Key takeaways
The sunset clause is a condition in the contract that sets a date for the contract to end.
A sunset clause is routinely in off-the-plan property contracts of sale.
A sunset clause is also often used when a buyer makes a property purchase that is conditional on the sale of their current home.
In response to widespread abuse of the sunset clause, new legislation has been put in place to protect buyers.
You can try to work out how long the project will take and then negotiate a reasonable sunset clause with the developer.
A developer can use a sunset clause to their advantage.
When it comes to buying an investment property or your next home, it's important that you’re aware of everything listed in the contract of sale and how it might affect you.
It might sound like a tropical holiday cocktail, but a sunset clause packs much more punch than a summery beverage – it is a contractual term designed to protect both the buyer and seller.
After all, when it comes to buying a property, there is a lot at stake and a lot that can go wrong.
While sunset clauses were put in place to offer security and protection to both parties, unfortunately, they can sometimes be manipulated.
Over the years, reports of developers taking advantage of these clauses to make a profit in off-the-plan properties have left buyers wary.
Thankfully there are now some new reforms to protect consumers.
Here is everything you need to know about the controversial sunset clause when it is used, and to what gain.
What is a sunset clause in real estate?
A sunset clause (or sunset provision) is a contractual term or statement in a property's contract of sale which puts an expiry date or time limit on the contract’s validity.
The sunset clause is put in place to enable the buyer and/or seller by letting either party walk away from the contract if the requirements of the agreement are not met by a certain date.
Essentially the sunset clause is a condition in the contract that sets a date for the contract to end.
If a settlement has not taken place by the end date included in the sunset clause in the contract, the buyer would then receive their deposit back in full.
The sunset clause is put into a contract to ensure that development companies don't begin projects (with money from investors) that they don't intend to finish (although there is sunset clause legislation now in some states to prevent this).
It also protects developers from buyers who back out of the deal prematurely before the project is completed.
When is a sunset clause used?
A sunset clause is generally used in one of two situations.
1. Off-the-plan sales
A sunset clause is routinely in off-the-plan property contracts of sale.
Here the clause stipulates the date by which the property developer must finish the project, and it also stipulates that, if the property is not finished by this date, the buyer is legally entitled to walk away from the contract and receive their deposit back in full.
Generally, the project is finished well before the date outlined in the clause, as developers exaggerate the required timeframe, to allow for delays caused by industrial action, inclement weather, or lack of funding.
With off-the-plan contracts of sale, each sunset clause will be different depending on the size of the project.
For example, a smaller development could take 12 months, while a high-rise development could take 24 months.
Generally, however, the average sunset clause period is around 18 months.
Sunset clause example:
A contract between a buyer and a developer specifies that the developer must finish the project by a specific date - let’s say 31 March 2022.
The deadline day comes around and the developer has completed the project, so the sale can go ahead.
Or, the buyer might find that the developer hasn’t met the sunset clause deadline and the project isn’t completed by 31 March 2022, at which point the buyer has the option of rescinding the contract.
2. Established properties
A sunset clause is also often used when a buyer makes a property purchase that is conditional on the sale of their current home.
When a buyer makes such an offer, a seller often chooses to insert a sunset clause into the contract of sale so that they can pull out of the deal should the buyer fail to sell their current home within the timeframe outlined in the sunset clause.
In this context, a sunset clause protects the seller by offering them a way back onto the market, should the buyer take too long to get their finances in order.
It can also be used when a vendor is putting an offer on a property in order to force a decision, and hopefully commitment, out of the seller.
Sunset clause example:
A contract between a buyer and a seller of an established property has a sunset clause specifying that the settlement on the sale of the property must occur by a specific date (again we’ll say let’s say 31 March 2022).
The date has rolled around and the settlement has occurred, at which point the sale can continue.
Or, 31 March 2022 has come and gone with no settlement in sight - the sunset clause has been triggered so now both the buyer and seller have the option of walking away from the contract with no legal obligations.
Can a sunset clause be extended?
It is possible for two parties to come to a mutual agreement to extend the terms of a sunset clause.
Legal advice should be sought, however, and in this scenario, the sunset clause would carry on until the new agreed-upon date.
If by this date the requirements of the contract had still not been met, both parties would once again have the option to invoke the clause and walk away.
The risks of a sunset clause
In recent years, developers have come under scrutiny for using the sunset clause to their own advantage, particularly in a hot market.
There had been reports from disgruntled buyers that developers have purposely run over the time outlined in the sunset clause in order to have the contract terminated to then resell the property for a higher price.
The problem is that even though the buyer then gets their deposit back, they are then forced to either pay for the same property again at the inflated price or look elsewhere.
At this point, because prices have risen since the buyer first struck a deal with the developer, the buyer can find themselves priced out of the market without a home because the property they could afford is now out of reach.
This was happening in a buoyant market when developers wanted to cash in on rising property prices.
Sunset clause legislation updates
In response to widespread abuse of the sunset clause, new legislation has been put in place to protect buyers buying an off-the-plan property.
New South Sales
The New South Wales government made legislative changes in 2015 to the NSW Conveyancing Act 1919 under section 66ZL which requires a buyer to give written consent for a seller to trigger a sunset clause and rescind a contract if a project is delayed...
Alternatively, a developer has to get written consent from the Supreme Court to terminate the contract.
This means a developer can no longer terminate a contract under the guise of a sunset clause in order to resell the property for a higher price amid a rising market.
In other words, the legislation update means developers can no longer use the clause for financial gain.
In a statement released in November 2015, Off The Plan Protections Secured, Finance, Services, and Property Minister Victor Dominello said:
"The new laws are intended to prevent rogue developers from rescinding contracts using the sunset clause to make windfall profits.
Any developers who are thinking of acting unethically should know that their behavior will no longer be tolerated."
Victoria
In 2019, the Victorian government followed suit with the New South Wales government and passed a new Sale of Land Amendment Act 2019.
The legislation update was implemented to close the loophole which previously allowed developers to exploit sunset clauses to get out of contracts they had previously entered into with purchasers.
Developers were found to be intentionally delaying building projects with the aim of exploiting buyers.
The Sale of Land Amendment Act 2019 placed restrictions on when and how the developer can exit a contract once the sunset clause has expired.
Developers now need to provide 28 days' written notice to a buyer that the project has been delayed and why.
The developer is now only able to exit a contract under a sunset clause with the written consent of the purchaser, or with the permission of the Supreme Court of Victoria.
In the absence of the purchaser’s consent, the developer will need to provide evidence to demonstrate that they are unable to complete the proposed development.
These new laws were backdated to contracts entered into from 23 August 2018.
Canberra
In November last year, after a raft of complaints about a property developer rescinding sales, Canberra also introduced similar legislation to protect buyers.
The legislation is a blend of Victorian and New South Wales laws and better protects home buyers.
The changes included an obligation to give a buyer 28 days' notice in writing of a developer's intention to rescind a sale, to which the buyer must then consent to.
In cases where there is no agreement, the ACT Supreme Court will have to decide whether the rescission of the deal is fair and equitable.
Queensland
Developers in New South Wales and Victoria can’t use sunset clauses for financial gain thanks to legislation protecting buyers.
But unfortunately, the Queensland government is yet to catch up with any sunset clause legislation updates.
In fact, Queensland’s property laws have recently come under fire as more developers use sunset clauses to cancel contracts and leave would-be first home buyers priced out of the market.
Just this month Gold Coast resident Yasmin Reiser told that she signed a contract with a local developer to buy a 315-square-metre lot for $270,000 in February 2021.
But after lengthy delays, she is worried a sunset clause could be activated to rescind the contract after 18 months given she, and several other buyers, have a sunset condition in their contracts allowing them and the developers to cancel the contract if the development is not finalised in that timeframe.
And she told news.com.au that she’s worried that she might have to submit another contract at a much higher price.
According to City of Gold Coast councillor Mark Hammel, the project’s delay is, in part, due to ongoing negotiations between the developer and a neighbouring property developer.
But Hammel said he was aware of 6 other projects in southeast Queensland where developers were using a sunset clause to cancel contracts.
While there appears to be an increase in the number of developers using the clause for financial gain, the good news is that Queensland Attorney General Shannon Fentiman told news.com.au that Queensland’s property rules are under review. She said:
We are rewriting the entire Property Law Act right now in Queensland [and] it's been a long time coming,
I hope to have legislation in the parliament at the end of this year or early next year.
What does the new legislation mean for buyers and sellers?
Developers now need to provide buyers with 28 days' notice and an explanation for why they are seeking rescission of a contract.
A seller now needs to specify why the completion of the project cannot be fulfilled as per the sunset clause.
If a buyer does not agree with the developer’s reasons the developer must obtain an order from the Supreme Court to be able to rescind the contract, for which the developer is liable for the legal fees.
This means that a property developer or seller is no longer able to automatically rescind a contract if the time constraints under a sunset clause are not met.
How to use a sunset clause to your advantage as a buyer
Provided the small print works in your favour as much as the developer's, a sunset clause isn’t always bad news.
In fact, the clause is a valuable get-out-of-jail-free card that you can pull out of your pocket when deadlines are missed.
You should obviously do your due diligence on the developer before signing a contract of sale.
This means asking for evidence of past projects, reaching out to previous buyers of those projects, and a google search for any reports or feedback on the developer.
Once you have an understanding of the developer's credibility, you can turn your attention to the specific building you’re considering buying.
If construction is already underway, find out whether it's running on schedule.
If construction hasn’t started yet, check if the project has received all the necessary permits and building approvals.
Using this information and other projects for comparison you can try to work out how long the project will take and then negotiate a reasonable sunset clause with the developer which minimises the chance of it running past the end date.
Another advantage for a buyer is that a sunset clause is a good way for a buyer to successfully negotiate with the seller to include a ‘subject to sale’ clause in the contract of sale if a buyer still needs to sell their home before they can settle on the purchase of the seller’s home.
The sunset clause would allow the buyer to include a “subject to sale” clause but with an attached deadline (to protect the seller).
The advantages of a sunset clause for a seller
The benefit of a sunset clause for a developer is clear - when it comes to the construction of new homes, delays are inevitable.
So a developer can use a sunset clause to their advantage if the delays are genuinely out of the builder's control.
If the developer is unable to meet the agreed deadline, the sunset clause releases them from their obligation-free legal action from the buyer.
For a seller of a developed property, the sunset clause also has added advantages, according to Canstar.
The comparison site explains that generally if there is competition for the property, a buyer who is making an offer subject to a sunset clause will produce a higher offer to avoid losing out on the home.
Another advantage for the seller is that they can continue marketing their property while the sunset clause is in place and if another buyer makes a more favourable offer, the seller would be free to accept the new offer, provided that the buyer is given due notice.
From the time of receiving the notice, the buyer will then have around three working days to decide whether they will waive the conditions of the sunset clause and settle or terminate the contract and have their deposit returned.
Make sure you enter any agreement to purchase a property with your eyes wide open to ensure that you sign a contract that works to your advantage and doesn’t unfairly benefit the developer or vendor.
Firstly, as I mentioned above, make sure you do all your research and due diligence.
Secondly, get your solicitor or conveyancer (not one recommended by the project marketer, developer, or real estate agent) to check the contract before you sign it to make sure you haven’t missed anything important.
