What is a sunset clause and how to use it

Written by view.com.au in Buying

What is a sunset clause and how to use it

The term ‘sunset clause’ is a very poetic description of a very unpoetic legal consideration. It has nothing to do with aging gracefully, nor sipping on a martini on a yacht in the Greek islands. But if you are thinking of selling your home, buying an existing home or buying off-the-property, sunset clauses can often play an important role.

What is a sunset clause?

Sunset clauses can occur in two scenarios:

  1. Existing properties. A vendor of a home may want to use a sunset clause if they wish to apply pressure on a potential bidder (e.g. if they are selling privately.) A sunset clause in this scenario effectively places a time limit on the bidder, that if they do not finalise their bid by that date, then the property becomes available to other bidders. A sunset clause also allows the vendor to continue marketing the property, with them often providing the original bidder three days to match or beat a higher bid.

A potential buyer can also apply a sunset clause to allow them the time to sell their existing home.

  1. Off the property homes. A sunset clause is most commonly associated with off-the-plan developments. Within a Contract of Sale, a sunset clause states an expiration date of sorts where if the property has not been completed then the potential buyer’s deposit is refunded, while the developer is freed from their obligations.

Note: sunset clauses can occasionally be misused, providing developers the opportunity to invoke the expiration date of their contract with a potential buyer, to then reopen the development to new bidders who are willing to spend more if the market has changed. In late 2017, the NSW government began an investigation into this practice, but as a potential owner of a home, there are number of things you can do to protect yourself against the misuse of a sunset clause, as detailed below.

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Don’t try to do it alone. Consult the right people to understand whether your sunset clause is reasonable and realistic.

Getting to know your sunset clause

Different states have different rules, unfortunately, regarding the sunset clause. In response to the misuse of the clause by developers, the NSW government amended its Conveyancing Amendment (Sunset Clauses) Act 2015 in favour of buyers. Under the amendments, developers have to give notice if they do want to cancel a contract under the sunset clause, provide adequate reasons for delays in the build and the purchaser has to agree for the contract to be terminated. If the purchaser does not agree then the developer has to apply to the Supreme Court.

As of 2018, only NSW has made such an amendment that protects the buyer. For this reason, it is important to consider the following when buying off-the-plan.

Do you have a conveyancer/solicitor?

A great benefit of buying off-the-plan can be to receive a discount on properties as developers try to clear the last remaining units of any given development, or even receive discounts on stamp-duty or other concessions. While you should be wary of any developer offering such incentives, especially those that offer cars or gifts in exchange for a sale, some of the money you might save on an off-the-plan sale should definitely be used in employing a conveyancer or a solicitor who has significant legal knowledge in this area.

A conveyancer/solicitor can look through a Contract of Sale and tell you whether a sunset clause is reasonable as well as what loopholes are available to the developer or yourself in the contract.

Judge the suitability of a sunset clause

While a legal expert will be able to help you evaluate how reasonable a sunset clause and contract may be, there is other help available to you as well.

A building consultant will be able to look at the potential works ahead for a development, whether it is at the start of a build or at any other stage, and with a knowledge of what other permits need to be made and what type of construction is left, will be able to help you decide whether a sunset clause is reasonable. If a consultant can see that a property should only take another 12 months to build, as much of it may already have been constructed, then the sunset clause should reflect this, and not be for 24 months in the future.

Do your research

The most important thing to do before signing a contract is to do your homework on a developer. Without adequate national protections within the law for buyers, it is pivotal that you only engage with developers that have a history of providing properties in a timely manner and that have not shown a history of using a sunset clause to their advantage.

Look at a developer’s previous builds, gather information on how long these builds took to complete and whether that was a reasonable time limit. You can even get in contact with owners of a developer’s properties to see whether they had a good experience with a developer.

Set your gaze beyond the developer, and research who they have used and intend to use as contractors for a build and see what sort of history these contractors have as well.

Find more information on researching a property development.