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Sunset clause in subdivision sale agreement passes reasonable person test

05 June 2020

The subdivision process can take many months and even years to complete. Because of the time involved and potential for unexpected issues and delays, an agreement for sale and purchase of a property being subdivided should have additional clauses for the protection of both the developer and the buyer. One of these protections is a “sunset clause”. The sunset clause says that, if the titles do not issue with an agreed time, then either the developer or the purchaser may cancel the agreement. The sunset clause helps ensure the developer tries to complete a subdivision within the stated time frame while allowing for some flexibility if there are unexpected delays. Purchasers have certainty in that they are only committed to the agreement for the time frame agreed. Despite the inclusion of a sunset clause in the agreement, issues still can, and do, arise. A recent case of Ling V Northwest Developments Limited [2019] NZCA 630 is an example.

Ling v Northwest Developments Limited

In the Ling case, Mr Ling (the purchaser) signed an agreement to purchase a property in a subdivision being undertaken by Northwest (the developer).  The agreement contained the usual subdivision clauses including a sunset clause. The sunset clause provided for titles to issue by 31 March 2018. It also provided the developer (in its sole discretion) could extend the sunset date for another six months if it had submitted the survey plan to LINZ for approval if titles had not issued by that date.

By February 2018 Northwest had completed most of the steps in the subdivision process, including the Council’s approval of the plan. However, Northwest struck issues – it needed some neighbours’ consents and it needed to amend its plan to take into account a neighbouring subdivision. The amended plan did not change the subdivision or the lot being sold to Mr Ling. As a precautionary measure Northwest extended the sunset date by six months.

In August 2018 Northwest advised Mr Ling they had lodged their documents with LINZ to obtain the new titles. Mr Ling cancelled the agreement. Northwest obtained an order for “specific performance” i.e. a Court order requiring him to complete the agreement. Mr Ling appealed that order. He argued he could cancel the agreement because the plan that was finally lodged to obtain the new titles was not the same plan that had been lodged before 31 March 2018.

The Court interpreted the sunset clause in the agreement on the following principles: what do the words survey plan “convey to a reasonable person having all relevant background knowledge reasonably available at the time of the agreement”? This enquiry was to be undertaken “against the overall context of the agreement”. Considering these principles, the terms of the agreement as a whole, the subdivision process and the purpose of the sunset clause the Court found a reasonable person would “unquestionably” treat the amended plan as being the survey plan for the purposes of the sunset clause. Mr Ling’s appeal failed. As a result the order for specific performance of the agreement by Mr Ling stands.

The devil can be in the detail

Particular care should be taken with the terms of the agreement when selling a subdivided property or buying a property before the title has issued.  Complications can arise – as Northwest and Ling found out to their detriment. This is definitely an agreement which requires the advice of an experienced property lawyer.

 

Barbara McDermott is a Partner in the Private Client Team at Norris Ward McKinnon. You can contact Barbara at barbara.mcdermott@nwm.co.nz

Barbara McDermott