Off the plan contracts have a potentially fatal flaw with the use of a sunset clause. While a sunset clause provides the benefit of setting a deadline for when the property must be built by, it can and has been exploited by developers to terminate contracts and proceed with a higher offer price. With the overly competitive property market in mind, this article will explain the use of a sunset clause, the way forward and what buyer’s should look out for when purchasing properties off the plan.
What is a Sunset Clause?
A sunset clause provides the requirements needed to finish building the property and the maximum amount of time the developer has to complete the build of the project (known as the Sunset Date). It sets the time limits that the developer must complete the contractual requirements, and settle the property by. If the developer cannot meet the requirements under the sunset clause by the last day of the Sunset Date, then either party may terminate the contract.
A sunset clause provides both parties the benefit of confirming a timeline for the property to be built. If the property cannot be built on time, the buyer can terminate the contract with little repercussion as they are entitled to a full refund of their deposit in this scenario.
However, there is a risk for a sunset clause to be exploited. If the work cannot be completed by the Sunset Date then either party can terminate the contract. Developers therefore have the option not to complete the build by the Sunset Date and terminate the contract in order to re-sell the property at a higher market price. This provides a concern for buyers as the Sunset Date is typically a couple of years after the contract date and the market could see a spike in property value that potential buyers cannot predict. This is more relevant than ever with the last couple of years seeing property values skyrocket.
Buyers are put at a serious disadvantage if the developer terminates the contract on the basis of the sunset clause. While a buyer will be refunded their deposit, they have wasted their time and money and the market may have moved beyond what they buyer can afford.
Can a sunset clause be extended?
It is possible for two parties to come to a mutual agreement to extend the terms of a sunset clause.
Legal advice should be sought, however, and in this scenario, the sunset clause would carry on until the new agreed upon date.
If by this date the requirements of the contract had still not been met, both parties would once again have the option to invoke the clause and walk away.
The way Forward
Sunset clause legislation updates in NSW and VIC protect property buyers
Some states, such as New South Wales and Victoria, have recognised this concern and have update their conveyancing legislation.
How has the Property legislation changed?
In these states, if the developers wanted to terminate the contract when the project was delayed they must
- receive written consent from either
- the buyer or
- Supreme Court
to terminate the contract.
While this is a positive step forward, it remains to be seen whether Queensland will adopt this amendment, particularly as Queensland has no conveyancing act. Therefore, Queensland has no regulation stopping developers from delaying the completion of the development and terminating the contract.
Presently, buyers can protect themselves by looking into the reputation of the developer before signing the contract. Confirming whether the developer has completed previous developments and online reviews can confirm the reputation of the developer and their reliability to complete developments on time, and therefore unlikely to exploit the sunset clause.
MyPropertyProtect has a plethora of experience in off the plan matters. If you have any questions or require assistance with a conveyancing matter in Queensland, please contact the property team at My Property Protect for more information.
Kayleigh Swift, Associate
Chloe Skubis, Graduate Law Clerk
About the authors
Kayleigh Swift is an associate in our Commercial and Property team who assists with Employment Law matters. With a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations, Kayleigh provides practical advice to ensure smooth business transactions.
Chloe Skubis is a Graduate Law Clerk in our Property team who assists with various conveyancing transactions. Chloe is very experienced in residential conveyancing and is a problem solver. She always provides efficient service to all her clients.