Do you understand the hidden trap of a Sunset Clause in your Contract of Sale?
Most off the plan property purchasers don’t understand this risk.
I read a blog on Domain with interest where a purchaser was horrified to find that she had purchased a property off the plan and even though it had increased in value considerably, she simply wasn’t going to be able to settle it.
Here’s the transcript:
Kevin: Garth, I know you’ve been looking at this. Give me the background of this particular story.
Garth: Two years ago, the apartment was bought for $890,000 and now that it’s come time for settlement, the apartment is worth about $1.4 million.
What’s happened here is that the developer has somewhat delayed the construction of this apartment, so they’d gone past the sunset clause, and it looks like they wanted to rescind the contract, give the deposit back to the original purchaser so that they can resell at a higher price and make more money from a second purchaser.
Kevin: And that’s legal, is it?
Garth: Yes. There is what’s known as a sunset clause. If a building is not completed, in say two or three years’ time, the developer can rescind the contract, which means give your deposit back and contract to sell to another purchaser.
Kevin: I imagine that would be something not many purchasers would know about – what a sunset clause is or even that there is one in the contract.
Garth: Yes, that’s right.
It’s something that all potential off the plan buyers should talk with their practitioners about.
Kevin: I imagine that would be one of those dates you’d want to make sure that you’ve written down on your calendar so that you’re aware that it’s coming up.
Garth: Yes, a bit like your birthday.
Kevin: Yes, I reckon it would be. Are there any other ways that developers can get out of these off-the-plan contracts?
Garth: Yes. Another way is that there’s usually a special condition in the contract that talks about the floor area of the apartment.
Kevin: Yes, that variation in the size of the unit is something that I imagine could also concern a lot of purchasers even though they might not be aware that the developer can actually reduce the size of it without any penalty whatsoever.
Generally, these special conditions are if it’s less than 5% reduction in floor area, that’s okay, but if there’s a change of any more than that from the original plans, the vendor can rescind the contract because the floor area is a lot smaller than what they contracted to build.
Garth: Yes. It’s something to be aware of.
All these things get down to time and money and what the property market is doing at the time when it comes to settlement and the valuations that are coming in, but these are things that you need to really talk in detail and be aware of.
Kevin: What are some of the other considerations you’ve come across that you warn off-the-plan property purchasers about?
Garth: The other one is that some developers need a particular number of exchange of contracts by a specific date and if that doesn’t happen, then they can rescind the contract.
Some developers may take advantage of this by delaying or not exchanging at all with purchasers because the property market has gone ahead so far and they can do better by not going into contract and contracting with someone else for a higher property price.
Kevin: Garth, are there any other considerations when you’re looking at buying off the plan?
Garth: Yes, definitely. There are probably another three or four I’d like to share.
1. The first one is about stamp duty.
In New South Wales, you need to pay stamp duty within 12 months of signing the contract.
Usually an off-the-plan sale could go for two or three years, so if you haven’t paid that stamp duty within the first 12 months of signing the contract, you’ll be up for interest per day, something around 15% interest on the stamp duty amount.
2. Then there’s defects – if paintwork isn’t completed properly or there has been some sort of structural problem or if there’s a carpet hasn’t been laid properly – these are things that you pick up with a pre-settlement inspection.
Generally, there’s a special condition in the contract saying that these will be rectified within three months after settlement.
But we recommend to our clients that these should be rectified prior to settlement because that’s when trades are still working in a lot of these units and it’s really hard to get access to get in a re-lay the carpet or tidy up the paint.
It’s better to have these things rectified prior to settlement when it’s vacant and no one’s in the apartment.
3. Next look at the inclusion list – for your kitchen appliances and bathroom supplies, carpet and paint colors, and things like that.
If there’s a display apartment take a picture of these items and make sure that there’s an inclusion list in your contract that outlines what model, what appliance, brand, and things like that are selected.
4. And finally with regards to finance, it’s good to keep in mind that a finance approval usually only lasts three months, and if you’re buying off the plan, you’re not going to be able to get a loan pre approval because the settlement is not for another two or three years.
You need to be aware that six months prior to the settlement of the property, you really need to re-engage and re-confirm your finance offer because you can’t just rely on a three-month approval when signing the contract. It just won’t be validated.
Kevin: What this has highlighted for me is the need if you’re going to be buying off the plan, to make sure you get a good solicitor, take their advice, and go through every portion of that contract.
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