What is a Sunset Clause – and how can you use it to your advantage?

It sounds like a cocktail you’d enjoy on a tropical holiday, but a sunset clause packs much more punch than a summery beverage!

A sunset clause is a contractual term designed to protect both the buyer and the seller.

However, recent reports of developers taking advantage of these clauses to make a larger profit in off the plan (OTP) properties have left buyers wary.

The basic premise of a sunset clause is to put an expiry date on the property contract at hand.

It can 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.

A sunset clause can also be used when an offer is put on a property conditional to selling their previous home.

If the previous home is not sold within a certain time period, then the contract on the new property becomes null and void.

In the spotlight at the moment are sunset clauses for off the plan properties.

In these instances, a buyer is committing to a property that has not been built yet and there needs to be some conditions built into the contract to ensure that the project is a) completed in a fair and timely manner and b) settled at the price originally agreed upon.

[sam id=37 codes=’true’]

At the same time, the developer or seller is protected by a sunset clause because it means that the buyer can’t back out of settlement at completion of the project, if it is completed before the sunset date.

Builders are reliant upon deposits and contracts for their building project to get off the ground, so they want to keep those buyers committed until completion – and therefore settlement – of the new property. They also want to be paid promptly upon completion.

Developers have come under scrutiny for using the sunset clause to their own advantage, particularly in a hot market.

There have been reports from disgruntled buyers of developers who purposely run over time in order to invoke the sunset clause and therefore nullify all contracts. They then put the same properties back on the market at a higher price to increase their profit margin.

This scenario leaves the buyer at a great disadvantage because while their money has been tied up in the OTP development, they have not been able to make offers on other properties and properties that they could afford at the time of deposit have increased in value and are now out of reach.

 

If you’ve been reading my blogs for a while now, you will be aware of my feelings about OT

I advise against these types of investments because they are a dangerous, speculative investment and usually favour the developer in general.

However if you do decide to buy an OTP property, it is important to make sure a sunset clause works to your advantage to ensure that your assets and rights are protected.

So, before signing anything, run through this checklist first:

1. Are you working with a property lawyer or conveyancer?

It is more critical than ever with an OTP property to appoint a solicitor or conveyancer to review your contract and ensure your needs (and not just the developer’s) are considered before you sign anything.

On the one hand, the contract may be vague leaving loop holes all over the place and on the other end of the spectrum, tricky property developers could clog the contract up with so much confusing jargon that it is difficult to decipher without an expert to help you.

With a risky purchase like this, I can’t recommend a solicitor enough.

 2. Have you done a background check on the developer?

WRJust like you would with any professional you are considering working with, a smart investor would do a background check on the developer of your OTP property so you know exactly who you are dealing with.

You are well within your rights to ask for a resume of sorts to see if they have completed other similar projects and to get feedback from other buyers.

I would advise researching these other buildings or even paying a visit to ask around about the quality of the developer.

 3. Is the development on track according to milestones so far?

 

Make sure you know exactly where the project is up to and how that compares with the proposed timeline for completion.

You can check on the progress of the development by enquiring with the developer or getting your solicitor to look into it.

If the construction has not yet commenced, find out what further approvals are needed and how many other contracts have been secured so far.

Often, there will be a minimum number of contracts required before the project can even go ahead, so this may affect the proposed completion date.

If the project has begun, check that the milestones that have passed already were on time. It is completely normal in the building industry for there to be some legitimate delays (including building permits, construction and weather) so be sure to build in a buffer.

 4. Does the sunset date in the clause work for you?

A typical sunset clause for an OTP property is typically around 18 months.

Depending on where the project is up to in completion, that length may not make sense.

 

A building that has not yet begun may require up to 36 months, while a building nearing completion may only need 12 months.

The length of the sunset clause is not set in stone so you can request for it to be changed before you sign the contract.

Just remember that once you have signed the contract, this date is fixed and cannot be changed, so do your homework up front.

Instead of leaving the developer with all the power, it is possible for you to request an extension of the sunset date or include a clause where you can extend the date if you need to.

The bottom line:

Whether you’re looking to buy OTF or an established home, remember that every investment carries with it an element of risk.

Go in with your eyes wide open to make sure that you sign a contract that works to your advantage and doesn’t unfairly benefit the developer.

icon-podcast-large

Subscribe & don’t miss a single episode of michael yardney’s podcast

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

Need help listening to michael yardney’s podcast from your phone or tablet?

We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.

icon-email-large

Prefer to subscribe via email?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.


Avatar for Property Update

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'What is a Sunset Clause – and how can you use it to your advantage?' have 8 comments

  1. Avatar for Property Update

    August 17, 2018 Chamained

    Hi Michael,

    We purchased a house and land package and the Da approval got rejected by council we were told when purchasing that registration will be dec 2017 but it’s now August 2018 and land hasn’t even been DA approved. Developer is appealing council decision and are in the process of coming to an agreement in Land and Environment court. We have been lied to and even if the Da is approved we won’t be in our property until at least 2020 three years after the fact. Our sunset clause is December 2018 I am sure the developer is going to try and extend the sunset how can we get out of this as we don’t won’t to wail until 2020 to be in our house that’s not was promised and if we don’t build before July 2019 the builder will charges fees for every month build is delayed this isn’t fair as we purchased a house and land package it isn’t our fault that the land isn’t ready. What can we do in this situation.

    Thanks Charmiane

    Reply

    • Avatar for Property Update

      August 18, 2018 Michael Yardney

      Charmaine – I can understand your concern – this is a legal issue and your solicitor should have put in clauses to protect you from delays so you can get out of your contract and so the developer can’t extend his contract.
      I hope you’ve got your own solicitor and didn’t use the developers one

      Reply

  2. Avatar for Property Update

    May 22, 2018 Worried Parent

    Hi Michael, our daughter and partner have signed an OTP agreement that contains a sunset clause. The clause date has now passed and there is no sign of any work commencing. There seems to be a lot of interesting connections between developer, agent, lawyer etc.and I think changes to the directors of the company too. But to sum it up, the builder has offered and additional bedroom and and garage, at no extra cost, if they will sign a variation that includes progress payments. The original agreement is ‘turn key’, pay deposit, and balance on completion etc. They don’t want to sign this, and to be honest, their lending approval might not even permit it. But the most concerning part, is that the have recently discovered (and this was not highlighted by the lawyer) that the sunset clause applies to the completion of the subdivision, not the actual house-build itself. They are now stuck in ‘no mans land’ as the subdivision has been completed. The developer wont allow the contract to be cancelled, and the lawyer (actually conveyancer) seems to be offering no sign of hope either? Would you have any recommendation as to where they could go for advice? They are first home buyers, who have had their dream shattered, and their kiwisaver deposit stuck in limbo :(

    Reply

    • Avatar for Property Update

      May 22, 2018 Michael Yardney

      As you say, their bank may not allow progress payments.
      Your children need independent legal advice and the question they should ask is “How can we get out of the contract?” which is very different to “can we get out of the contract?”
      They need their own solicitor, never use the developers solicitor

      Reply

  3. Avatar for Property Update

    March 5, 2018 Raj

    hi,
    i sign a contact with one company & my contract’s sunset clause till March 2019, what we do if they make more delay like is any option we can push developer to complete with in time. like they always take advantage of this. sell land on lower price use our money& then sell on high price. its like blackmailing…

    Reply

    • Avatar for Property Update

      March 5, 2018 Michael Yardney

      Raj
      You are right – some unscrupulous developers take advantage of this type of clause if it suits them.
      Your contract is a legal instrument, and each sunset clause is worded differently, so this is something you should ask your lawyer

      Reply

  4. Avatar for Property Update

    October 9, 2017 Jen

    I have bought a property Otp and the sunset period ends and the vendor want to increase the price. The property has completed before the sunset period but they haven’t got the plan of subdivision. I think they purposely delay so they could ask for higher price after the sunset period ends. I disagree and they wish to refund the full deposits and put the property back to market. What is your best advice?

    Reply

    • Avatar for Property Update

      October 9, 2017 Michael Yardney

      Jen
      That sound terrible – you’re right some developers take advantage of purchasers.Ont he other hand first make sure of the value of the property you’ve committed to – you may find it is worth less than the contract price and then the developer is doing you a favour

      Reply


Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*


facebook
twitter
google
0
linkedin
0
email
Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!