When a seller accepts a buyer’s offer, both parties list their terms of agreement in the contract of sale document. A sunset clause puts a time limit on this contract in the form of an expiry date.
If that date passes before the terms are satisfied, both parties are free to cancel the sale without any financial penalty.
When is a sunset clause used?
Buyers and sellers use sunset clauses as a safety net. They are common in certain situations where the purchase of a property depends on other factors, such as a home’s development or the pending sale of another property.
Example 1: Buying off-the-plan
Sunset clauses are common for off-the-plan properties. In this type of purchase, a buyer enters into an agreement with a developer to purchase a house or apartment that has not yet been built. The buyer pays their deposit and includes a sunset clause in the contract. Then, if the property isn’t ready by the expiry date, the buyer can cancel the agreement and get their deposit back.
For instance, say you buy a house and land package in a newly established suburb from a developer. The sunset clause in the agreement states the limit of the contract of sale is December 1, 2024. If the house isn’t finished before that date, you will get your deposit back and no longer be obligated to pay for that house.
Example 2: Subject to sale contracts
Sunset clauses are also common in ‘subject to sale’ contracts — where a buyer agrees to purchase a property as long as they can sell their old house.
For instance, say you make an offer on a house but can only afford to buy it if you can sell your current apartment. The sunset clause includes a date of November 1, 2024. If you still haven’t sold your apartment by that date, you and the seller can walk away.
Including this condition will protect you as the buyer from paying for a house you cannot yet afford. It also allows the seller to continue looking for a new buyer without having to wait a long time with no guarantee the sale will ever go through.
» MORE: What does ‘under contract’ mean?
What is a typical sunset clause?
A typical sunset clause will clearly state that both parties have agreed to the determined expiry date and the conditions of sale in the contract. However, the conditions included, such as the amount of time needed before that expiry date, can vary. Specifics often depend on the unique circumstances involved with a particular sale.
For example, in off-the-plan purchases, the clause must allow enough time for the developers to build that property. So, the sunset clause should reflect a realistic timeframe for that construction, with some added time for delays due to weather, material or labour shortages.
In established property purchases with a ‘subject to sale’ sunset clause, the date set should satisfy the needs of both parties. As the buyer, you must be realistic about how long it might take to sell your current property. And the seller needs to consider how long they are willing to wait before moving on.
Including sunset clause
A good sunset clause should protect both the buyer and seller. Despite the benefits, there are also risks that both parties should consider.
Considerations for buyers
- A sunset clause gives a buyer an end date that the sale will or won’t go through. It can prevent negotiations or conditions from dragging out.
- In a ‘subject to sale’ circumstance, you only have to go through with the purchase if you can successfully sell your old property. Including a sunset clause saves you from being tied to a purchase you cannot yet afford.
- In an off-the-plan purchase, you have a safety net if the developer does not finish building the property. You’ll also get your deposit back.
- A seller may be less likely to accept your offer that has a sunset clause if they have other offers that are unconditional.
- Trying to buy one property while selling another can be challenging as property markets can be difficult to predict. Furthermore, having a deposit tied up in a property you don’t end up buying can cause financial stress.
- Developers have been known to intentionally delay finishing a property so they can terminate contracts made years ago and sell for a higher price to new owners later. Legislation is in place in some states to prevent this, so be sure to research the sunset clause laws in your area before signing a contract with a developer.
Considerations for sellers
- For private sellers, you can continue marketing your property with a sunset clause, so if the original sale falls through, you can move on to a new buyer quickly or receive a better offer.
- For a developer, construction delays can be inevitable. A sunset clause gives you a buffer to finish the project and have buyers sign on before you finish.
- Depending on the contract terms, it can be tricky to move on to a new buyer during the sunset clause period, meaning you miss out on a better offer while you wait for a buyer to fulfil the conditions of the contract.
- Material costs, labour costs or changes to the value of a market can all occur while you build. If you finish a project late and the buyer walks away, you have to return the deposit and may struggle to find a new buyer.
Frequently asked questions
When the contract of sale reaches the sunset clause date, both parties can legally rescind their contract and walk away from the sale. Either side can decide to do so once the sunset clause date has passed. That way, both parties can return to the same position they were in before signing the contract of sale. If the buyer has paid a deposit, the seller must return it in full if either party rescinds the contract.
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