Over the past few months, there has been uncertainty regarding off-the-plan contracts, after the NSW Government announced plans to pass new laws giving purchasers greater consumer protection when buying residential property off-the-plan (including apartments and greenfield subdivisions). The legislation passed Parliament on 13 November and requires official announcement before it commences.
The Conveyancing Legislation Amendment Act 2018 (NSW) is substantially consistent with the amendments previously outlined by the NSW Government, but does not yet include the draft Regulations that will contain key details on how these amendments will operate and what will be required of the property industry.
What's changing with rescission rights in NSW?
The Act seeks to give purchasers buying apartments or residential greenfield lots off-the-plan more clarity and consumer protection by:
- requiring vendors to attach a disclosure statement to off-the-plan contracts;
- notifying the purchaser of any inaccuracies to the disclosure statement at least 21 days before completion; and
- giving purchasers a right to rescind the sale contract, if certain criteria are met.
Developers marketing off-the-plan residential properties for sale without a disclosure statement could face penalties of $1,100 per property.
Notice of changes to Disclosure Statements
At least 21 days before completion, developers will be required to notify purchasers, if the developer becomes aware the disclosure statement:
- was inaccurate in relation to a "material particular" at the time the contract was signed; or
- has become inaccurate in relation to a "material particular" after the contract was signed.
A "material particular" includes a change to:
- the draft plan of subdivision;
- a provision of draft by-laws;
- an easement or covenant; or
- the schedule of finishes in respect of the property,
that will, or is likely to, adversely affect the purchaser's use or enjoyment of the property.
Further matters which constitute 'material particulars' may be prescribed by the Regulations at a later date. The Act does not prescribe any penalties where a developer fails to issue a notice of change.
Due to the subjective nature of what constitutes a "material particular" (explored further below) it is unclear how the obligation for developers to issue notices of changes to material particulars will operate in practice.
Subjective test for rescission
The Act refers to the purchaser's "use or enjoyment" of the property, which introduces a subjective element when assessing whether or not a purchaser is entitled to access the protections under the amended legislation. In other words, it is necessary to enquire what the specific purchaser's use or enjoyment of the relevant property would entail (rather than an "ordinary" purchaser's use and enjoyment of an "ordinary" property), and whether that specific use or enjoyment would be adversely affected by a change to a material particular.
The logic of using this test - and the consumer protection benefit of applying it - can be poignantly illustrated in the case of a person who requires an apartment to be constructed to particular disabled access standards, and has entered into a contract based on these specifications. If the specifications of the apartment change, then the hypothetical purchaser would be materially adversely affected in their use of the property, and could be exposed to considerable costs to reconfigure the property to meet the necessary specifications.
But could this proposed legislation have unintended consequences? While few would argue against a purchaser being entitled to expect that a property will meet disabled access standards on completion if it has been marketed as such - the equity of these amendments becomes less clear as a purchaser's intended use or enjoyment of a property becomes more arbitrary.
Could developers be snookered?
Take instead, an avid snooker player who enters into a contract to purchase an apartment off-the-plan relying on the dimensions of a room being 6.7m x 4.9m - perfectly sized to allow the installation of a tournament size billiards table, and ideal for this hypothetical purchaser's very specific intended use and enjoyment of the property. Under the proposed legislation, if this room is reconfigured during construction to provide a room with dimensions of 5.3m x 5.3m, despite providing the same floor area, this change in dimensions would adversely affect that particular snooker-playing purchaser's ability to use and enjoy the property as they had planned, and the developer may find themselves with a claim for rescission - a claim which would not arise under current laws.
While a contract being snookered over such an outlandish example (really - who can afford a tournament-sized table at home in the Sydney property market?) it is not difficult to imagine any number of potential ways a purchaser might intend to use or enjoy a property based on specific characteristics set out in the disclosure statement, but which might be entirely unknown to the developer until a claim for rescission arises due to one of those characteristics being changed in a manner that affects a particular purchaser - even though most purchasers might be completely unaffected by the change. And in times of market downturn - where property prices may have declined since contracts were originally entered into - cynics might predict that off-the-plan purchasers could begin to express very specific intended uses for properties giving rise to more rescissions on the basis of changes which have occurred throughout construction.
When the rubber hits the road….
Developers (and their financiers) should be aware of the possibility for slight deviations to the property, to potentially give rise to a purchaser asserting that their particular use or enjoyment has been adversely affected, therefore satisfying one of the requirements triggering a right of rescission.
Once a change to a "material particular" under the Disclosure Statement is established, to access a right of rescission, a purchaser would need to assert that they:
- would not have entered into the contract if the purchaser had been aware of the change; and
- would be materially prejudiced by the change.
As the above test goes to the purchaser's state of mind at the time of entering into the contract and not to any objective basis, this is unlikely to provide developers and financiers with much comfort.
How will a purchaser rescind a contract in practice?
The Act does not specify a particular process for claims for rescission. It is not clear whether the onus will be on purchasers to make out a right to rescind, or whether developers will be required to disprove a claim by showing that a change to a material particular would not be prejudicial to a specific purchaser (having regard to that specific purchaser's expected use or enjoyment of the property).
In line with ordinary dispute resolution principles, we expect that the claimant (i.e. a purchaser claiming a right to rescind) will bear the onus of making their case. This would mirror the process applied in Queensland, where similar consumer protection legislation has been in place since 1997. As similar legislation has been in effect in Queensland for more than two decades, there is substantial judicial guidance on what constitutes "material prejudice" to purchasers in the Queensland market. However, whether NSW follows Queensland in relation to how such claims are handled is yet to be seen.
With developers facing the risk that changes arising during construction could give rise to rescissions by purchasers, it's logical that developers may turn to their builders to mitigate this risk by requiring that builders indemnify them for any losses suffered from purchaser rescissions (where it is a change caused by the builder which has resulted in a change constituting a material particular). Apportioning risk in this way is likely to come with added costs to the overall project, and as such, added costs to consumers.
A number of key details which will specify the obligations on developers and which may clarify how the proposed legislation will operate, including the specifics of what material must be provided in Disclosure Statements are yet to be revealed as the Regulations which are to accompany the Act are yet to be released. The NSW Government has flagged further changes to the Conveyancing (Sale of Land) Regulation 2017 pending further consultation with stakeholders.
Developers, financiers and agents dealing with off-the-plan sales should be ready to update their sales contracts as necessary when the legislation comes into effect. Watch this space as we monitor and issue further updates on the progress of this Act.