Buying property is stressful. There's a lot of financial and emotional investment at stake, and a lot of things that can go wrong.
For that reason alone, you're unlikely to ever come across a real estate article that doesn't mention the need for buyers to do their research – and this one's no different.
Here, we take a look at the controversial sunset clause, the risks associated with it, and how you can make it work for you.
What is a Sunset Clause?
The sunset clause is a statement in the contract of sale that effectively puts a time limit on the contract's validity. If settlement has not taken place by the end date included in the clause, both parties are legally entitled to walk away from the contract. In such a scenario, the buyer would receive their deposit back in full.
Risk free: 8 common questions when buying off-the-plan
Sunset clauses are commonly included in contracts of sale for off-the-plan properties. Picture: realestate.com.au/buy
When is it used?
The sunset clause is generally used in one of two situations.
Firstly, it is routinely included in off-the-plan property exchanges. In this context, the clause stipulates the date by which the developer must finish the project, and it also stipulates that, if the property is not finished by this date, the buyer is legally entitled to walk away from the contract and receive their deposit back in full.
Generally, the project is finished well before the date outlined in the clause, as developers exaggerate the required timeframe, to allow for delays caused by industrial action, inclement weather or lack of funding.
Secondly, a sunset clause is often used when a buyer makes a property purchase conditional on the sale of their current home. When a buyer makes such an offer, a seller often chooses to insert a sunset clause into the contract of sale so that they can pull out from the deal should the buyer fail to sell their current home within the timeframe outlined in the sunset clause.
In this context, a sunset clause protects the seller by offering them a way back onto the market, should the buyer take too long to get their affairs in order.
What are the risks?
In recent years, there have been a spate of cases where developers have purposely run over the time outlined in the sunset clause, so that they can terminate the contract and attempt to resell the apartment for a higher price.
While the buyer gets their deposit back, they are forced into either paying more for the same property, or looking for another property elsewhere. The problem is prices will have most likely risen since the buyer first struck a deal with the developer, meaning they find themselves priced out of the market, without a home.
This happens in a buoyant market, when developers want to cash in on rising house prices.
In response to widespread abuse of the sunset clause, the New South Wales Government announced in October 2015 that it would pass new legislation that forced developers to get written consent from either the buyer or the Supreme Court if they wanted to terminate the contract when the project was delayed.
In August 2018, the Victorian Government followed suit, preventing developers from using sunset clauses to intentionally delay building projects with the aim of exploiting buyers.
Vendors also use sunset clauses when buyers make their offer conditional on the sale of another house. Picture: realestate.com.au/buy
How to use a sunset clause to your advantage
Despite the recent controversies, a sunset clause isn't always bad news. Provided the small print works in your favour as much as the developer's, the clause is a valuable get-out-of-jail-free card that you can pull out your pocket when deadlines are missed.
First things first, you should do your due diligence on the developer before signing a contract of sale. Ask them for evidence of past projects, reach out to people who have previously bought apartments from them, and find out whether the media has reported any bad behaviour. It's also worth paying a visit to sites they have built in the past, just to assess the quality of their work.
Once you've gleaned an understanding of the developer's credibility, turn your attention to the specific building in which you hope to build a home. If construction is already underway, find out whether it's running on schedule; if it's yet to begin, check if the project's received all the necessary permits and building approvals. Obtaining these can take a long time, so if the project hasn't already received them, it's probably best to steer clear.
Next, taking into account the size and current progress of the build, and using similar past projects as a barometer, try to work out how long the project will take. Bearing in mind that a project can take up to 36 months to build, negotiate a reasonable sunset clause with the developer that minimises the chance of the project running past the end date.
Finally, ask a conveyancer or solicitor to look over the contract before you sign it. Even if the sunset clause looks reasonable, there's a high chance you will have missed something else important.
Research is key
As with all things relating to your new property purchase, you need to do your homework. Do your research on the developer and make sure they have a good track record and are a trusted presence in the industry.
It’s important that buyers have faith in what they are buying and in the security of the contract. After all, there aren't many purchases more important than buying a home.