Garry and Louise wanted to move house but, due to strong demand, hadn´t found one they liked.
Their friend suggested that they look into buying a property ´off the plan´. Garry and Louise spoke to several real estate agents and picked a unit in a complex about to start construction.
In April, they made an offer and signed a contract of sale. The contract stated that settlement would take place before 31 March the following year. The couple arranged their finance, paid an initial deposit and listed their current home for sale.
Construction progress was slow and, by Christmas, Garry and Louise could see that settlement would not take place before 31 March.
Property prices had increased during construction. The developers told Garry and Louise that they were going to terminate the contract and re-list the property at a much higher price.
The contract contained a sunset clause which stated that if settlement could not be reached by 31 March, either party had the right to withdraw from the agreement without penalty.
Garry and Louise were stunned to learn that, if they still wanted the apartment, they would be forced to sign a new contract of sale at $55 000 more than the original.
What is a sunset clause and how should Garry and Louise have protected themselves?
A sunset clause is a provision in a contract of sale that sets a date after which the agreement is no longer in effect, such as reaching settlement by a certain date.
Both the buyer and seller can use this clause to protect themselves from certain circumstances. For example:
- a buyer can use a clause to state the expected completion date because, if the developer runs out of money, they could hold up construction indefinitely with no way for the buyer to get the deposit back or compel the developer to finish construction
- a seller might use a sunset clause to fix a settlement date, thus ensuring that they are paid in full as promptly as possible.
Garry and Louise should have insisted that the sunset clause be removed or amended before they signed the contract so their deal could not be cancelled due to uncontrollable circumstances.
Contracts can be difficult documents to understand. For such a major purchase, like real estate, Gary and Louise should have obtained independent legal advice before they signed the contract.
Read more about buying real estate.
Last reviewed 30/11/2011