Understanding sunset clauses in off-the-plan contracts

For investors and owner-occupiers alike, buying property off-the-plan can have many advantages. Some common benefits include the reduced land transfer duty and the ability to have more input into the property’s overall design. Many proponents of off-the-plan also highlight the locked in contract price. This means that regardless of any changes in the property’s value throughout the build, the price stays the same as in the contract.

The benefits of buying off-the-plan are numerous. However, there are some additional contract features that can confuse off-the-plan buyers and investors. This article takes a closer look at sunset clauses in off-the-plan contracts, including what they are and why they’re used.

Benefits of buying off-the-plan

For many potential buyers and investors, buying off the plan is one of the easiest ways to get a foot into the property market. In fact, many off-the-plan builds only require a 10 per cent deposit. The reduced deposit amount means savvy buyers pay less up front, and can use the build time to save more towards the balance of the purchase at settlement. While every build is different, most buyers will have a general idea of how long they will have to wait to enjoy their new home. This is where sunset clauses come into the picture.

What is a sunset clause?

A sunset clause is a statement in the contract of sale that puts an expiry date or time limit on the contract. This means that if settlement has not taken place by a certain date, the contract is essential void and both parties (buyer and seller) can walk away.

Why sunset clauses are used

While a sunset clause can appear in other building contracts, they are routinely used with off-the-plan developments. This can be for a number of reasons.

They outline the build terms for both parties

Sunset clauses are written into off-the-plan contracts of sale to prepare both parties for the possibility of a build taking longer than predicted.

A sunset clause outlines what both parties are entitled to in the event the contract terms aren’t met. More often than not, the potential buyer will have their deposit refunded and the developer will be released from their obligations to complete the project.

They account for potential build complications

Ultimately, build times will always differ. Off-the-plan builds are vulnerable to a number of potential delays, many of which could be out of the builder’s hands.

More often than not, the build project is completed well in advance of the date outlined in the clause. Most builders take into account the possibilities of some delay into the assigned build time period, including unpredictable weather and labour shortages.

They provide structure and set expectations

When used correctly, a sunset clause can help establish a well-structured timeframe for a build project – from contract signed to keys in hand. Without such a clause, it’s easy to imagine a situation where a build is permitted to carry on indefinitely.

A sunset clause helps to set reasonable expectations of the project’s completion for both parties.

Why buyers stick with a contract after the sunset clause date

Some buyers may panic at the first sign of a delay with a build. Delays can be frustrating, and the instinct to pull out of a contract can be strong. However, there are a number of reasons buyers stick it out beyond the time period set in a sunset clause.

Delay doesn’t necessary disadvantage the buyer

Having to delay your move-in date can be an inconvenience. But, a delay won’t necessarily leave the buyer at a disadvantage.

Some delays may be caused by elements outside of the builder or developer’s control. In some cases, these delays may be necessary to account for changes to civil works, such as water, gas or electricity. Delays might be caused by an adjoining council project, or a neighbouring development that also impacts your build. Whatever the extenuating circumstances, it’s important to look closely at the cause of the delay and see it within the larger scope of the project.

If the unplanned delay will eventually lead to a safer, more secure build, then it’s likely worth the wait.

The property may have already appreciated in value

The property market – while open to fluctuations – is still one of the best long-term investment opportunities. For off-the-plan buyers, a significant upside can be buying a property at the lower end of the market and securing that property while the prices are reduced. Over the time of the build, the value of the asset could very likely have appreciated before settlement. This means the buyer has already benefited from buying low and sticking with the contract, even before the first mortgage payment is made.

Investing in property is for the long-term

Property is a long-term investment – it’s also typically a cyclical one. As a result, property prices don’t tend to increase in a liner fashion. Instead they’ll experience ups and down over the life of the property. Despite some undulations, property has historically been a safe investment. Data over the last 25 years shows that median house values have increased by 412 per cent or $460,000.

It’s important for any investor to recognise that choosing to invest in property isn’t a shortcut to wealth and prosperity. Buyers and investors alike need to have a longer-term plan in place to truly benefit from the investment. For those buying off-the-plan, sticking out a contract beyond the sunset clause time period can play a big part in a long-term buying strategy.

For many buying off-the-plan, patience is an asset. In the event there are delays, it’s prudent to remember that property is a long game and panic-selling could backfire.

Stay the course for long-term gain

At Accrue, we pride ourselves on the work we do to provide savvy investors with off-the-plan property options that meet their investment goals. In a time where record-low interest rates and strategic buying opportunities are up grabs, now could be the ideal time to secure a great deal with an off-the-plan property. Contact the Accrue property experts today to discuss whether buying off-the-plan is the right move for you.

Disclaimer: This is general advice and has been prepared without taking into account your particular situation or needs. You should consider whether it is appropriate for you before acting on it.