What are sunset clauses in property contracts?

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?

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 expiration date stated in the clause.

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 March 31, 2025, or that the settlement on the sale of a property must occur by January 31, 2025.

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.

You should also note that the developer similarly 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.

In response to developers exploiting sunset clauses to deliberately delay projects and cancel contracts to resell properties at higher prices, the New South Wales government took action to protect buyers. The Conveyancing Amendment (Sunset Clauses) Act 2015 was passed on November 17, 2015, amending the Conveyancing Act 1919 by creating a new Division 10. Under these provisions, a developer proposing to terminate an off-the-plan contract for a residential lot under a sunset clause must either:

• obtain written consent from each purchaser to the proposed rescission after serving them 28 days written notice; or
• obtain an order from the Supreme Court allowing the rescission

The amendments applied retrospectively to any developer intending to withdraw from an off-the-plan contract under a sunset clause on or after November 2, 2015.

Following New South Wales’ lead, the Victoria government made similar amendments to the Sale of Land Act 1962 through the Sale of Land Amendment Act 2019, which came into effect on March 1, 2020. The amendments provide greater protection to buyers by also requiring developers to obtain the buyer’s written consent or a Supreme Court order to use a sunset clause to terminate a contract of sale.

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 expiration 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 on 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 terminated, 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
•       A high-rise development could take 24 months

But generally, 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.

What are the advantages of sunset clauses?

• 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).
• Luckily for buyers, the laws in some states are slowly starting to adapt to help ensure that they are not disadvantaged by some developers who intentionally delay the project to allow them to invalidate their contracts. 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.
• 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.
• 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.

What are the disadvantages of sunset clauses?

• If the buyer elects to go the route of a sunset clause, 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 accommodating 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. 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 they will be left with the uncertainty as to whether or not the contract of sale will be finalised with the original buyer.
• With off-the-plan contracts of sale, there had been several 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.

What about 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 example, however, is that the developer may have to continue the build without a buyer or must delay the build until they find a new buyer – all of which creates uncertainty for the developer.

Seeking legal advice

Given the complexity of sunset clauses and the potential risks involved, it is highly recommended to seek legal advice before entering a contract with a sunset clause. A legal professional can help you understand your rights and obligations and ensure that the clause is fair and reasonable for your specific situation.

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