6/07/2022·4 mins to read

Court provides some clarity on the exercise of mutual sunset clauses

A sunset clause is often an expected provision in a “land and build” or “off the plan” contract. While the building and construction industry has been experiencing increased costs and unexpected delays due to (among other factors) rising labour and material costs, purchasers have been wary of tales of sunset clauses being used by developers to get out of existing fixed-price contracts, during a period of unprecedented housing demand.

In this article we look at a recent High Court decision that provides some guidance as to the limits of the exercise of a sunset clause.

Key takeaway from the Titterton v Dynasty Capital Limited case

Developers need to be aware that sunset clauses cannot necessarily be used as a method of changing a deal to cover unanticipated costs, for example, costs resulting from delays particularly where the developer has contributed to the delay. They should also consider whether any proposed sunset date is realistic and achievable and allow sufficient contingencies.

About the case

Titterton v Dynasty Capital Limited [2022] NZHC 1202

The developer in question asked a purchaser for a $45,000 price increase before putting construction on hold, yet was able to finish other houses being built on adjoining lots within timeframe. These factors contributed to the judge sustaining the purchaser’s caveat on the grounds that the purchaser had a reasonably arguable case to challenge the developer’s purported cancellation of contract - as it appeared the developer had materially contributed to the delay.

The plaintiff, Andrea Titterton (Purchaser), entered into an “off the plan” agreement on 24 October 2020 to buy Lot 19 in Kaiapoi, Canterbury (Lot 19) from Dynasty Capital Limited (Vendor), as a land and building package (Agreement). The Agreement included a sunset clause for the benefit of both parties, allowing either to cancel if the Vendor had not obtained the code compliance certificate (CCC) by 28 February 2022.

Construction did not start until 30 March 2021. In April 2021, the Purchaser was told that the Vendor expected lengthy delays and the revised forecasting was the construction on Lot 19 (along with Lots 20 and 21 which were being built in parallel by the Vendor) would not be completed until June 2022 and possibly later.

On 3 June 2021, the Vendor called the Purchaser and asked for another $45,000 to be paid for Lot 19. The Purchaser was told that the purchasers of Lots 20 and 21 had both agreed to pay similar price increases so that their houses could be completed, otherwise the build could not continue. The Purchaser’s solicitor asked for details of why completion was not expected for another year, and called for an extension of the sunset clause to take into account the delay, among other things.

There was no reply to the Purchaser’s solicitor’s letter. The Purchaser lodged a caveat against the property on 15 July 2021. Meanwhile, Lots 20 and 21 were completed, and CCCs issued in respect of those lots in September 2021.

On 1 March 2022, the Vendor sought to cancel the Agreement under the sunset clause. The Purchaser, in applying to sustain her caveat, disputed the Vendor’s right to cancel on the basis that the Vendor had an obligation to take reasonable steps to complete the construction of the house and, having failed to do so, could not rely on the sunset clause as that would represent it relying on and benefiting from its own breach of contract. The judge agreed that the issue was the validity of the vendor’s cancellation of the Agreement, and that the Purchaser needed to establish an arguable case for her claim that the Agreement remained on foot in order to sustain her caveat.

There was a provision in the further terms of sale attached to the Agreement that the Vendor “shall complete the construction and finishing of the dwelling on the property in a proper and workmanlike manner in accordance with the plans and specifications attached to this Agreement”. The Vendor accepted its obligation to undertake the build with reasonable diligence. However the parties disagreed whether there could be an implied term obliging the Vendor to complete the property within a reasonable period of time.

Based on the evidence submitted, the judge found that the Purchaser had established a reasonably arguable case that the Vendor’s contribution to the delay in obtaining CCC was “material”, ie “a substantial and operating” cause of the delay, regardless of whether the Purchaser’s actions contributed to some extent to the delay. Given that Lots 20 and 21 were completed well ahead of the sunset date, from a construction point of view there was no reason why Lot 19 could not have also been finished on time.

The completed house on Lot 19 is currently tenanted, and the caveat was sustained so the parties could pursue the dispute resolution mechanism in the Agreement. Given the amount of the disputed price increase and the costs of going through the Court process to resolve it, the case may not proceed to trial, but the approach taken by the Court is relevant for developers and potential purchasers alike.

What does this mean?

In a similar vein to a recent Supreme Court decision in Melco Property Holdings (NZ) 2012 Limited v Anthony John Hall [2022] NZSC [60], where the Court relied on the principle that no one should “take advantage of the existence of a state of things which he himself produced” (in relation to a purchaser’s inability to satisfy its due diligence condition when the vendor failed to facilitate access to the property), the High Court case shows that the Courts could be willing to imply into a contract the requirement for a developer to use reasonable endeavours to complete construction within a reasonable period of time, when assessing whether the developer should be permitted to cancel a contract under a sunset clause for the benefit of both parties.

If you would like to discuss the implications of the case on the use of a sunset clause, or other aspects of your contract to buy or sell property, please get in touch with one of our team.

Special thanks to Kitty Lin and Sarah Heslin for their assistance in writing this article.