The Sunset Clause in a contract of sale

Rob Balanda About Rob Balanda

Rob is a partner in the Gold Coast based law firm MBA Lawyers. He is a highly regarded educator of property investors and estate agents and the author of the "Made Simple" series of books and CD's.
Visit www.ClausesMadeSimple.com

This clause comes into its own in a flat or quieter market as a means of resolving impasses between Buyers and Sellers. 

The classic scenario is where a Seller is reluctant to accept an offer from a Buyer which is subject to the sale of their own property because they believe that this will take the property off the market and they will miss the opportunity to sell to someone else for a higher price.

The sunset clause arose as a compromise between the positions of a Buyer and a Seller.

It results in the Buyer securing the property, subject to the sale of their own property, but leaves the Seller with the right should they receive a better offer to put it to the Buyer they go unconditional and waive the benefit of their subject to clause i.e. get bridging finance to purchase the property.

 

But I sense the market may be moving and this is changing the dynamics of this clause. 

Or at least Sellers are getting more confident and sense there could be an increase in market activity.

Recently Sellers have sought my advice about whether it is possible to build into such a clause the right, should they receive a higher offer, to force the Buyer to match it.

 

The simple answer is “Yes it is”. 

If this was part of the deal the clause would then go on to provide that if this Buyer did not match the second offer then either the Buyer or the Seller could terminate the Contract and the Seller would then be free to sell to someone for a greater price.

 

But be careful. 

Fine tuning the clause in this way tips the balance of the clause very much in the favour of the Seller and will I believe, be seen by a lot of Buyers as an undisguised lever by the Seller to increase the price.

When that occurs the clause ceases then to be a reasonable and balanced way of moving forward and resolving an impasse between a Buyer and a Seller.

Understand too that changing the clause in this way might just prompt the Buyer to react like this:

“Mr Seller, you are so keen to protect your right to extract more money from me, or another Buyer, for the property, I am getting the feeling that not only are your expectations about the property’s value overinflated, I am getting an uncomfortable feeling that I paid too much for your property.  So, I will go along with your right under the clause to force me to match the higher offer, if you receive one, or pull out, but only if this works goes both ways.  If you can’t produce a written higher offer before settlement then I believe I have paid too much for the property and the price should be reduced on settlement by at least $10,000.00.”

 

What do you say then?

There is a point during negotiations at which you can just get “too cute”.

You might think up to then that you are impressing yourself and everyone else around you with this Mark II version of a sunset clause, but at the end of the day you may frighten off your Buyer.

In this situation I fondly recall the words of an old Romanian client of mine who would revel in revealing the foolhardiness of Sellers who tried on this strategy with him.  He would reply with this blunt response (in broken English).

“You want sell this property, or you want keep it?”

Touche!

Smart Questions Property Investors must ask their solicitor

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