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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.
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.
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.
In this scenario, the buyer would receive their deposit back in full.
When is a sunset provision 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.
2. Established properties
A sunset clause is also often used when a buyer makes a property purchase which 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 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 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.
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 which 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 want to cash in on rising property prices.
Sunset clause legislation updates in NSW, VIC, ACT protect consumers
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.
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 August 2018, the Victorian Government followed suit, preventing developers from using sunset clauses to intentionally delay building projects with the aim of exploiting buyers.
Again, developers now need to provide notice and get written consent from a buyer to be able to terminate the contract.
In November last year, after a raft of complaints about a property developer rescinding sales, Canberra also introduced similar legislation to protect buyers.
In Queensland, while there have been no legislation updates, the recent cancellation of buyer contacts by a major developer has thrown the law into the spotlight.
And a local MP wants the legal loophole fixed as a “matter of urgency” to stop the “immoral behaviour”.
What do the changes mean for buyers?
Developers now need to provide buyers with 28 days’ notice and an explanation for why they are seeking rescission of a contract.
They need 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 seller
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.
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.
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.