A sunset clause is a condition included in some contracts of sale of property, to protect the buyer and seller. It lets either party end the contract if certain requirements are not met. Think of it as a ticket to walk away if things don’t go to plan.
However, while sunset clauses may exist to offer security and protection, they don’t always pan out this way and can sometimes be manipulated. Read on to learn more about this clause and what you may want to consider before signing.
In this guide
What is a sunset clause?
A sunset clause is a stipulation included in some contracts of sale. It is designed to protect the buyer and/or seller by letting either party walk away from the contract if the requirements of the agreement are not met by a certain date.
In real estate transactions, the clause is commonly included in the sales contract of off-the-plan property. It can also be used when buying an established property if the sale is conditional on the buyer selling their current home first.
Why are sunset clauses used?
A sunset clause is used to protect the buyer or seller and gives either party the option to leave the contract if things don’t go to plan. They are generally used in one of two types of real estate negotiations:
When buying an off-the-plan property
The inclusion of a sunset clause may be useful when buying an off-the-plan property (eg. a new build house, townhouse or apartment) since it can give the buyer the option to walk away if the build gets held up, while also being paid back their deposit in full.
Usually, the sunset clause will state the date by which the build must be completed. If this date passes and the requirements of the contract have not been met, the buyer has the option to end the contract.
When purchasing or selling established property
A sunset clause may also be a useful to a vendor selling their home if the sale is conditional on the buyer selling their current home first.
By including a sunset clause in the contract of sale, the vendor can stipulate a date by which settlement is to be completed. If the buyer is unable to sell their current home and settle by this time, the vendor then has the option to invoke the sunset clause. This lets them walk away from the contract and gives them the chance to find another interested buyer.
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Who do sunset clauses apply to?
Use of the sunset clause is open to the buyer or the seller, and either party can choose to invoke the clause if the expiry date has passed. Once invoked, it applies to both parties.
There are, however, cases where invoking the clause may be more difficult for one party than the other. Legislation has been passed in some states to make it more onerous for building developers to invoke the sunset clause. This is the result of instances of some developers manipulating the clause to purposely hold up development until the expiry date has passed, so that they can relist the property for a higher price.
When can a sunset clause be invoked?
Typically, a sunset clause may be invoked by either party if the expiry date has passed and conditions or requirements of the contract have not been met. It is the option of either of the two parties to invoke the sunset clause, and it does not happen automatically.
Can a sunset clause be extended?
It is possible for two parties to come to a mutual agreement to extend the terms of a sunset clause.
Legal advice should be sought however, and in this scenario the sunset clause would carry on until the new agreed upon date. If by this date the requirements of the contract had still not been met, both parties would once again have the option to invoke the clause and walk away.
As with any contract negotiation, legal fees may be a factor when invoking a sunset clause. It will always be a good idea to get legal advice in a situation where potential liability for large sums of money is involved.
Lawyers may charge around $300 per hour for their services, and a standard property contract typically costs around $900 when prepared and executed by a solicitor or property conveyancer. It would be reasonable to assume that lawyers have a standard sunset clause wording that can be inserted into a property contract if you need time to sell your current property, and that the additional cost would be minimal (say $100). However, if the clause later had to be invoked by the solicitor on your behalf, you might be looking at a further $300 at least.
Where you need a lawyer to inspect a sunset clause inserted into a contract by a vendor, you may need to pay for several hours of their time if they need to investigate the vendor’s history and reliability. However, this would probably be money well spent unless you felt qualified to carry out the investigations yourself.
How to use a sunset clause
Invoking a sunset clause generally includes the following steps:
- Sunset clause is included in contract of sale and both parties sign and agree to it.
- Expiry date listed in sunset clause passes without the requirements of contract being met.
- Either party (the buyer or seller) chooses to invoke the clause. Notice of this is usually done in writing.
- Once invoked, both parties walk away from the contract. Any deposits are paid back in full.
In some cases, a sunset clause can disadvantage one party, or even be manipulated for gain. Those entering a contract of sale with a sunset clause (or proposing one be added) should be aware of the potential risks.
Developers using the sunset clause to cancel the contract and put the property back on the market for a higher price.
- There are cases of developers deliberately delaying construction to invoke the sunset clause.
- This can allow the developer to walk away from the contract of sale and relist the property for a higher price.
- Buyers should be aware of the risk before signing any off-the-plan development and seek legal advice before doing so.
- On average, the sunset clause on off-the-plan developments is around 18 months. Any more than this may be a red flag.
Vendors choosing another buyer rather than including a sunset clause in the contract.
- If a buyer’s purchase of a property is conditional on them selling their current home first, they may ask the vendor to include a sunset clause in the contract of sale.
- While this may be to the buyer’s advantage, in a hot market it offers little incentive to the vendor.
- Instead, the vendor may choose to find another buyer who does not need to include a sunset clause in the contract.
Example sunset clause
Here’s a hypothetical scenario of a sunset clause in action.
Barry and Georgie have a growing family and wish to move to a bigger place. The couple already own their own home, but they will need to sell their place to afford something bigger.
After countless open house weekends, the couple finally find a suitable residence in a leafy suburb with good schools. They put in an offer which is accepted by the vendor. A contract of sale is drawn up.
Knowing that they will need to sell their current home to afford the new house, Barry asks that a sunset clause be included in the contract in case things don’t go to plan. Since the couple are offering a good price and the vendor had previously struggled to find a buyer, she agrees to including the clause and gives the couple 90 days to sell their house.
Three months pass and the couple have still not sold their current home. The couple decide to invoke the sunset clause and walk away from the contract. The vendor finds another buyer.
This information has been prepared as a guide and does not constitute legal or financial advice. We recommend seeking professional advice before signing or undergoing contract negotiations.