In the Supreme Court case of Silver Star Fashions Pty Ltd v Dal Broi  NSWSC 1445, the Court was called upon to consider whether a number of off-the-plan contracts could legally be rescinded under a sunset clause. The Court held that it was necessary to show that rescission was just and equitable in the circumstances. In this particular case, the Court held that the actions of Silver Star (the Vendor) were not just and equitable and hence rescission was invalid.
The Vendor entered into off-the-plan contracts with Dal Broi and various other purchasers who were also joined as co-defendants (the Purchasers) for unregistered subdivided lots on Mary Street, Surry Hills. Under clause 54.2, the contract provided that the Vendor must cause Development Activities to be carried out with due expedition. Clause 54.5 also provided a right of rescission if the proposed plan of subdivision was not registered by the sunset date of 31 December 2016. The plan was ultimately registered on 23 January 2018 with the Vendor arguing that external reasons caused the delay. As the plan was registered well after the sunset date, the Vendor sought permission from the Court under s 66ZL of the Conveyancing Act 1919 (NSW) to rescind the contracts.
The court reiterated that to be granted permission to rescind a contract whilst relying on a sunset clause, the applicant must demonstrate rescission is just and equitable in all the circumstances. Hence, the Court examined various questions to determine whether rescission in this particular case was just and equitable.
The Court first considered whether the Vendor breached clause 54.2 and whether this breach caused the delay in registering the strata plan. In this instance, though the Court held that part of the Vendor’s conduct had not aligned with its obligations under 54.2, the available evidence did not indicate that the failures to meet the obligation in 54.2 actively caused the failure of registering the Strata Plan before the sunset date.
Yet, in spite of this, the court did note that the delays caused by the Vendor’s conduct as well as the fact that the Vendor encouraged the Purchasers to rescind in a misleading letter prior to the sunset date was unreasonable and relevant to the question of whether rescission was ‘just and equitable’.
Impact on the purchasers and impact on the vendor
When considering the question of whether rescission would be just and equitable, the Court placed particular focus on the impact that rescission would have on each respective Purchaser. The Court found that the effect of rescission would be the Purchasers losing their ability to purchase a lot that was significantly below current market value and only receive a refund of their deposit (with interest). The Court also placed value on the considerable disappointment that would be caused by being denied the opportunity to complete the purchase of each lot. Justice Darke highlighted that with property ownership being highly valued in society, the fact that many of the Purchasers were first home buyers as well as the fact that property ownership can also afford purchasers a certain societal status – the disappointment of a lost purchase cannot be regarded as a trivial matter.
In contrast, the Court noted that since the expiration of the sunset date, the value of the lots had risen significantly. Whilst the Vendor argued that such an increase in value following the delay in registration and construction was a just and equitable reason to rescind the contracts, the Court ruled otherwise. It was held that whilst the increase in the value of land lots was relevant, it was one of many factors to consider. Furthermore, the Court found that the Vendor was unlikely to incur a cost by continuing with the agreements in contrast to the likely losses in value and disappointment that the Purchasers would incur if rescission was granted.
Therefore, on the balance of relevant factors that the Court considered, it held that rescission would not be just and equitable and hence ruled in favour of the Purchasers.
It is important to note that in a latter judgment with regard to costs, the Court held that the Purchasers were entitled to demand costs from the Vendor on an indemnity basis. This was because the Vendor refused a Calderbank offer of compromise by the Purchasers who offered to pay a 15% uplift charge on the lots in an attempt to settle the proceedings outside of court. The Court found that the Vendor’s refusal of such an offer was unreasonable and hence granted indemnity costs to the Purchasers.
- The expiration of a sunset clause does not automatically allow a right of rescission. The Court will only allow a right to rescind the contract if it is just and equitable in all the circumstances;
- The disappointment and losses faced by Purchasers are relevant to the consideration of whether rescission will be just and equitable. An increase in the value of land following the expiration of a sunset date may not be enough to demonstrate a just and equitable reason to rescind the contract;
- The conduct of all parties in meeting contractual obligations is also of relevance when determining whether rescission will be just and equitable;
- Offers of compromise ought to be considered carefully as unreasonable refusal can result in being the subject of an order to pay indemnity costs.
Partner, HWL Ebsworth