What is a sunset clause, and should you sign a contract with one?
A sunset clause is a condition included in a contract that provides that if a certain event has not occurred by a specific date, then either one or both of the parties can cancel the contract by providing written notice.
When would a sunset clause be included in a contract?
Sunset clauses are useful in the context of a new build or when a property is being purchased ‘off the plans’. In these instances a sunset clause would provide that where the development has not reached a certain stage by a particular date, then either the purchaser, vendor, or both (depending on the drafting of the clause) may cancel the contract. For example, if title or a Code of Compliance Certificate has not been issued within two years from the date of the contract, then the contract can be cancelled.
Why would a purchaser want to include a sunset clause in their contract?
Sunset clauses have the effect of protecting purchasers from being locked into a contract indefinitely. Inclusion of a sunset clause in a new build contract can be particularly important if the development is delayed or unexpected events occur resulting in certain milestones not being reached by expected dates.
Invoking the sunset clause would allow for cancellation so that the purchaser can then look to put an offer on another property or explore other options. Note that the party benefitting from the sunset clause has the option to immediately cancel the contract or request an extension to the condition date.
When should I be concerned about a sunset clause in my ‘off the plans’ contract?
In recent times, sunset clauses have been problematic. Although most developers intend to finish on time and are acting in good faith, rising property prices and increased construction costs may see some developers deliberately delay construction until the sunset date is reached. At this stage, the vendor would not agree to an extension, resulting in cancellation of the contract on the basis of the sunset clause. The property can then be sold to another party for a much higher price or on more favourable terms.
Pressure in the construction industry and rising property prices have highlighted the importance of obtaining legal advice before signing up to purchase property. This is to ensure contract clauses are drafted to afford as much protection to the purchaser as possible.
For independent advice from someone who understands the buying and selling process well, and will have your best interests at the centre of their negotiations, contact a member of Govett Quilliam's Property Law team today.
Author - Priyaanka Khatri
Priyaanaka is a member of our Property Law team and has experience in contractual review, conveyancing, leasing, residential build contracts, and property refinancing, and can provide general advice in all areas of Property Law.