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.
Pros and cons of off-the-plan purchases
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.
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.
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 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.
“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.”