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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.contract

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.

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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.

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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?

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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.

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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.



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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


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