Increased costs are not a force majeure event justifying a Queenstown developer’s cancellation of pre-sold residential units, purchasers complain, with developer Dean Franklin looking to resell with price increases of between twenty and thirty per cent. Giving existing purchasers some negotiating leverage, the High Court drove a bus through developers’ imposition of ‘no caveat’ clauses commonly used to limit purchasers’ rights.
The High Court was told of Mr Franklin’s FCL CL Ltd running short of funds to complete its three separate apartment blocks under construction on McAdams Drive at Jacks Point, Queenstown. Construction got underway in early 2021. He said money ran out because of downstream consequences from the covid-19 pandemic: construction delays, supply shortages, delivery delays and price increases for building materials.
As is common, apartments had been sold off the plan, providing comfort to financiers that there will be sufficient sales income to repay loans put up to finance construction. However, the finance committed proved insufficient to cover unbudgeted increased construction costs.
A July 2022 email to purchasers requested a twelve month extension beyond agreed completion date. One year later, purchasers were asked for a further twelve month extension and also asked to pay an increased purchase price.
Purchasers of two units did not agree to the proposed increase: an extra $299,000 on a $795,000 purchase in one case; an extra $247,000 on a $1.3 million purchase for the other.
When told their contracts to buy had been cancelled, they each lodged a caveat against head title to the development to protect their claimed interest as apartment purchasers.
FCL CL Ltd said they had no right to lodge a caveat. Each apartment sale contained a ‘no caveat’ clause, prohibiting purchasers from disrupting the legal process of subdividing title on completion of the project.
Associate judge Paulsen ruled the right to lodge a caveat is a right given by statute and a contract-derived ‘no caveat’ clause cannot override the court’s discretion to decide whether a caveat should be upheld.
Judge Paulsen ruled the purchasers have an arguable case that FCL CL Ltd had no valid grounds to cancel on grounds of force majeure. The caveats remain, with the merits of their case argued in court at a later date.
A force majeure clause in a construction contract operates when performance of the contract according to its terms becomes impossible because of some specified external event.
The purchasers say there has been no external event preventing performance. Rather, the construction contract has become expensive to perform and that is a loss for the developer to carry.
Lynch v. FCL CL Ltd – High Court (9.04.24)
24.087