision (therefore being in breach of the Contract) and sought loss of bargain damages.

The Vendor submitted that the Purchaser’s claim for loss of bargain damages could only have arisen in circumstances where a breach of the Contract or repudiation is found and the Purchaser terminated the contract on such grounds prior to the rescission of the contract by the Vendor.

The Purchaser maintained that loss of bargain damages can be claimed if the claimant has not terminated the contract for breach of repudiation as it was enough that the Contract has come to an end.

What the Court found

The Court found that there was no proper basis for the Purchaser to claim loss of bargain damages, relying on the principle enunciated by the High Court of Australia in Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444.

The Court held:

  • in order for a party to claim loss of bargain damages, there must first be a termination of the contract for repudiation or breach.
  • the failure by the defendant to obtain the consent of the Plaintiff to rescind the contract, prior to serving the notice to rescind, was wrongful and evinced an intention to no longer be bound by the contract.
  • as the plaintiff did not elect to accept the repudiation, instead affirming the contract and commencing proceedings for specific performance, the plaintiff’s right to terminate the contract for breach or repudiation was lost, including any loss of bargain damages which flowed.

The Court dismissed the proceedings and ordered that the plaintiffs pay the defendant’s costs of the proceedings.

 Key Takeaways

Whether you’re a vendor, purchaser, developer or someone game enough to be in the property scene, it is always important that you understand the application of section 66ZL of the Act, the material and practical implications of rescinding a contract (especially an off-the-plan contract) or terminating a contract.

As the Court highlighted in this case, his Honour found that the defendant repudiated the contract, which in turn, had the plaintiffs accepted the repudiation and terminate in a timely manner, the plaintiffs would have received an order for damages. Instead, by the plaintiffs’ own conduct, the plaintiffs lost the property and had an adverse cost order made against them for their troubles.

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