What are Sunset clauses in development contracts and why should you be worried about them?

A development contract carries with it inherent risk. You pay a deposit upfront for a property that is incomplete. Then, you have to wait many months, if not years before the property is completed. What if the construction of the property was delayed for many months? The sunset clause was designed to protect property buyers from such risks. In development contracts, the sunset clause allows either the buyer or the developer to terminate the contract if the property is not completed by a promised date. That way, if the property you paid a deposit on was delayed for too long, you could terminate the contract and receive your deposit back.

However, there is now a trend, especially in the Eastern States, for property developers to abuse sunset clauses. The sunset clause works in their benefit if the property they are developing rapidly increases in value during the building time. Say for example, you want to buy a property that is about to be developed. The sunset clause says the property must be completed in two years, and its estimated value upon completion is $500,000. You pay a 10% deposit of $50,000 upfront and wait the two years for it to be completed.

However, in the two years that you wait, the value of the property goes up from $500,000 to $800,000. The developer now faces a loss of $300,000 if they proceed with the development contract to sell you the completed property at $500,000. With that in mind, the property developer purposely delays completion of the property. In doing so, the developer can use the sunset clause to terminate the contract to you, give you back your deposit, and re-sell the property you wanted at a higher price. This is what was happening in the Eastern States.

The NSW government has since legislated to prevent this from happening. In South Australia, the risk still exists. Whilst sunset clauses cannot be removed, we can help you to minimise your exposure to them. We can advise you on the sunset clauses in your contracts and push developers to ensure they do not purposely miss completion date.

If you would like to discuss any of these further, please feel free to email us at info@straitslawyers.com or give us a call on 8410 9069.

Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.