Why you should always read the sunset clause
When you buy a property, particularly a property off the plan there are many things you need to consider and check, and one such item of importance not to be overlooked is the sunset clause.
What is a Sunset Clause? Off the plan properties will always have a sunset clause in the contract and this sets out to protect both the buyer and the vendor. A sunset clause can vary in length and is generally around 18 months; however for a development not already started; the sunset date could be for 36 months, whilst a development nearing completion may only require 12 months.
If the development has not been completed by the specified sunset date, then the vendor and buyer are allowed to pull out of the contract without any penalties and the deposit is returned to the buyer in full.
Why have a Sunset Clause? A sunset clause adds some certainty to a development and provides buyers with an expected completion date, whilst it also gives developers some leeway in case of delays due to factors such as adverse weather conditions and things that are beyond the developer’s control. It is important to note though that a development is likely to be completed before the estimated completion date, but the sunset clause acts as a safety net and provides the longest possible time it could take to complete.
Sunset Clauses: Things to watch out for Even though sunset clauses are put in place to protect both the vendor and the buyer, there are cases where developers use the sunset clause to their own profit and advantage.
Examples of this include where the developer has purposefully run over the time limit which is set by the sunset clause by the sunset date. This means that buyers have the option to terminate their contract and receive their full deposit back, but the properties within this development are then sold to new buyers at a higher price.
This type of scam is more common when a property market is red hot and booming as the developer will be able to sell these same apartments at a greater price making a greater profit. It’s not as good news for the buyer though who has not only missed out on this opportunity, but their money has also been tied up for perhaps two years meaning they were unable to buy anything else in the meantime. This is known as opportunity cost.
It is also likely that property prices have increased in value since the buyer first put down their initial deposit, so not only have they missed out on capital growth, but they are also faced with a higher entry price into the market which they might not have the immediate funds for.
How to reduce risk It’s important to know that this kind of scam is not widely practiced; however investors and buyers need to do their homework to ensure they reduce their risk.
1) Check the length of the sunset clause
Buyers and investors should check the sunset clause carefully and ensure that it provides a reasonable length of time to complete the project as with like anything in life, there are likely to be delays.
2) Planning Approval
You should also check to see if planning approval has already been given as this will mean the project is more likely to go ahead than one that has yet to get approval from the local council.
3) Developer background checks
Have you checked the developer’s background? Have their past developments run to schedule? Working with a good developer is very important as this will determine the quality of the property as well as whether it will be built on time. You should also check for progress and be contacted regularly of any delays that might have occurred.
What happens if the development runs over the sunset date? If the developer has not completed the property by the sunset date deadline as determined by the sunset clause, then the buyer has two options.
1) Terminate the contract
The buyer can either terminate their contract to receive their full deposit back, or
2) New contracts organised
The developer and buyer can organise for a new contract to be written up if both parties are still happy with the original pricing and terms originally agreed upon.
So if you are considering buying an off the plan apartment, then it works in your favour to use a reputable conveyancer or lawyer who specialises in off the plan property contracts so that they can thoroughly check the contract for you and identify whether the sunset clause in this instance is fair.
You should also do your due diligence and check this sunset date too and see how far into the construction the development is.
At iBuyNew we pride ourselves on using reputable developers and have worked with many of our developers for numerous years and can recommend numerous projects and developers to buy today. For more information on sunset clauses, our developers and off the plan properties, call us today on 1300 123 463.
Published on 25th of August 2015 by Marty Stanowich