Purchasing a property is always a stressful experience, especially if you are a first-time homeowner. So in order to protect both parties involved in the process, a sunset clause is usually found in a contract of sale.
So what is a sunset clause? Who does it apply to, and what are the potential risks to be aware of?
Continue reading to find out about everything related to a sunset clause.
What Is the Sunset Clause?
A sunset clause in a contract of sale is a provision that sets an expiration date on the contract’s validity. With that in mind, the expiry dates listed should be realistic so as to provide enough time for both parties to meet the requirements stated in the contract.
After the said date, the contract will no longer be in effect, and both parties are legally allowed to walk away from the agreement.
The sunset clause is designed to protect the buyer/seller in case one of the two parties involved decides to walk away, which happens when the requirements are not met until a specific date or if things go south.
Similar to the subject to finance clause, the sunset clause is not automatically included in the contract of sale, meaning that you need to add it to your agreement.
Note: Make sure that both parties understand and agree to the sunset clause. Once the contract is signed, it will be legally binding.
Who Do Sunset Clauses Apply To?
A sunset clause applies to both the buyer and the seller, and either party can choose to terminate the contract once the expiration date has passed. Once a sunset clause is invoked, it applies to both parties.
Before agreeing on a sunset clause to be included in the contract of sale, it would be best to seek legal advice. But beware of the legal fees.
- Lawyers might charge around $300 per hour;
- A standard property contract costs around $900;
- Including the standard clause wording in the contract costs around $100;
- If the clause is invoked by a solicitor, you might need to pay at least $300.
To sum up, the legal fees might go over $2000, but it’s always a good idea to consult a legal expert rather than taking the situation into your own hands.
Thinking about invoking a sunset clause in your next contract of sale? Pay attention to a few things.
- The sunset clause is listed in the contract, and both parties sign, i.e. agree on it.
- The expiry date should give both parties enough time to complete their obligations.
- Either party can invoke the clause if the obligations towards them haven’t been met.
- Once invoked, both parties can walk away, and any deposits are paid in full.
Can a Sunset Clause Be Extended?
The good news is that it is possible to extend a sunset clause, but only if both parties involved in the contract come to a mutual agreement. Only after getting legal advice should a new final date be set. If the newly appointed date for the sunset clause has still not been met, both parties could invoke it and walk away from the deal.
The sunset clause can be extended in the event of delays that are out of the developers’ control, like weather conditions or strike.
However, in cases where one of the parties doesn’t want to cooperate and extend the sunset clause, or if the contract doesn’t include a provision that allows for that, the sunset clause cannot be extended.
How To Use a Sunset Clause?
Generally, sunset clauses are used in two situations:
Off-the-plan sales:
When buying an off-the-plan property, buyers usually include a sunset clause that specifies the date by which the developer must finish the project. It also stipulates that if the project is not finished until the expiry date, the buyer is legally allowed to walk away and get the deposit in full.
Purchasing established properties:
In this situation, the seller typically wants to include a sunset clause so that they may withdraw from the agreement if the buyer fails to meet the needed requirements, such as selling the current private property within the specified time frame.
You might be interested in: What Happens When You Pay Off Your Mortgage in Australia?
What Are the Disadvantages And Risks?
While it is typically beneficial for the overall security of the parties involved, some potential risks do come with a sunset clause, meaning you should include it in the contract with some caution.
There have been situations in which developers would purposely exceed the expiry date of the clause, causing an invocation of the sunset clause only for them to relist the property for higher payments. In this case, even though the buyer gets the deposit back, he is the one affected by the situation.
The problem that arises is that the buyer is forced to pay for the property at a higher price due to inflation or to look elsewhere. This can further complicate the situation as prices have risen since the deal was made, and the buyer is now priced out of the market.
On the other hand, a salesperson is more likely to choose a buyer that doesn’t require a sunset clause in their contract. This commonly happens when the buyer needs to sell their current land before buying another one. When this occurs, the vendor might prioritise buyers with whom they won’t need to include a sunset clause.
Further reading: What Happens if Settlement Is Delayed by Buyer?
Bottom Line
As with all things in real estate, you need to do thorough research before signing a provision. Therefore, knowing the answer to questions like “what is a sunset clause”, “how does it protect the homeowner”, and “does a sunset clause make the property harder to sell” is a must when you get involved in the property market.
