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What is a 'sunset clause'?

Friday, June 20, 2014
What is a sunset clause?

Simply put, a sunset clause stipulates the date by which the sun sets on the agreement allowing the property contract to be voided and the deposit be returned to the buyer.  It is commonly inserted into agreements over properties that are not yet capable of being conveyed - i.e. in the absence of a title (new development or subdivision).  

If your sale and purchase agreement contains a sunset clause, irrespective of whether you are the buyer or seller, make sure you speak to your conveyancing lawyer to understand the operation and the implications of the clause fully.  

Typically for a property without a title, settlement will be set for 5 working days after the issue of title.  However, unforeseen delays can freeze the buyer's deposit indefinitely while still putting him under the obligation to complete the purchase.  Putting in a sunset date in these situations give the buyer a safety net to fall back on.  The seller is pressured to complete all necessary work in order to transact the property by the sunset date.  When it has come and gone, both parties still have the option to continue with the (amended) contract.  

In a hot market however, buyers should be aware of the potential loophole a sunset clause affords sellers.  Consider this: 

You have been enticed into purchasing a $500K property still at the blue print stage by putting down a $100K deposit, the agreement comes with a sunset date of six months from today so you figured you have nothing to lose.  The sunset date came along and you were told by the developers due to overwhelming construction delays, they are not able to complete the construction in time and obtain title.  They are very sorry but here is your money back.  A month later you found out that the said property has been fully constructed and is now selling at the market price of $650K.  W@#$#%^!  You just missed out on $150K of capital growth while the developers essentially enjoyed an interest free loan from you (ok, maybe not a loan but your deposit and commitment to purchase would have allowed them to obtain further finance).  Additionally, you are also facing with having to enter a market 6 months late that has appreciated by 30%. 

So how do you set an appropriate sunset date and ensure that the above does not happen to you?

  • Research the developer/seller - find out as much as you can about the seller, their backgrounds, their past projects (in particular the scope of the projects), talk to past buyers to find out what their experiences had been like; 
  • Set ground rules for transparency - make sure the seller is accountable to you all the way through the construction/consenting process so that you know the state of play at all times, that way come sunset date you can make an informed judgment whether to void the contract completely; and 
  • Talk to the experts - if you feel uneasy about buying a property before title has been issued, always talk to your lawyer about the effects of a sunset clause and what your options are.  
Have you had much experience with sunset clauses?  Share them below to help our community of investors!

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