What is a Sunset Clause in Off the Plan Contracts?
When buying property off the plan, whether it is new apartments, townhouses or even house and land packages, your contract will include a Sunset Clause.
What is a Sunset Clause?
Essentially a Sunset Clause provides a maximum time limit for the project to be completed by. If the project does not complete by this time frame (or known as the Sunset Date) then the contract is void and the buyer’s deposit will be refunded to them in full and they are free to walk away from the contract.
Time limits for the Sunset Clause?
Every Sunset Clause will be slightly different and will depend on the project size. A boutique development is likely to have a shorter time frame compared to a high rise development. This is because a high rise development will have many more apartments and even some communal facilities that require much more work. However, what remains the same is the fact that if the property is not finished by the maximum time frame (or sunset date) then you can legally walk away and receive your full deposit back.
Typically, the sunset clause is around 18 months; however, for a development yet to start this could be 36 months, whilst a development nearing completion might only require a 12-month sunset clause. It’s therefore best to get your conveyancer or lawyer to carefully look through your contract to check this sunset clause and sunset date for you. It’s also worth noting that you should use a conveyancer or a lawyer who is familiar with off the plan contracts as established properties do not include a sunset clause, it is only off the plan projects.
Why have a Sunset Clause?
The reason for having a sunset clause is that not only does it give developers some breathing space if there are delays beyond their control, but it also gives buyers an expected completion date and some more certainty.
Generally, projects will be completed well within this time frame. It is usual that there will be unexpected delays that the developer might experience along the way, for example adverse weather conditions, industrial actions or even development funding delays, so having a sunset clause will protect the developer as well as protecting the buyer.
What are the risks?
Ideally, you want the project to go ahead and to be completed on time without running over the sunset clause date. Although you do receive your full deposit back if the development does not complete, it means that you would have wasted a few years in the property market and have nothing to show for it. During this time, property prices could have increased massively so you would miss out on all this potential capital growth. Look at the Sydney property market as an example: 2014 -2015 saw exceptional levels of growth in the double figures and you would be kicking yourself if you missed out on this capital gain.
It would also mean that by the time you get your deposit back, property prices are a lot more expensive than when you first put your deposit down, making it even harder to get a foot on the property ladder. This is why it is so important to check the sunset clause, research the developer and research the project to ensure that it is a viable option for you.
Another major risk to be aware of is that previously developers of off the plan properties would over-run on purpose in order to rescind the contracts, refund the deposit in full, only to resell these properties at a much higher price and cash in on this rising market.
Fortunately, there are now consumer protections in place to protect buyers against developers who purposefully do this. Developers will now only be allowed to rescind contracts under the sunset provision under carefully prescribed grounds and must also serve a notice to buyers outlining their reasons. However, if the purchaser does not consent to the rescission then the development will have to obtain a court order at their own cost.
How to avoid risks?
If you are worried about your project potentially running over the sunset clause or working with a developer that does the dirty, then there are a few things you can do first to protect yourself.
Use a reputable developer – It is important to work with a reputable developer that has a solid track record in developing high quality projects on time. At iBuyNew, we only work with reputable developers and have built up strong trusted relationships with them. We can therefore point you in the right direction of which developers are best to use within your budget and who should be avoided.
Check that Development Approval has been granted - If Development Approval has yet to be received from the council then the project might not even go ahead or could seriously delay the project from starting; thereby overrunning the sunset clause date. To avoid this, try to buy within a project that has already received this approval.
Check what stage the project is at – You should also check with your property consultant or developer which stage the project is currently at. Usually it will be yet to be started or under construction. If the project is yet to start construction, then you should find out when the construction is expected to commence.
Is there a minimum number of contracts a developer must satisfy? – Sometimes banks and financers will only let a development proceed if the developer has fulfilled its minimum number of contracts first. Therefore, you should find out how many contracts have already been filled.
Get independent legal advice – Ensure that you use a reputable lawyer or conveyancer that specialises in off the plan contracts to look over the contract for you and check the sunset clause.
Check the sunset clause length yourself – You should also take a look at the sunset clause to see whether this provides a reasonable length of time, in case any unexpected delays occur. Our Property Consultants at iBuyNew can also assist you with this if you are unsure.
It is important to note that if the development runs over the sunset clause time frame, you can have the contract re-written if both parties are still happy with the pricing and original contract terms. However, there is also the options to have the deposit refunded in full and walk away from the development.
If you do decide to have the contract re-written, we would recommend you speaking to your Property Consultants to see how far away completion is whilst you should also speak to your reputable conveyancer or lawyer to go over the new contracts.
To learn more about sunset clauses or to start your property hunt, why not get in touch with the iBuyNew team today. Call us on 1300 123 463 and speak to one of our expert Property Consultants.