19 April 2022

What’s the purpose of a sunset clause?

Danielle Redford

There are all kinds of terms that are part of the property purchasing landscape. For those who are new to the market, learning the lingo is a crucial part of understanding contracts, deal terms, and making decisions in the heat of a rapidly moving market.

Before you set out to pick up a new property, it pays to know the ins and outs of what may face you in a purchase contract. This is also the case if you’re selling a property, as a buyer may propose terms that can make or break outcomes depending on a wide range of factors.

One of the most controversial clauses in a sale contract is the sunset clause. This comes with inherent risks, so it’s important that you’re familiar with what it is, how it works, and how it may benefit you.

What is a sunset clause?

A sunset clause is a statement that places a time limit on the validity of a contract. It outlines that if the settlement hasn’t occurred by the end date within the clause, then both parties are legally able to walk away from the contract, with the buyer receiving their deposit back in full if it’s invoked.

When are sunset clauses used?

There are commonly two situations when a sunset clause is used. The first is in off-the-plan property exchanges when this is routinely used to stipulate a date by which the developer must finish the project. It also details that if the property isn’t finished by that date, the buyer is legally entitled to walk away from the contract without losing a single dollar from their deposit.

Developers often protect themselves by extending the required timeframe in their contracts, creating a natural allowance for delays that may result from a gap in their funding, industrial action or unfriendly weather. However, the use of the sunset clause still gives buyers peace of mind that their off-the-plan purchase does have an end date attached, one way or another.

The other scenario where a sunset clause is used is when a buyer purchases property within a contract that’s conditional on the sale of their current home. If a buyer proposes this to a seller, the seller has the choice to add in a sunset clause. This gives the seller the option to pull out of the contract if the buyer hasn’t sold their current home within the associated timeframe. Here, the sunset clause protects the seller, giving them a manageable timeline to risk being out of the market and the option to return to it if the buyer’s unable to secure a sale.

What are the risks of sunset clauses?

You may have seen numerous headlines over recent years detailing incidents where developers have knowingly run over the time constraints of the sunset clause, allowing them to then resell the property for a higher price within a booming market.

This can be risky for buyers. Although they get their deposit back, they’re then in need of another property, potentially buying within a market that’s had dramatic price changes since their initial purchase. This can lead to buyers being priced out of the market, particularly as some off-the-plan purchases can take years to reach settlement.

A crackdown on this practice was introduced by the NSW Government in 2015, which announced that new legislation would be passed that forced developers to secure written consent from either the buyer or the Supreme Court if they intended to terminate the contract due to project delays. This was also taken up by the Victorian Government in 2018, protecting Victorian residents from developer exploitation through intentional delays.

How can you make the most of sunset clauses?

Despite the bad publicity, sunset clauses aren’t always negative things. They can be used in your favour. As long as the finer details are working for you and not just for your developer, the sunset clause is something you can make use of if deadlines are missed.

You can avoid running into problems with your developer by completing a due diligence process before signing a contract of sale. You’re able to request proof of past projects they’ve completed and contact details of individuals who have previously bought off-the-plan apartments from them. A quick Google search can also reveal any negative press coverage that may detail shady, developer-benefitting decisions via sunset clause abuses.

Use this information to build your understanding of the credibility of the developer. If all is in order once you’ve completed this process, take a look then at the building you’re looking to buy in. Is construction already underway? Is it running on schedule? Has it received the necessary permits and building approvals? As these can be time-heavy processes, if the project doesn’t already have these items in place, this may be an apartment to skip out on.

The size and progress of the build can then be compared with past projects as a way to measure how long the project may take. Many projects take up to three years to build, so having an understanding of where the project is on its pathway to completion is key in negotiating a fair sunset clause. Ask your developer for further information as to how progress has gone to date against their proposed timelines.

Research, research, research

There’s a reason people find purchasing property to be stressful! While there are many ways you can prepare yourself to minimise this stress, it’s helpful to remember that this is a big investment. Taking your time, preparing your strategy and informing your decisions with genuine research can make a world of difference to your overall experience.

If you’re planning on signing a purchase or sale contract with a sunset clause, it’s important to do your research. Take a look at the developer, investigate their track record, and ask for referrals from previous buyers. This process means that even if delays do arise, you have the benefit of peace of mind, guiding you as you make your way towards that final moment when you open your new front door for the first time.

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