This was the solution that worked for me. Posting here in case it helps someone.
Gradle version was not correct in project build.gradle file.
I had
classpath 'com.android.tools.build:gradle:1.0.0'
but this needed to be
classpath 'com.android.tools.build:gradle:2.1.0'
Note:
This should be updated to the newest version of gradle tools which can be found here
Android Studio also recommends the latest plugin version.