A sunset clause (also known as a sunset provision) is a provision in a contract that limits how long a contract is valid. As a result, the contract will no longer be effective after the specified date in the contract, and the parties involved can legally walk away from the contract.
This read sums up all you need to know about sunset clauses and how they work in Australia.
What is the Purpose of a Sunset Clause?
The primary purpose of a sunset clause in the contract of sale is to protect both the buyer and selling by setting a date for the contract’s validity. The sunset clause is the maximum amount of time allotted to the developer to complete the project.
It lets the buyer and/or seller exit from the contract if the agreement’s requirements are not met by the contract’s expiry date. In such a scenario, the buyer will receive their deposit back in full.
Why Do I Need a Sunset Clause?
In real estate transactions, the sunset clause is usually included in the sales contract of off-the-plan properties.
It can also be leveraged if you’re buying an established property and the sale is conditional on you (the buyer) selling your current home first.
Purchasing an Off-the-Plan Property
In Australia, one of the most common usages of the sunset clause is seen in contracts of sale for off-the-plan sales of apartments, townhouses or houses.
Buying off the plan typically indicates that the property is purchased before it’s fully built and received all the necessary permits. Based on their financial situation, many home buyers find it a suitable pathway to enter the property market.
Where home buyers opt for such off-the-plan purchases, in most cases, the clause stipulates a sunset date, i.e., the date by which the developer must finish the project. In addition, the clause stipulates that the buyers are legally entitled to abandon the contract if the property is not completed by the date outlined. Further, they will have their entire deposit returned to them.
When purchasing your off-the-plan home, be mindful of the following ground realities:
- Protection for the developer: It’s essential to note the sunset clause protects developers too if they cannot meet the mentioned deadline. Where the delays are beyond the builder’s control, the sunset provision enables them to cancel contracts and resell when the property is developed.
- Factors affecting the sunset clause: Often, the project may be completed before the date specified in the sunset clause. Developers, however, tend to overestimate the timeframe to provide for delays. These delays could be due to natural factors such as weather and economic factors, including industrial action, funding problems, etc. So, suppose your developer faces unexpected delays, for instance, from issues related to building approvals by authorities or other problems. In that case, the clause will also create uncertainties for you - the buyer.
- Controversial sunset clause: In recent times, it has been noticed that some developers were misusing the sunset clause for their gains. By intentionally delaying the project, these developers leveraged the sunset clause to nullify the contract and resort to reselling the same properties at higher prices.
Purchasing an Established Property
When buying an established property, you may want to put in a purchase offer conditional on the sale of your existing home, i.e. you intend to purchase the property based on your current home being sold first. In such situations, it’s relatively common for the seller to incorporate a sunset clause into the contract of sale.
The sunset clause lets your vendor stipulate a date by which settlement must be completed. If you cannot sell your current home and settle by this time, your vendor has the right to invoke the sunset clause and pull out of the deal.
The sunset clause primarily protects the seller in the sale of an established property. It gives your seller the option to put their property back onto the market if you cannot complete the sale.
At the same time, the sunset clause benefits you as a buyer since it allows you to get back your deposit if you haven’t been able to sell your previous home.
When Are Sunset Clauses Used?
Either party may invoke the sunset clause once the timeframe outlined in the clause has passed and the conditions or requirements stipulated in the contract have not been fulfilled.
It is not automatic. Instead, once the sunset clause deadline has passed, either of the two parties has the option to invoke the clause. However, the sunset clauses apply to both parties once invoked.
How Long Does a Sunset Clause Last?
In general, there is no universal period for a sunset date.
- For off-the-plan contracts: The sunset clause is determined based on your property size and other dynamic factors. So, for instance, where for a smaller development, the date could be set for 12 months. For a high-rise development, the period could be around 24 months. In most cases, the average sunset clause period is around 18 months.
- For established properties: The conditions for an established property are generally set to enable the buyer to sell their own home. In most cases, the sunset clause for established properties typically allows the buyer around 60-90 days to settle.
What Happens if the Clause is Triggered?
Once the agreement or contract is no longer legally binding, it could have many consequences. Here are some typical scenarios:
- Revert to original status: If the contract is nullified, both parties revert to their original positions, i.e., the situation before entering into the contract of sale. In that sense, it will be as if there was no agreement, and neither party will have any obligations to the other.
- Extend the contract: Sometimes, the parties involved could arrive at a mutual agreement to extend the terms of the sunset clause. If this happens, the contract will remain valid until the new date passes, after which the parties will again have the option to step away from the contract.
Pros of Sunset Clauses
When buying your next property, understanding the pros and cons of sunset clauses is essential. Knowing how they affect you could save or cost you money and peace of mind.
Here’s a quick rundown of the pros:
Ability to Successfully Negotiate
As a buyer, you may first need to sell your home before settling on buying the seller’s home. Here’s where you can favourably negotiate with your seller to incorporate a “subject to sale” clause in the contract of sale. This enables you to work towards selling your present home within the timeframe.
Greater Protection for Buyers
To counter intentional delays by developers in off-the-plan properties, laws have been put in place to protect the buyers. For example, in Victoria and NSW, your developer will now have to obtain written consent from you (the buyer) or the Supreme Court if they want to invoke the sunset clause to terminate a contract of sale.
Protection Against Unforeseen Events
One of the most significant advantages of the sunset clause for you as a buyer is that it allows you to withdraw from the contract if unforeseen circumstances prevent the purchase from being completed.
You do not have to pay any penalty, and you’ll get your deposit back. Thus being a buyer, you’re assured that you will not lose their money if something happens beyond your control that affects your financial situation.
Cons of Sunset Clauses
There are certain risks associated with sunset clauses. Here are some key takeaways of associated cons:
Property Price May Not be Negotiable
The ‘subject to sale’ clause with the deadline may restrict the buyers’ options for ongoing negotiations on property price. Since the buyer has already negotiated to include the ‘subject to sale’ clause, the seller may not want to oblige further. This is because the property sale has already been delayed to accommodate the buyer.
In a hot market, the sunset clause is of little benefit to the seller. And some sellers may prefer to avoid the sunset clause altogether. If this is the case, and the seller finds another buyer ready for a contract without the sunset clause, you could potentially lose out on what would have been a fair deal.
Developers Exploiting Buyers n a Buoyant Market
In cases of off-the-plan homes, several cases were reported where developers purposely delayed the building projects, invoked the sunset clause and then resold properties at a higher value.
Buyers putting their money into these projects may find their monies locked in the development and with no access to that money until the expiry date of the sunset clause. If you get caught in a similar situation, then until the sunset date is crossed, you may not be able to pursue offers on other properties.
Moreover, house prices, in all probability, will have increased since your original deal with the developer. As a result, you’ll also miss out on significant capital growth and find yourself priced out without a home.
This typically happens when developers want to benefit from rising house prices.
How To Use Sunset Clause to Your Advantage?
You can work the sunset clause in your favour as a buyer and get a great deal on your off-the-plan home based on the following:
Research on Past Projects
To begin with, before inking the deal, run due diligence checks on the developer. Ask for proof and review the status of past projects. You can also look online for news articles or media reports on the developer.
Try connecting with homeowners who have purchased apartments for first-hand feedback about your developer. As far as possible, include a site visit to see past projects and assess the construction job’s quality.
Research Your Specific Building Project
If you’re satisfied with the developer’s credibility, consider the specific building where you plan to build a home. This could involve multiple layers as follows:
Track the schedules where construction is already in progress. Check whether they’re on time or lagging and the reasons for the delay.
Where construction is yet to kick off, examine the status of the project’s permits and building approvals. Since these can take a while to obtain, and if they aren’t already in place, it may be better to avoid the property altogether and start looking elsewhere.
Consider the size and current progress of the build and leverage similar past projects as a reference point to estimate the approximate time it may take for the project to get completed.
With all your fact-checks in place and mindful that projects generally take around 36 months to complete, negotiate a reasonable sunset clause with your developer. Try to finalise a deal with minimal chances of the project running past the expiry date of the sunset clause.
Purchasing a new home is a huge decision and a considerable investment. You could miss something important even if you’re confident you understand all the builder’s terms. So consider seeking legal advice to scour over the contract before you sign it.
Sunset Clause Example
This segment contains an example of how a sunset clause works. Notably, it’s in no way any form of legal or financial advice.
Jane and Henry presently live in their own home in the city. However, they plan to move to a bigger place.
They finally find a suitable place and make an offer. The seller accepts it, and a contract of sale is drawn up.
Jane and Henry realise that they must first sell their current home to be able to buy the new house. Therefore, they request that a sunset clause be included in the contract.
Since the price offered by the couple is reasonable, their seller incorporates the clause. He gives them 60 days to sell their house.
Once the 60 days are up, Jane and Henry can still not find a buyer for their city home. They invoke the sunset clause and exit the contract. Their seller begins the search for another buyer and also refunds Jane and Henry their deposit.
Legislation on Sunset Clauses
Some legislations have been introduced across Australia to provide greater protection to home buyers looking at off-plan homes.
New South Wales
In 2015, the New South Wales Government introduced legislative changes to the NSW Conveyancing Act 1919 under section 66ZL, which applies to an off-the-plan contract.
As per the section:
- On being served with the notice under subsection (4), the buyer must give the seller written consent to the rescission if a project is delayed, or
- The vendor (developer) has to obtain a Supreme Court order to terminate a contract under the sunset clause, or the regulations otherwise permit the vendor to rescind the contract under the sunset clause.
Thus, in NSW, developers can no longer leverage the sunset clause to terminate a contract, resell the property for a higher price, and make unfair financial gains.
In 2019, the Victorian Government passed new laws preventing developers from using sunset clauses to exploit home buyers by intentionally delaying building projects.
Under the Sale of Land Amendment Act 2019 (the Act), developers can exercise the sunset clause only with the buyer’s written consent or the Supreme Court of Victoria’s permission. The new laws regarding sunset clauses are backdated to 23 August 2018.
Developers can use the sunset and development delay clauses to rescind a contract only if the buyer consents or if they’re allowed to by order of the ACT Supreme Court.
Here too, developers must offer the buyer 28 days’ written notice, stating the reason for the proposed rescission under the sunset or delay clause.
Under Queensland’s property laws, the builder or the developer can cancel the contract by building a right into the sales contract through sunset clauses.
Developers in Western Australia can use the sunset clause to set a contract’s end date. However, the contract should ideally specify the buyer’s recourse where time frames are not met.
Where no time frames are mentioned, the buyer can still have recourse under Australian Consumer Law if the property is not completed within a reasonable time.
In South Australia, builders are required to provide specific warranties when taking up domestic building work, and the work must be finished in a reasonable time.
In Tasmania, the residential building work contract between owners and a building services provider must also include the practical completion date or the method for calculating the estimated time for completion.
Those involved in building services must provide a range of warranties in a contract. This includes completing work per plans and specifications set out in the contract.
In Northern Australia, when you sign the contract to buy an off the plan property, your contract won’t have a completion date. Instead, it will be included in the contract once the building is completed and the unit plan is registered.
Nonetheless, there are some protections for those who buy off the plan. For example, your deposit must be held in a trust account with a licensed real estate agent, lawyer, conveyancing agent, or lawyer. When the settlement date is reached, you can walk away from the contract without penalty.
Can Sunset Clauses Be Extended?
Yes. Where the parties mutually agree, the terms of a sunset clause can be extended. However, it’s advisable to seek expert legal advice when carrying on until the new agreed sunset date. If the contractual obligations are still not met, the parties have the option to reinvoke the sunset clause and exit the contract.
Why is it Called a Sunset Clause?
Sunset clauses are so-called because they set a time limit for a contract’s validity. Therefore, the parties involved can legally cancel the contract if the settlement does not occur by the end date specified in the clause.