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, over the years reports of developers taking advantage of these clauses to make a larger profit in off the plan (OTP) properties have left buyers wary.
What is a Sunset Clause?
The basic premise of a sunset clause is to put an expiry date or time limit on the property contract.
If a settlement has not taken place by the end date included in the clause, both parties are legally entitled to walk away from the contract.
A sunset clause is generally used in one of two situations.
1. Off The Plan Sales
It is routinely included in off-the-plan property contracts of sale.
Here the clause stipulates the date by which the 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.
In the past 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 of developers who purposely run overtime 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 Off The Plan 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.
In today’s more challenging property markets, where investors are very wary of buying off the plan property, and on completion values for this type of property are slumping and often well below the original contract price, it’s unlikely that developers will use a sunset clause to their advantage.
In response to widespread abuse of the sunset clause, the New South Wales Government announced in October 2015 that it would pass new legislation that forced developers to get written consent from either the buyer or the Supreme Court if they wanted to terminate the contract when the project was delayed.
In Victoria, the laws changed in 2019 and developers are now no longer allowed to use sunset closes to “rip off” buyers.
2. Purchasing established properties
A sunset clause can also be used when an offer is put on a property conditional to selling their previous 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 from 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 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.
The bottom line:
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.
This means get your solicitor (not one recommended by the project marketer, developer or real estate agent) to check any contract before you sign it.
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