What is it and why would you need one?
A sunset clause is a clause in a contract that allows a party to cancel once a specific date has been reached, known as the sunset date.
Although they are a common topic, a sunset clause can actually exist in a couple of different forms.
1. A bare right of cancellation held by a vendor or purchaser, or both; or
2. A condition, subsequent to for example, a title; code compliance certificate and/or practical completion of the project.
It is now commonplace for informed developers to push for the inclusion of a sunset clause. It is important to consider what will suit them best in order to design a contract that will best fit both their needs and those of their financers.
Bare right of cancellation
A bare cancellation right is a sunset clause that allows a set date for when the agreement is able to be cancelled.
Things to consider here are whether the cancellation right should be exercised within a set timeframe once the sunset date is reached, or whether the benefitting party is able to waive this right.
It should also consider who this right is specifically held by. These considerations should be included expressly within the wording of the clause.
The slightly more complex condition subsequent sunset clause allows cancellation of an agreement upon the failure to meet a specific requirement by a set date.
This can either be for the benefit of the developer, purchaser, or even both.
A sunset condition for the sole benefit of the developer
In our opinion, this is the best possible option for a developer. It provides the option to cancel or waive the condition, therefore binding the purchaser even in circumstances where the condition is not met.
As this form of sunset clause is a condition of the agreement, developers must be aware that it will be subject to provisions of the ADLS Agreement for Sale and Purchase of Real Estate general terms. These create protections for purchasers. Specifically, clause 9.10(2) of the standard terms reads:
“party or parties for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment”.
This means where there is a sunset clause benefitting the vendor, they must take reasonable steps to fulfil the condition. A developer will be unable to purposely delay completion in order to invoke a cancellation right under a sunset condition.
However, as long as a developer has taken all reasonable steps to satisfy the sunset clause, a sunset condition benefitting the developer will grant them a full right to cancel the agreement once the sunset date is reached.
The property might then be retained or re-marketed at a price more suitable to the new market conditions (if the market prices have increased) which in turn offsets the cost of previous delays.
However, in most cases, a developer will also need to consider their financiers. Typically a developer is not entitled to cancel a presale agreement without financier approval. Financiers relying on existing sales to repay their loans are typically loathe to permit cancellation.
A sunset condition to the benefit of the purchaser
A developer may also enter into a contract where a sunset condition has been drafted to benefit the purchaser. This will require a developer to be aware of a few key points.
Once the sunset date hits and the requirements under the condition are not fulfilled, the purchaser will have the ability to cancel the contract. They may look to find something else, rather than being locked into the agreement until the build is complete.
This obviously puts a lot of pressure on developers and may cause some issues, especially during labour or materials shortages where significant delays are caused.
A way that a developer can decrease this risk is to include contingencies against sunset clauses, such as a right for the developer to extend the sunset date on notice.
Another example of this would be the inclusion of a force majeure extension clause. This would allow an extension of the sunset date if events outside of a developer’s control prevent them from fulfilling their obligations under the agreement.
We can help
The team at AlexanderDorrington is happy to assist if you wish to discuss the use of sunset clauses within your off-the-plan agreements. We can look through the various options and work with you to provide drafting requirements that are tailored to your specific needs.