What is a Sunset Clause in Real Estate and How Does it Work?

In this guide, we’ll explain sunset clauses, how they work, and how to use them to protect yourself during real estate transactions. You can also speak to an expert Sydney mortgage broker to get specific info on sunset clauses, based on your buying scenario. 

Imagine you bought a new home off-the-plan, and you’re waiting for it to be built. You’ve signed the contract, paid the deposit, and counted the days until you can move in. But what happens if the developer fails to complete the project on time?

This is where a sunset clause comes in. A sunset clause can protect you if things don’t go as planned. Instead of waiting indefinitely for your new home, you can withdraw your deposit and look elsewhere. However, sunset clauses don’t just protect buyers – they’re also essential for developers and those selling a private home.

What is a Sunset Clause?

While it may sound like the name of a fancy cocktail, a sunset clause is a straightforward legal term; it’s part of the sale contract that sets a deadline for specific conditions to be met. The contract can be terminated or renegotiated if these conditions aren’t met by the set expiry date beforehand. Real estate transactions usually involve deadlines for completing a building or registering a title.

Uses of a Sunset Clause

Sunset clauses are common in two scenarios – buying off-the-plan properties from a developer or selling an established home. The clause functions differently in each situation.

1. Buying Off-The-Plan

Buying off-the-plan means you agree to buy a property that hasn’t been built yet. For example, you might decide to buy a new apartment based on plans from the developer. In the contract, a sunset clause outlines a deadline by which the apartment must be completed. If the deadline isn’t met, you and either the buyer or developer have the right to exit the contract, and your deposit is refunded.

2. Selling an Established Property

When buying an established property, it’s common for a “subject to sale” sunset clause to be included. This clause sets a deadline for the buyer to sell their current home before finalising the purchase of the new one. If they can’t, the contract can be terminated, allowing both the buyer and the seller to walk away without penalties.

What Does a Sunset Clause Include?

A sunset clause might sound complicated or dull, but it’s simple. It comprises different parts that help protect everyone involved in a real estate transaction.

A well-structured sunset clause should include:

• Conditions: These are the conditions that must be met for the contract to proceed. For example, it might include the completion of construction or the sale of the buyer’s current property.
• Deadline: This is the date the specified conditions must be fulfilled. The deadline ensures that both parties know the timeframe for meeting the conditions.
• Consequences: This section outlines what happens if the conditions are not met by the deadline. It may include the right to terminate the contract and walk away without penalty, seek compensation for any losses incurred, or renegotiate the contract terms to extend the deadline.

How Does a Sunset Clause Work?

Knowing how a typical sunset clause works can make real estate deals a lot simpler to navigate. Here’s a quick rundown of the usual steps involved:

1. Choosing the date and conditions: Both parties must agree on the conditions included in the clause and a specific date by which these conditions need to be met.
2. Inclusion in the contract: The sunset clause is added to the contract of sale. Once both parties sign the agreement, the sunset clause is legally binding.
3. Monitoring progress: Both parties monitor the progress of the conditions, ensuring that milestones and deadlines are being met.
4. Exercising the clause: If the conditions are not met by the deadline, either party may exercise the sunset clause to terminate the contract.

Common Scenarios Involving Sunset Clauses

There are several reasons why conditions might not be met by the time deadline day rolls around. Some common examples of when a sunset clause may be activated include: 

Delays in Construction

Delays can happen due to supply chain disruptions, labour shortages, or regulatory issues. In these cases, a sunset clause protects buyers and developers by ensuring the buyer agrees they’re not stuck in a delayed project indefinitely. For developers, it offers the option to renegotiate the contract with a new buyer or terminate it if needed.

Quality and Compliance Issues

Buyers might want to back out if the completed property doesn’t meet quality standards or comply with building regulations. A sunset clause can routinely included to provide an exit strategy, allowing buyers to withdraw from the contract if the property fails to meet the agreed-upon standards by the deadline.

Market Fluctuations

Cancelling a contract due to market fluctuations is a rather topical issue. In recent years, several developers have been accused of invoking sunset clauses on purpose, allowing them to resell the properties at higher prices after the market has increased. Understanding the implications of market conditions on property purchase, price, and sunset clauses is crucial for both parties. For insights on navigating market fluctuations, refer to our article on property investment tips for Australian homebuyers.

Why are Sunset Clauses Important?

Real estate involves many moving parts, so a lot can go wrong. A sunset clause, or such an offer as an offer, can protect parties against financial loss if things don’t proceed exactly as planned.

Protection for Buyers

As a buyer, a sunset clause provides security if something happens that would cause you to back out of the sale. This is important when buying off-the-plan, where delays can lead to financial strain and uncertainty. If a developer fails to complete construction on time, you can take your deposit and search for another property. For help navigating the property market, check our guide on buying a house.

Protection for Developers

Sunset clauses are a big help for developers. They can exit a contract if certain conditions aren’t met, like securing financing or getting necessary permits. This gives developers the flexibility to manage their projects better. It also helps them handle risks from unexpected issues or delays, such as bad weather, strikes, or labour shortages.

Protection for Sellers of Established Homes

Sellers of established homes can also benefit from a sunset clause in sale contracts. If a buyer can’t secure financing, the seller can end the contract and find a more qualified buyer. That way, the sale can proceed smoothly and without unnecessary delays.

Pros and Cons of Sunset Clauses

Sunset clauses come with both benefits and drawbacks. No matter which side of the sale you’re on, weighing them carefully before including the clause in the contract is essential.

For Buyers

Pros

• Security in project timelines: A sunset clause can protect you as a buyer against construction delays, ensuring things move forward at a reasonable pace. This provides peace of mind and financial security—you don’t want hundreds of thousands of dollars tied to an apartment that takes years to build.
• Exit strategy: If there are issues with the build, a sunset clause can enable you to take back your deposit and buy another property instead. This flexibility is crucial when unforeseen issues arise, helping you avoid prolonged financial commitments.

Cons

• Risk of exploitation: Developers might use the clause to cancel contracts if property values rise, reselling at a higher price. This has happened so frequently recently that some buyers have opened class-action lawsuits.
• Reduced bargaining power: When buying an established property, having a sunset clause can limit your negotiating power. Sellers might view the clause as an added risk and be less willing to negotiate on price or other terms.

For Developers

Pros

• Flexibility with unforeseen delays: Often, delays are outside a developer’s control. Sunset clauses offer protection against delays caused by factors like zoning issues, allowing them to manage projects more effectively and reduce financial risks.
• Risk mitigation: For developers, sunset clauses ensure that the buyer will have enough money to complete the purchase, reducing the risk of the sale falling through due to financing issues.

Cons

• Reputation damage: Unethically using sunset clauses can harm a developer’s reputation, making it harder to sell future projects. This can be a significant issue, especially if a developer sells properties off-the-plan where there’s a lot of good faith involved.
• Potential legal disputes: Disagreements over enforcing sunset clauses can lead to legal battles and additional costs. This can be both time-consuming and financially draining.

For Sellers

Pros

• Assurance of financial capability: For sellers of established homes, sunset clauses can assure that the buyer will secure financing and complete the purchase, reducing the risk of the sale falling through.
• Flexibility to find qualified buyers: If a buyer fails to secure financing by the deadline, the seller can terminate the contract and find someone more qualified. This means the sale can proceed smoothly without unnecessary delays.

Cons

• Dependence on market conditions: As a seller, you might be in a weaker position if market conditions change once the clause is activated. This could make it harder for you to find a new buyer. 
• Potential for disputes: Enforcing sunset clauses can sometimes lead to buyer disputes, which can result in legal battles and additional costs.

Legal Considerations and Risks

When including sunset clauses in the contract of sale, all parties have responsibilities under Australian law. These laws are designed to prevent people from unfairly exploiting the clause. However, the law can only provide so much protection. Buyers, developers, and sellers of established homes all have responsibilities to ensure the clause is fair and enforceable.

Buyer’s Perspective

If you’re buying a property and a sunset clause is included in the contract, you should:

• Review the clause carefully: Check that the sunset clause in the contract is transparent and fair. Pay attention to specific dates and conditions that must be met and look for any red flags that may work against you.
• Seek legal advice: Even after reading the clause yourself, consulting an expert ensures the clause is in your best interests and doesn’t overlook anything important. A conveyancer, a legal professional specialising in property transactions, can help you do this. If you don’t know a reliable conveyancer, we’ve compiled shortlists of leading experts in Sydney, Melbourne, and Brisbane. 
• Monitor the project’s progress: If a clause may be exercised, it’s best to know as soon as possible. Check for updates regularly and maintain communication with the developer so you’re kept in the loop.

Developer’s Perspective

Developers must navigate legal obligations and potential pitfalls when including sunset clauses in contracts. Key considerations include:

• Being transparent: Keeping buyers informed builds trust and reduces the likelihood of disputes. Provide regular updates on the project’s progress and any factors affecting completion dates.
• Legal compliance: Adhere to local regulations and laws governing sunset clauses. Compliance ensures that the clause is enforceable and protects against legal disputes.
• Documentation: Keep thorough records of all communications and project milestones. This can be crucial in disputes, providing evidence of compliance and good faith efforts to meet contractual obligations.
• Risk management: Plan for potential obstacles such as zoning issues, financing problems, or supply chain disruptions. Having contingency plans in place can help manage these risks effectively and keep the project on track.

Seller’s Perspective

Sellers of private homes also need to be mindful of the implications of sunset clauses. If you’re selling your home and want to include one, you should:

• Consult a conveyancer: A conveyancer will protect your best interests when writing the contract of sale. This includes clearly defining the conditions and deadlines and outlining the consequences if the buyer fails to meet their obligations.
• Verify a buyer’s financial situation: Before including a sunset clause, verify that the buyer can meet the conditions. This can include checking pre-approval letters from their lender or other financial documents.
• Plan for contingencies: If the sunset clause is activated, have a contingency plan in place. This might involve identifying potential backup buyers or preparing to relist the property quickly.

What to Do When a Sunset Clause Is Activated

While sunset clauses are a safety net for unexpected situations, they’re activated more often than you might think. Regardless of which side of the contract you’re on, there are specific actions you’ll need to take if that happens.

Review the Contract

The first step is to review the contract thoroughly. It’s crucial to understand your rights and obligations under the sunset clause. Make sure you’re clear on the specific conditions and deadlines, and take note of any penalties or consequences for not meeting them.

Seek Legal Advice

Next, chat with a legal expert, like a conveyancer. They can help you determine your options, whether that means ending the contract, renegotiating terms, or seeking compensation. Getting legal advice ensures you make informed decisions that protect your interests.

Communicate With the Other Party

Finally, keep the lines of communication open with the other party. Discuss what’s happening and look for possible solutions, like extending the deadline or renegotiating terms. Clear communication can help avoid misunderstandings and make finding a resolution everyone is happy with easier.

Conclusion

Understanding sunset clauses and their implications is crucial for buyers, developers, and people selling established homes. A well-negotiated sunset clause can provide peace of mind. However, a sunset clause can expose you to significant financial risks if you’re not careful. If you will include one in a contract, seek professional advice and thoroughly review the contract before signing. This will protect your interests and prevent any unforeseen complications.

FAQs About Sunset Clauses in Real Estate

1. What is a sunset clause in real estate?

A sunset clause is a contractual term designed as a legal provision in a real estate contract that sets a specific deadline for certain conditions of a property contract to be met, such as the completion of construction. If these conditions are not met by the deadline, the contract may be voided, allowing parties to exit the agreement without penalty.

2. Where are sunset clauses commonly used?

Sunset clauses are commonly used in off-the-plan property purchases. In these transactions, buyers commit to purchasing a property yet to be built. The clause sets a deadline for the project’s completion, offering protection if delays occur. Sunset clauses are also standard in the sale of established homes. In these transactions, the clause sets a deadline for the buyer to agree to sell their current home before finalising the purchase of the new one.

3. How does a sunset clause benefit buyers when purchasing off-the-plan?

Sunset clauses provide security for buyers by ensuring that the contract of sale property is completed within a specified timeframe. If the developer fails to meet the deadline, buyers can withdraw from the contract and recover their deposit, protecting them and other properties from indefinite delays.

4. How does a sunset clause benefit developers?

Developers benefit from sunset clauses as they provide an exit strategy if certain conditions, such as securing financing or obtaining permits, are unmet. This flexibility helps developers manage project risks and timelines more effectively.

5. Can a sunset clause be renegotiated?

Yes, sunset clauses can be renegotiated if both parties agree. If unforeseen circumstances arise, such as construction delays due to natural disasters or other external factors, both parties may negotiate a new completion date or modify the sale or contract terms.

6. What happens if a sunset clause is activated?

If a sunset clause is activated, it means the conditions and expiration date outlined in the contract are not met by the deadline. In that case, the affected party can terminate the agreement. This typically involves recovering any deposits paid and may include additional compensation, depending on the contract terms.

7. Are there any risks associated with sunset clauses for off-the-plan buyers?

One potential buyer risk is that developers might use the sunset clause to their advantage. For example, if property values increase, developers may delay the end date of project intentionally by cancelling existing contracts and reselling at the end date at a higher price.

8. Can developers face penalties for invoking a sunset clause?

Developers can face reputational damage if they invoke the clause unethically, which can impact their future business. However, proving that a developer acted in bad faith is challenging for buyers, making legal penalties less common.

9. How can buyers protect themselves when a sunset clause is included in the contract?

Buyers can protect themselves by thoroughly reviewing the sunset clause, ensuring the deadlines are reasonable and the conditions are clear. It’s best to consult a qualified conveyancer to understand the implications fully and negotiate terms offering the maximum amount of adequate protection.

10. Are sunset clauses enforceable in all jurisdictions?

Sunset clauses are generally enforceable, but their specifics can vary depending on local laws and regulations. In some states, recent rules and new legislation have been introduced to govern the use of sunset clauses to prevent abuse and protect consumer interests. Buyers and developers should familiarise themselves with the laws in their state or territory.