This is a question that gets floated around a lot with purchasers who have heard bad-news stories about greedy developers canceling contracts. And fair enough.
The thought of entering a sales and purchase agreement for an off-the-plan development and then it being canceled on you months later is enough to frighten most people. Especially first-home buyers.
To avoid getting caught up in a contractual mess, it's important to understand some of the key clauses that are involved in off-the-plan contracts.
For now, we're going to turn our attention to sunset clauses.
Sunset clauses are very popular in the media because there has been bad press about them in the past, but it's not all doom and gloom.
In essence, a sunset clause is a clause intended to draw the contract to a close in the event progress is not being made as anticipated on the construction of the property.
Commonly this relates to problems with:
Consents
Procurement
Issues relating to materials and labour
Funding
Pre-sales requirements before the development can start
In the property ecosystem, at the start of development, a developer goes to the bank (or other lenders) to ask for money. The lender offers the developer the money if they have a sufficient number of “qualifying presales”.
A qualifying presale is a sale on:
Conventional terms (not builders' terms)
To a conventional person (not a building company)
With a 10% deposit paid into the developer’s solicitors' trust account
With a sunset clause of not less than two years
That last part is significant because often investors mistake the sunset clause as the anticipated completion date and this causes concern.
It is important to remember two years or even three years as a sunset clause is not unusual. Most of the time they have to be at least two years in order to get bank funding.
The reason for this is to allow time for the developer to make reasonable progress on the build. Sunset dates that are short (e.g. 3 months) are the riskiest because the developer can easily extend their building time by 3 months and cancel the contract.
Equally as important is the wording of the specific clause. In particular, who has the ability to quit the contract - that person can be the purchaser, the vendor, or both.
Vendors don’t want a situation where purchasers can pull out arbitrarily if the purchasers see something they like better and likewise purchasers don’t want a situation where vendors can pull out to on-sell at a higher price if the market escalates.
This area of the contract is where your lawyer earns their fee.
Your lawyer will be able to provide advice specific to your needs and the wording of the contract and the market as a whole at the time.
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