Material changes to plan of subdivision - off-the-plan contracts and rescission risks for developers

In brief - Purchasers lawfully rescind contracts based on material changes to plan of subdivision

In Victoria, there has long been debate about what amendments to a plan of subdivision will "materially affect" a lot and entitle a purchaser to rescind an off-the plan contract pursuant to section 9AC(2) of the Sale of Land Act 1962 (Vic) (Act). With no definitive answer on what constitutes a "material change", this issue has recently been considered again by the Victorian Supreme Court in Burger & Ors v Longboat Holdings Group2 Pty Ltd [2021] VSC 469.

Amendments to plan of subdivision

In this case, the Court considered whether the following changes to a plan of subdivision materially affected purchasers' lots:

• amendments to the boundaries of the apartment lots, resulting in a reduction in size and altered shape of the master bedroom;

• a reduction in the size of the light court, resulting in the reduction of available natural light in the master bedrooms;

• a change in size and location of one of the assigned car park spaces;

• a decrease in the size of one car park lot; and

• a reduction in the area of common property 1 by the creation of common property 2 and a reserve to be vested in Council.

On the basis of these amendments, the purchasers of two lots purported to rescind their contracts but the rescissions were not accepted by the developer. 

The purchasers issued proceedings against the developer pursuant to section 49(1) of the Property Law Act 1958 (Vic), seeking declarations that they had lawfully rescinded their contracts under section 9AC(2) of the Act.

Were they amendments "materially affecting" a lot and does size alone matter?

In coming to its decision, the Court did not accept the developer's arguments that:

• there was only a "modest change" to the size of the master bedroom; and 

• the total reduction in the size of the lots of 4.39% was less than a 5% reduction in size, which was "generally regarded as tolerable" (relying on the decision in Birch v Robek [2014] VCC 68; Buckley v Drk (Unreported, Supreme Court of Victoria, Teague J, 30 April 1993) in which the Court had considered "that 5% was a material cut off point for [a reduction in size to] a suburban allotment").

Instead, the Court took into account not only the reduction in the size of the bedroom but also the negative effects that the size reduction would have on "the utility of the bedroom" and the "amount and the distribution of natural light into the master bedroom".

Similarly, the Court accepted that the reduction in the size of the northern boundary of the light court, when combined with the changes to the master bedroom, would likely affect the flow of light into the bedroom, constituting a change that had materially affected the lots. 

The Court also accepted that:

• the amendment to the plan of subdivision to include a new small roof terrace (resulting in a reduction in the area of Common Property 1 by the creation of Common Property 2 for the benefit of the members of Owners Corporations 2, which the purchasers would not be members of) was a material change, as the purchasers had suffered a loss of any rights to that area, including to any usage of the area should it no longer be inaccessible, which had become the case; and

• the "lack of exclusivity" resulting from the creation of the Council reserve (which land had previously been part of Common Property 1), materially affected the purchasers' lots.

The Court did not, however, accept the purchasers' evidence in relation to the changes to the car park spaces and decided that those changes were not material.

The Court ultimately concluded that:

• individually and in combination, the changes to the bedroom size and configuration, the creation of the Council reserve and the creation of Common Property 2; and

• the light court changes in combination with the bedroom size and configuration changes,

materially affected the lots and the purchasers were entitled to declarations that they had lawfully rescinded their contracts.

Developers should consider risks of changes to plans of subdivision

Developers need to be aware of what may constitute material changes to plans of subdivision or run the risk of valid rescissions by purchasers pursuant to section 9AC(2) of the Act.

The plans of subdivision that developers include in off-the-plan contracts should be finalised as much as possible and any subsequent changes should be minimised to avoid these rescission risks.

They should carefully consider any changes to plans of subdivision and ensure that they obtain legal advice to mitigate any potential risks of rescission by a purchaser as a result of proposed changes to the plan of subdivision.

Implications for development financing arrangements 

Since material changes to a plan of subdivision can entitle a purchaser to lawfully rescind their off-the-plan contract, any such rescission can impact a developer's presales and financing arrangements, resulting in reductions to total presales amounts, as well as potential breaches of conditions in development facility agreements.

Developers should be aware of their financier's conditions in relation to purchasers' rights to rescind contracts and obtain legal advice when entering into financing arrangements which are conditional upon a development's presales.