back to news

The Sunset Clause: Failure to meet Notice requirements are fatal

CaseFlash 20 November 2017

In Klein v McMahon [2017] NSWSC 1531, Klein (the Purchaser) sought an order of specific performance against Mr and Mrs McMahon (the Vendors) who had attempted to rescind the contract in accordance with the terms of certain provisions within the agreement but without regard to s66ZL of the Conveyancing Act (‘the Act’). The Court ruled in favour of the Purchaser and highlighted that the Vendor had not satisfied their obligations under s66ZL and were thus ordered to specifically perform the contract for the sale of land and complete the sale of the land to the Purchaser.

Fact Summary

The Purchaser entered into an agreement on 2 July 2015 to purchase a vacant lot of residential land in an unregistered plan of subdivision in Picton. The agreement was signed by the Purchaser and signed by one of the vendors being the Vendor’s wife (Mrs McMahon) who signed for herself and on behalf of her husband. The contract employed the 2005 edition of the Law Society/Real Estate Institute standard form together with numerous special conditions. Relevantly, Clause 13 of the contract provided that the Vendors must register the subdivision plan within 6 months from the date of the signed contract. Failure to do so would provide both parties with a right to rescind the contract. Printed Clause 28 of the standard provisions in the Contract further provided that the vendor must do everything reasonable to have the plan registered within 6 months after the contract date. Failure to do everything reasonable would prevent the Vendors from exercising a right to rescind the contract.

On 25 August 2016, the Vendors’ solicitors sent the Purchaser’s Conveyancer a Notice of Rescission of contract as per Clause 13 of the contract. The Notice of Rescission highlighted that the contract was contingent on registration within 6 months of the date of the contract. Given the subdivision plan was not registered within 6 months of the date of contract, the Vendor was exercising his right to rescind the contract.

The Purchaser rejected this rescission by arguing that the Vendors were in breach of s66ZL of the Act.

The Vendors insisted on their interpretation of the contract and argued their rescission was valid and further asserted that s 66ZL had no application to the contact. Consequently, the Purchaser lodged a caveat over the property and brought proceedings to the Supreme Court seeking specific performance of the sale.

Agents and Enforceable Contracts

The Vendors argued that because Mrs McMahon had signed the contract on her husband’s behalf without his knowledge, the contract was not valid. However, whilst the Court accepted that the Vendor did not in fact sign the contract, he conceded that his wife told him that she had signed his name on the contract. The Vendors further conceded that he left everything of a financial or business nature to his wife and agreed that his wife was acting as his representative throughout the whole transaction of the sale. Yet the Vendors maintained that he did not give permission for his wife to sign the deal.

The Court highlighted that this relationship was evidence of a principal-agent relationship whereby the Vendor’s wife was authorised to act for the Vendor in effecting the sale of the land. Additionally, Mr McMahon conceded that he later, at the very least, suspected that the sale had been entered into and his behaviour indicated he was content for the sale to proceed. Thus the Court held that Mrs McMahon had the approval of Mr McMahon and was placed in a position of a representative of the Vendors for the purposes of the transaction. Thus the signature was binding on the Vendors and the contract was deemed valid.

Interpreting Section 66ZL

Section 66ZL provides that if a Vendor opts to rescind the contract by applying a sunset clause, it may only do so if it provides the purchaser with a notice in writing at least 28 days prior to the rescission including reasons for the rescission. Additionally, the section requires the purchaser to consent to the rescission in writing or requires the Vendor to seek an order from the Supreme Court permitting rescission.

The Court held that Clause 13 was a sunset date given that it provided for a right of rescission for the registration of a plan by a certain date. The Court further noted that the Vendors at no point served a notice that gave 28 days’ notice, nor did they seek the Purchaser’s permission in writing and nor did they seek an order from the Court to rescind the contract.

Given that there was no valid rescission, the Court ruled that the Purchaser was correct in arguing the contract still to be on foot and given no matters were realised that ought to bar an order of specific performance, such an order was made accordingly. The Court also ordered the Vendors to pay the legal costs of the Purchaser.

Lessons

  1. The many requirements, including the 28 days’ notice under s 66ZL of the Act, must be met in order to ensure rescission of a contract for the registration of an “off the plan” residential property is valid.
  2. If an agency relationship exists, acts done within the agent’s scope will be binding on the principal.

Gary Newton, Partner
Sydney

Khushaal Vyas, Law Clerk 
Sydney

CaseFlash 20 November 2017
back to news