There has been a lot of reports in the media lately regarding sunset clauses and changing the way they operate. To best understand the need for reform of these clauses, its important to first understand "What is a sunset clause?"
What is a sunset clause?
A sunset clause most commonly appears in a contract for off-the-plan sales, either for apartment blocks or unregistered vacant land. This clause sets the date that a contract may be rescinded (wound back) or cancelled without penalty, by either party if conditions are not met.
Sunset clauses may allow a period of 12-36 months (if not longer) for the developer to have the property ready for settlement. They also provide that this period can only be extended by a further 12 months past the original date.
What does a sunset clause achieve?
The intention of a sunset clause is to protect the purchaser from being tied to a development that never gets completed, and to protect the developer by ensuring that purchasers cannot pull out of settlement if the project is completed in accordance with the sunset clause.
What is the current situation?
There has been a great deal of media attention on sunset clauses due to the tactics of some developers to use the sunset clause to their advantage in a market where we are seeing great price increases. Allegations have been made that some developers are delaying construction to push past the sunset date. This allows the developer to pull out of the contract and then put the property back on the market for a higher price. In the current market this can yield significantly higher returns.
This affects purchasers as their deposit has been tied up in a development that has essentially put them out of the market since the time they paid their deposit. This could be for a period of 2 years or more, meaning many can now not afford what they originally signed up to purchase. It also affects confidence of purchasers, particularly in relation to off-the-plan sales with those involved in the above situations stating they will not consider purchasing off-the-plan again.
What is being done to prevent this in the future?
Consumer protection is high on the agenda of Victor Dominello, the Minister for Innovation and Better Regulation. In the past week he has announced two potential options to prevent or avoid these situations in the future. The options are:
- To imply a term in all off-the-plan contracts that only allows the purchaser to rescind. This arrangement aligns with that in Western Australia.
- To imply a term where if the vendor rescinds a contract under a sunset clause and then resells the property within a certain period of time, the purchaser is entitled to damages equal to the difference on sale price between the two contracts.
Such proposals will turn the Sunset Date clause on its head. Purchasers previously affected by the underhanded tactics of developers have welcomed the reforms with the hope no one will have to endure their experience in the future.
Consultation with various stakeholders regarding off-the-plan contracts and the reforms have commenced and the wider community can take part by completing the survey at http://www.fairtrading.nsw.gov.au/ftw/About_us/Have_your_say/Buying_property_off_the_plan.page.