What is a ‘sunset clause’? Off the plan investment terms explained
The term ‘sunset clause’ is more easily thought about as a ‘time limit’ that can be put into property contracts. In this article, we’ll be discussing sunset clauses and off the plan purchases. We will cover sunset clauses and established property next week.
Whenever there is a sunset clause you should speak through the implications with your conveyancer.
Essentially, a sunset clause notes that if the project is not completed by a certain time then the contract is void. The buyers deposit will be refunded and they are free to look elsewhere.
Sunset clauses can help buyers by providing an expected completion date, and also as a safety net for if the developer delays for far longer than the buyer may be happy with.
A seller can also use the sunset clause to ensure they are paid in full as promptly as possible, explains the Queensland Office of Fair Trading.
However, warnings around sunset clauses have certainly been heard.
The sunset clause has seen some developers run over the time limit, refund the deposit, and then look to sell the blocks on at a higher price. This is especially the case if the market has been hot – meaning the buyer will also miss out on capital growth during this time. This leaves them losing out on other opportunities while their deposit is tied up in the development.
While Queensland’s Office of Fair Trading describes a real life example of this situation happening it’s unclear just how common this practice is, however it’s worthwhile for investors and home buyers to ensure that the length of the sunset clause is appropriate for them and the worst case scenario.
Delays can happen with construction and developments, so it’s worthwhile building in some ‘fat’ to the sunset clause and to have a clear understanding as to where the project is in its development (and whether lengthy uncertain parts of the process, such as obtaining planning approvals, have already occurred).
Background checking the developer can also be helpful, as can ensuring that progress is demonstrated regularly. You will want to be informed early of any delays and any issues these may cause.
The Western Australia Department of Commerce recommends these three considerations to determine whether a sunset clause's length is appropriate:
- Whether the developer has obtained all the necessary approvals to commence and, if not, what still needs to be approved.
- Whether the developer is required to secure a minimum number or proportion of unconditional contracts before they can obtain funding to allow the project to proceed and, if so, how many contracts have already been secured.
- The extent of progress of the development made to date (to check on progress, a proposed buyer could ask their solicitor, the developer or the developers representative whether the milestones are being met within the necessary time frames under the contract).
It's also worth noting that if a development runs over the length noted by the sunset clause, the developer and the buyer can organise to have the contract written up again if both are still happy with the price and terms previously agreed upon.