With many Kiwis now buying off the plans, some buyers are worried about ‘sunset’ clauses. Tessa Doherty of Morrison Kent explains what they are – and whether you need one, too.
When you’re buying a new build, sometimes things go wrong or there are delays. If that happens, either the builder or the prospective buyer might want to pull out.
That’s where a ‘sunset clause’ comes in.
In the case of a new build or buying off the plans, a typical sunset clause will allow the purchaser or the vendor (or even both) to cancel the contract.
The overarching purpose of a sunset clause is to prevent the parties from being locked into a contract for what could potentially be a long and indefinite period of time.
You might want to cancel
A sunset clause may come into effect when the development hasn’t reached a certain milestone by a particular time, say if the title has not been issued within two years of the date of the contract.
For the most part, sunset clauses in a new-build contract will only allow the purchaser to cancel. However, in some circumstances, the vendor also has the ability to cancel – and this is more of a worry for the buyer.
Sometimes a sunset clause will have a time by which you have to exercise the cancellation right.
On occasion, we see buyers given a window of time, for example, five working days in which to cancel following the relevant milestone date specified in the clause.
If the buyer doesn’t give notice within that window, then they can’t cancel and the contract continues on. You can’t exercise the cancellation right after that.
Here are some of the protections a purchaser gets, where you have a sunset clause giving only the purchaser the ability to cancel (and not the vendor):
- If an unexpected event occurs which significantly slows down or halts the development altogether, like a major consenting issue, the purchaser can cancel the contract and find something else to buy, rather than waiting around for what could be a lengthy period of time.
- If the vendor doesn’t meet their obligations by the sunset date, they can’t cancel the contract and sell the property to another buyer for a higher price.
The sunset date is either a set date or a period of time following an event, such as 24 months following entry into the contract.
The vendor usually sets the sunset date based on how long they estimate the development will take, what their funder requires, and a contingency period for unexpected delays.
As a purchaser, you should expect a sunset clause to be included in a new build contract.
Two-way or vendor-only clauses
Where a purchaser should be concerned is when there is a ‘two-way’ or ‘vendor-only’ sunset clause included in the contract.
A two-way sunset clause lets both the vendor and the purchaser cancel the contract.
In a vendor-only sunset clause, only the vendor and not the purchaser can cancel the contract.
In both situations, there’s cause for concern for a buyer because there’s risk of the vendor cancelling if a certain event has not occurred by the sunset date.
One clause you do probably want in your contract is a ‘solicitor’s approval condition’ – and this isn’t the same as a sunset clause.
Typically, a solicitor’s approval condition will let the purchaser’s solicitor review the proposed sale and purchase agreement from a legal perspective to either approve the terms of the agreement or to suggest amendments, additions or deletions to the terms.
I would also recommend a ‘due diligence condition’ is included in a new build contract. This is a condition which allows a buyer to make enquiries about the property to make sure it’s suitable for the purchaser’s needs and intended use.
A due diligence clause can be drafted quite widely and, in the context of a new build, can cover finance approval, zoning, and the development itself.
Play it safe
Buying a property off the plans can be a fantastic opportunity, especially for first-home buyers, to get their foot on the property ladder.
In saying that, it’s important to get proper and thorough legal advice when you’re buying off the plans.
More often than not, a new-build contract is drafted heavily in favour of the vendor, and there can be less room to negotiate the terms of the contract to ensure consistency across the development.
So, it’s essential to know what you’re committing to, so there are no unexpected problems waiting for you down the line.
Article originally published in Informed Investor.
For more information
If you are considering entering into a new build contract, come and see our property experts at Morrison Kent. Call 04 472 0020 to book your consultation with one of our highly skilled property lawyers today.