A Sunset Clause applies in two types of property purchase. First, when a property purchase is conditional upon the sale of the buyer’s existing property, and second, in an off-the-plan property purchase. This first scenario is reasonably straightforward: a buyer agrees to buy a new property only if their current home sells by a specific date. If the existing property does not sell within this period of time (by the “sunset” date), then the contract can be brought to an end without either party being penalised. The use of Sunset Clauses in off-the-plan purchases is more complex, and is the focus of this article.
In short, the Sunset Date is the day the developer fulfils the final obligation prior to settlement and registers the plan of subdivision. In essence, if the developer is unable to deliver by the Sunset Date, either party may rescind the Contract, without penalty. This article provides a summary of the most important concepts in relation to the Sunset Clause in off-the-plan purchases.
Buying a property “off-the-plan” means that you are agreeing to purchase something that is not yet in existence (or is at least not registered as a property with its own title). Most commonly a developer has decided to construct a building with multiple units but needs to secure the sale of at least some of the units before starting construction.
As the property that is being purchased does not yet exist, an off-the-plan purchase is conditional upon the property being constructed. There is usually a clause in the contract of sale that the date of settlement – that is, the date that the sale will go through – is when the seller/developer notifies the buyer that the construction is complete, the property has title, and a certificate of occupancy has been issued.
Even if construction of the property has already commenced, this does not guarantee that the project will be completed in the near future. In some circumstances, the developer will delay construction of a building while they wait to sell all of the units, or they will not commence construction until other projects they are working on are complete. The construction of a multi-dwelling property takes considerable time even if all goes well and can be beset with delays. The developer or builder might find that they are behind schedule because of the weather, council regulations and difficulty obtaining permissions, lack of availability of materials and labour, poor project management or financial problems. When buying off-the-plan, it is sensible to assume that the likely date for you to take possession of a property is some years in the future.
One of the terms of the contract will set out the last possible date that the developer must complete the building. If the developer does not complete the property by this date the sun will set on the contract – this is a rather poetic way to say that the relationship of buyer and seller will have run its course, and either party can choose to bring the relationship to an end by terminating the contract.
Pros and cons of off-the-plan purchases
For Buyers
The purchaser may find various benefits to buying a property off-the-plan, including the potential to pay a lower price in the pre-construction stage, and sometimes the ability to select elements of the build (such as layout, colour schemes, and finishes). There is also the potential for a buyer to secure a property with only a deposit and then have additional time to arrange the rest of the necessary financing. This is a risky strategy (as discussed below) and should only be used if your contract is conditional upon you obtaining satisfactory finance for the full purchase price.
For Sellers
In off-the-plan developments, the seller of the property and the developer of the plan may not be the same person or company. For instance, a seller may own a piece of land that has the potential for multiple dwellings, but may not be able or willing to develop the land themselves. In that case, the buyer may have a contract that lists this person or company as the seller (the “vendor”) and another company as the developer, the entity that will actually construct the building. In fact, in some cases, the seller is actually the state, but the obligations of the contract are between the developer and the buyer.
For the seller, the benefits of off-the-plan sales include being able to attract a developer to work on the project on the strength of the pre-sale of the units. This allows the seller to proceed with a development without making progress payments because the developer will be confident that payment will be forthcoming at the end of construction.
For Developers
By securing the sale of the unbuilt properties, the developer is able to show their bank that the construction will be financially viable. This may be the only way that the developer can secure the finance to buy the materials and pay workers to actually complete the project. Of course, the benefits to the buyer – of purchasing at a lower price and being able to specify elements – may also be considered the chief negatives from the developers point of view. They run the risk of selling the properties for considerably less than they would be able to fetch for a completed dwelling, and they have the ongoing challenge of working with buyers while constructing the properties.
What is the purpose of a sunset clause?
It is critical for a contract to provide both parties with a degree of certainty about when their obligations must be performed and when they will come to an end. The Sunset Clause allows an off-the-plan contract to have some certainty, even if the actual date when the property will be complete remains very uncertain. If, at the final date agreed by the parties, it is clear that the property is not yet ready to hand over, then either party can choose to walk away from the bargain. If there were no Sunset Clauses in an off-the-plan contract, then the contract would remain in place until the obligations were fulfilled, which could stretch on indefinitely.
What are the potential penalties of missing your sunset date?
The Sunset Date theoretically applies only to the obligations of the seller/developer to have the property ready to hand over. This is not a penalty clause, in that the developer or seller is not penalised for failing to complete the property on this date, but they do potentially lose the benefit of the agreed contract. The buyer will be able to terminate the contract, receive their deposit back in full, and will usually also receive the benefit of any interest which has accumulated on the deposit during the contract period.
However, the buyer must ensure that they are also in a position to settle at any time allowed for by the contract, and not assume that the contract will continue until the Sunset Date. For instance, let’s say you decide to purchase a unit. You have enough for a deposit, but you would not qualify for a loan to settle as your income is not high enough. You decide to purchase a property that is not yet built so that you have time to secure a better job or a promotion so that you can qualify for a loan for the required amount. The Sunset Clause on the property is five years, so you are confident that you will be in a position to settle by then. This approach exposes a risky approach to a Sunset Clause. A Sunset date is the last possible date for the obligations of the developer/seller to be fulfilled. Most often, the development will be finished years prior to the Sunset Date. In the scenario above you could find that the property is ready in six months, and you are obliged to settle but are not able to obtain finance. Unless your contract was subject to you obtaining finance, you would likely forfeit your deposit and possibly incur other penalties because you relied on the Sunset Date as the likely date of settlement.
For a buyer sunset clauses create a risk of becoming victim to an unscrupulous developer or vendor using a Sunset Clause to their advantage. For instance, let’s say that you bought a property off-the-plan in an area that was slightly unfashionable, where property prices were lower than neighbouring suburbs. You have a good feeling and you’ve done your research, and you think that the area is about to boom. You pay a fair market value for the off-the-plan unit, and agree to a Sunset Clause of five years. After the five years has elapsed, you are excited to note that the development is well underway but more importantly, the suburb has gone through the roof! Your unit will be worth much more on completion than the dollar value of your contract. In that circumstance, you may well choose not to terminate the contract, even though the contract allows you to, as you anticipate that your patience will be rewarded with a property that has substantial equity by the time settlement goes through.
The problem arises if the developer or vendor, who also knows that the property could now fetch a higher price than you have agreed to pay, terminates the contract so that they can resell it at the new market value. This bad faith act would deprive you of the benefit that you are entitled to due to your forethought and patience in purchasing off-the-plan. This action is, unfortunately, perfectly legal unless it is a breach of a contractual obligation: most off-the-plan contracts do include a clause that requires the developer to take all reasonable steps to complete the project prior to the Sunset Clause.
In some jurisdictions there is also legislation which aims to protect buyers from this unscrupulous conduct. In New South Wales, for instance, the Conveyancing Amendment (Sunset Clauses) Act 2015 sets out the vendor’s obligations relating to terminating a contract in this manner. A vendor planning to exercise a Sunset Clause must explain to the buyer why the project was not completed by the Sunset Date, and why they are now proposing to rescind the contract. The legislation also states that a vendor must obtain the consent of the buyer to terminate the contract under this clause. A vendor must either gain the written consent of the purchaser or obtain an order from the Supreme Court of NSW permitting the proposed rescission. The Court, in determining whether it is just and equitable to make the order must take into account factors such as the reason for the delay, any increase in value of the property, and whether the vendor has acted in bad faith. The prospect of having to convince the Court provides a fairly significant deterrent to developers who might otherwise attempt to terminate a contract and resell the property at the new market value.
Need to speak to a property lawyer or conveyancer?
The team at Unified Lawyers can help you during any stage of an off-the-plan purchase, whether it is reviewing the contract before you sign (which is a good idea!), terminating due to a missed Sunset Date, or arranging the settlement. Contact the team today for any property law advice or conveyancing assistance.
“All materials throughout this entire website has been prepared by Unified Lawyers for informational purposes only. All materials throughout this entire website are not legal advice and should not be interpreted as legal advice. We do not guarantee that any of the information on this website is current or correct.
You should seek specialist legal advice or other professional advice about your specific circumstances.
All information on this site is not intended to create, and receipt of it does not constitute a lawyer-client relationship between you and Unified lawyers.
Information on this site is not updated regularly and so may not be up to date.”
