The lack of due diligence is often the chief reason why new buyers find property ownership quite stressful. Without proper knowledge of possible costs and legal implications, anything can go wrong at any time. One such issue is sunset clauses.
In this article, we’re unpacking the sunset clause meaning, its importance and educating potential property owners on how they can benefit from them in their property process.
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What are sunset clauses?
As the name suggests, a sunset clause is a provision found in the sale agreement that limits the validity of the contract. It allows both parties to walk away from the sale should a settlement not be made within a certain period.
You may be asking, “What if the buyer had already paid part of the money?” That’s a good question. The sunset clause states that the seller would have to return the deposit in full.
The use of sunset clauses
From our experience in the property industry, we can identify two possible scenarios where the sunset clause can be used.
Scenario #1
The first scenario is where a buyer wants to purchase a property off-plan. An off-plan property project is where a buyer pays for a property before the development is constructed or finished.
Such a set-up is usually cheaper for the buyer since the developer/ buyer considers the time value of money. Also known as TVM, the time value of money is a financial principle that argues the worth of a dollar today is significantly more than it’s worth tomorrow.
However, during construction, the developer may delay the delivery of the project. Also, there might be changes made to the finishes or fittings, affecting the final use of the property. The buyer, who has been making regular deposits for the off-plan property, may pull out and ask for their full deposit.
Scenario #2
A sunset clause is also commonly used when a buyer adds in a conditional clause stating that they will purchase the completed sale of their current home. The buyer might need funds to make the purchase and meet any additional costs involved, such as closing costs.
Seeing a possible delay, the seller might decide to add a sunset clause in the sale agreement. Should the buyer fail to lock down and finalise the sale of their current residence, the seller can pull out and re-enter the market. This answers the possible question if a vendor can cancel a contract of sale.
As you can see, the sunset clause can be beneficial to either the buyer or the seller, provided that the clause is set up as it should.
The risks of using the sunset clause
Like all things under the sun, the sunset clause comes with a set of risks.
In the section above, we mentioned the time value of money and its implication on the price/ value of the property. Armed with this knowledge (and that of the sunset clause), the developer will seek to defy the contract, terminate it, and resell the property. The sale of the property will be at a higher price than the one stipulated in the original contract.
This scenario has occurred several times in the past and is often to the detriment of the potential buyer. The buyer aimed to enjoy a lower property price and own a home. This is no longer the case.
In addition to losing the home, the buyer has an additional problem—they cannot acquire a similar property with the deposit returned to them by the developer.
Due to this malicious application of the sunset clause, several governments have sought to protect the buyers. The New South Wales Government has legislation that requires developers to get consent from the buyer. Another government that has enacted similar legislation is the Victorian Government.
This has seen a significant decrease in similar cases in the country.
How to set the sunset clause to your advantage
With governments cracking down on its malevolent use, the use of the sunset clause can be an advantage in purchasing the property.
In the possibility of a delay in construction timelines or a variation in the amenities, you can decide to pull out of the contract. All that you have to ensure is that its set-up is in your favour.
Research and due diligence
As mentioned above, we cannot emphasise the importance of research in the property purchase process enough.
Take, for example, a buyer looking to purchase property off-plan. It is their responsibility to check their reputation, qualifications, and standing in the construction industry. They are also to research possible delays that might deter you from buying such a property.
It would also be prudent to do a physical site inspection. Before the visit, ask the contractor for a possible copy of building approvals, permits, and other pertinent documents. This will give you the projected timeline set by the developer. You can judge whether the development is being constructed as per the schedule or it will delay.
Due to the property’s longevity, either party must be sure of the decision they make. The sunset clause protects your interests through and through.
Consult a lawyer
Even with all the research done, you can appreciate the technicality and implication of such a clause. To protect your interests and ensure that the clause is in your favour, we recommend you consult an experienced and reputable solicitor. Before its execution, they will ensure that everything is in place.
Now that you understand sunset clauses…
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