Understanding the ‘Sunset Clause’
A sunset clause is a statement in the contract of sale that effectively puts a time limit on the property transaction taking place and is a way either the buyer or seller can legally walk away from the transaction.
We’ll usually see a sunset clause used in two different situations. The most common one is when a buyer puts an offer in on a property and it is subject to the sale of their current property.
In this instance, a buyer might not want to purchase another home, because they are unsure if they can sell their current property at a price they would be happy with. Using a sunset clause, allows the buyer to purchase the property if they ultimately sell their current home, or they can walk away.
However, when using a sunset clause under a subject to sale, the vendor is also left in a strong position. The reason being, that that the vendor can generally still continue to market their property and if another offer is made, they are able to walk away from the original offer if the buyer can’t potentially settle on the property.
If another offer is made, the first buyer will generally have two days for the offer to go unconditional, or it will be rescinded.
The sunset clause will also outline how long the buyer has before they will need to get an offer on their own property and also how long they have to settle. If the time period is not met, the offer is also rescinded.
The second situation, where we usually see a sunset clause is in off the plan sales. Developers will often require a certain percentage of an apartment building to be pre-sold before they can obtain finance to construct the building
As a result, it’s often a smart move by the buyer to use a sunset clause to outline how long the developer has to either get started with the building phase of the project or how long they have until settlement when the building is completed.
Construction projects can be delayed for a myriad of reasons, and if you have your money tied up in an off the plan purchase, you’ll be limited in what else you can do, until that building is finally constructed.
Advantages and Disadvantages of a Sunset Clause
While it sounds like the buyer is at an advantage if they buy a property subject to the sale of their own property, the reality is a little different.
If a vendor is prepared to accept an offer subject to the sale of another property, then they are likely going to expect a higher price than they would under different circumstances.
Generally speaking, the fewer conditions you’re able to put on your offer, the more attractive it is.
How effective this type of offer is, will also depend on how motivated the vendor is to sell. If they are highly motivated, they will likely be looking for a quick sale, with no issues surrounding finance. As a result, they might not be interested in a long draw out sale.
Conversely, if an owner is in no rush to sell and simply wants the very best price, this is where a sunset clause like a subject to sale will be far more appealing. The vendor might be happy to accept a higher price, for the uncertainty of waiting for the buyer to sell.
The buyer in this instance also gets the benefit of securing a property they really want, while having the security of not being forced to seek alternate finance, such as a bridging loan. Unsecured short term finance is often expensive and still puts you under pressure to sell your property.
When buying off the plan, there are significant advantages to the buyer for including a sunset clause. As mentioned, the construction phase of a project can take many years and if it is delayed, that will extend the wait time even further.
Again this will also come down to how motivated the vendor (in this case the developer) might be. Generally, a developer is often highly motivated to generate pre-sales and understands why using a sunset clause is valuable for the buyer. However, there have been instances in strong markets, where the price of the apartment could have seen a significant rise in value over the construction period and this could encourage a developer to delay the project, in hopes of activating the sunset clause so they can resell the property at a higher price. This is not common and it is generally a good idea to include a sunset clause in all off the plan purchases.
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