Case law updates – The sunset clause: Failure to meet notice requirements are fatal

In Klein v McMahon (2017) NSWSC 1531, Klein (the Purchaser) sought an order of specific performance against Mr and Mrs McMahon (the Vendors). The Vendors had attempted to rescind the contract in accordance with the terms of certain provisions within the agreement but without regard to Section 66ZL 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. The Vendors were ordered to specifically perform the contract for the sale of land and complete the sale of the land to the Purchaser.

Factual Background

The Purchaser entered into an agreement on 2 July 2015 to purchase a vacant lot of residential land in an unregistered plan of a subdivision in Picton. The agreement was signed by the Purchaser and one of the Vendors (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 six months of the date of the signed contract and that their failure to do so would provide both parties with a right to rescind the contract. Printed Clause 28 of the standard provisions of the contract further provided that the Vendor must do everything reasonable to have the plan registered within six months of 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 as per Clause 13 of the contract. The Notice of Rescission highlighted that the contract was contingent on registration of the subdivision plan within six months of the contract date and that, since the subdivision plan had not been duly registered, the Vendors were exercising their right to rescind the contract.

The Purchaser rejected this rescission, arguing that the Vendors were in breach of s66ZL of the Act. The Vendors insisted on their interpretation of the contract, arguing that the rescission was valid and further asserting that s66ZL had no application to the contract. 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 the contract was not valid because Mrs McMahon had signed it on her husband’s behalf without his knowledge. However, while the Court accepted that Mr McMahon had not signed the contract, Mr McMahon himself conceded that his wife had later told him that she had signed on his behalf. The Vendors further conceded that Mr McMahon left all matters of a financial or business nature to Mrs McMahon, and agreed that she had acted as his representative throughout this sales transaction. The Vendors maintained, however, that Mr McMahon had not given specific permission to his wife to sign on his behalf on this occasion.

The Court highlighted that the McMahons’ conduct was evidence of a principal-agent relationship whereby one of the Vendors was authorised to act for the other in effecting the sale of the land. Additionally, Mr McMahon conceded that he, later, had at least suspected that the sale had been entered into, his subsequent behaviour indicating that he was content for the sale to proceed. Thus, the Court held that Mrs McMahon had Mr McMahon’s approval to act and was therefore the representative of the Vendors for the purposes of the transaction. Consequently, Mrs McMahon’s signature was deemed binding on both the Vendors and the contract 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, s66ZL requires that the purchaser consent to the rescission in writing or that the Vendor seek an order from the Supreme Court permitting the 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 the required 28 days’ notice, nor did they seek the Purchaser’s consent in writing or seek an order from the Supreme Court to rescind the contract.

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

Lessons for Conveyancers

The Act’s many requirements, including that of providing 28 days’ notice under s66ZL, must be met in order to ensure that rescission of a contract for the registration of an “off the plan” residential property is valid.

If an agency relationship exists, acts performed within the agent’s scope will be binding on the principal.

This article was written by Gary Newton, Partner and Khushaal Vyas, Law Clerk at HWL Ebsworth.