What are sunset clauses in property contracts?

TUAN DUONG
23 December 2020
In an effort to protect the interests of both buyers and sellers, a sunset clause is commonly found within a contract of sale.

The purpose of including a sunset clause is to put a time limit on how long the contract of sale is valid for. But how does that work in practice? Does it differ from contract to contract? And how could it benefit you?

In this article, we’ll provide an overview of how sunset clauses apply when you’re buying or selling property.

What is a sunset clause?

A sunset clause is a commonly used contractual term designed to protect the buyer and the seller of a property. By including a sunset clause in a contract of sale, each party will be entitled to exit the contract after the expiry date stated in the clause.

So, essentially, a sunset clause gives the parties to the contract a time limit in which they can act to meet the requirements specified in the contract. For example, the contract may specify that the developer must finish the project by 31 March 2021, or that the settlement on the sale of a property must occur by 31 January 2021. If the obligations are not fulfilled by the date included in the clause, then the buyer or seller can walk away from the contract.

While a sunset clause can be found in any contract of sale, it’s most commonly found in real estate transactions. Generally, it can be used in one of two situations:

  • off-the-plan sales
  • purchasing established properties.

Off-the-plan sales

One of the best-known usages of a sunset clause in Australia is in contracts of sale for off-the-plan apartments, houses or townhouses.

In most cases, the sunset clause will specify the date by which the developer must complete the project. If the property is not completed by that date, the buyer is legally allowed to abandon their contractual obligations and receive their deposit payment back in full.

It’s also important to note that the developer also has the right to abandon the contract if they can’t meet their own deadline in the sunset clause. So, if they incur delays that are out of their control, the sunset provision enables them to cancel their contract and re-sell. While this can happen if the developer encounters unexpected issues such as with other third parties or with authorities, the provision does create uncertainty for buyers. In recent cases, it has come to light that developers were using this clause to their advantage. They were purposely delaying the project, cancelling the contract and then re-selling at higher prices to make an increased profit.

To avoid this happening, the Victoria government made amendments to the Sale of Land Amendment Act 2019 to provide greater protection to buyers. In terms of the amendments, developers can’t exercise a sunset clause unless they have permission from the buyer or the Supreme Court of Victoria. Similar provisions were also introduced in New South Wales.

Purchasing established properties

When a buyer puts in an offer to purchase a property, and that offer is made under the condition that their previous house is sold, it’s quite common for the seller to insert a sunset clause into the contract of sale.

This will allow the seller to be released from their contractual obligations if the buyer fails to sell their current home by the expiry date stipulated in the sunset clause.

In the context of this type of contract of sale, the sunset clause primarily protects the seller and gives them the option to put their property back onto the market if the buyer is unable to complete the sale. That said, it can also be beneficial to the buyer to have a contract clause that allows them to recover their deposit if they can’t sell their previous home.

What happens when someone triggers a sunset clause?

Once the deadline set down in a sunset clause arrives, then if the condition it relates to hasn’t been met, either party may have the option to rescind the contract.

If the contract is rescinded, the parties will revert back to the positions they were in, prior to entering into the contract of sale. In other words, it will be as if the agreement did not exist in the first place, and they will have no obligations to each other.

It is, however, possible for the parties to come to a mutual agreement to extend the terms of the sunset clause. If that is the case, then the contract will expire if the new date passes, in which case the parties will also have the option to rescind the contract.

With off-the-plan contracts of sale, each sunset clause will be different depending on the size of the project. For example, a smaller development could take 12 months, while a high-rise development could take 24 months. Generally, however, the average sunset clause period is around 18 months.

When buying an established property, the condition is usually set to allow the buyer to sell their own home. Generally, the sunset clause would allow the buyer between 60 and 90 days to settle.

property contract sunset clause
Source: Gajus (Shutterstock)

What are some pros and cons of sunset clauses?

For the buyer

A sunset clause is a good way for the buyer to successfully negotiate with the seller to include a “subject to sale” clause in the contract of sale. A “subject to sale” clause is when the buyer still needs to sell his home before they can settle on the purchase of the seller’s home.

The sunset clause would allow the buyer to include a “subject to sale” clause but with an attached deadline (to protect the seller).

However, if the buyer elects to go this route, they may not be in a favourable position to negotiate the purchase price of the property. This is usually because the buyer has already negotiated to include a ‘subject to sale’ clause. So, it’s unlikely that the seller would want to negotiate the purchase price if the sale of the property is already being delayed to accommodate the buyer.

Another possible disadvantage here is that if the seller would prefer not to have a sunset clause and finds another potential buyer who is offering a contract without one, the original buyer could lose out on the home.

With off-the-plan contracts of sale, there had been a number of reports of developers intentionally delaying the project to allow them to invalidate their contracts with the buyers using a sunset clause, before then putting the properties back on the market at a higher price. The disadvantage for the buyer in this scenario is that their money had been locked in the development. Without access to that money, they would not have been able to make any offers on other properties.

Luckily for buyers, however, the laws in some states are slowly starting to adapt to help ensure that they are not disadvantaged by these developers. For example, in New South Wales and Victoria, developers now have to get written consent from the buyer or the Supreme Court if they want to terminate a contract of sale using a sunset clause.

 



For the seller

Generally, if there is competition for the property, a buyer who is making an offer subject to a sunset clause will produce a higher offer to avoid losing out on the home.

Another advantage for the seller is that they can continue marketing their property while the sunset clause is in place. If another buyer makes a more favourable offer, the seller would be free to accept the new offer, provided that the buyer is given due notice. From the time of receiving the notice, the buyer will then have around three working days to decide whether they will waive the conditions of the sunset clause and settle. If the buyer is unable to do so, the contract of sale will end and the deposit will be refunded to the buyer.

The disadvantage for the seller in this scenario is that they can only give notice to the original buyer to waive the conditions of the sunset clause if they receive a better offer from another buyer. If they don’t receive a better offer in that period of time they will be left with the uncertainty as to whether or not the contract of sale will be finalised with the original buyer.

For the developer

When it comes to the construction of new homes, delays are often inevitable, whether it is due to unpredictable weather or labour shortages. The advantage of a sunset clause for the developer in this scenario is that if the delays are out of the builder’s control, and they can’t meet the sunset clause deadline, then they will be released from their obligation to complete the project in the agreed time without being subject to legal action by the buyer.

The disadvantage in that instance, however, is that the developer may have to continue the build without a buyer or have to delay the build until they find a new buyer – all of which creates uncertainty for the developer.

Key takeaways

In summary, a sunset clause in a property contract is the maximum amount of time allocated to:

  • a developer to complete the buyer’s project; or
  • a buyer to sell their home before settling with the seller of their new home.

Suppose either party does not meet the conditions of the sunset clause. In that case, the other person would be able to rescind the contract. If they do so, the contract would cease to exist, and the parties would return to the position they were in before entering to the contract – in other words, as if the contract never existed.

There are certain advantages to sunset clauses for both the buyer and the seller. However, a sunset clause can also pose some risks, particularly for the buyer. This is why you should only enter into a contract once you have a clear understanding of what you are agreeing to.

 

Cover image source: Nick Fox (Shutterstock)


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About Tuan Duong

Tuan DuongTuan is the Principal and Founder of Duo Tax Quantity Surveyors. His passion is to educate property investors in the power of tax depreciation and the benefits it can offer in helping them minimise their tax liability. Tuan is also a professional member of the Australian Institute of Quantity Surveyors and is a Registered Tax Agent, authorised to offer advice on all matters related to depreciation. You can follow him on LinkedIn.