How Do I Protect Myself Against A Developer Using a Sunset Clause To Cancel My Contract?

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Laine Moger

Journalist and Property Educator for 6 Years
Introduction

Picture this: you sign a contract with a developer to buy a property for a fixed price.

It’s going to take them 12 months to build the property. But, 18 months later it’s still not built.

Then you get a call from the developer who says, “I’m cancelling this contract. The price is now an extra $150,000 – if you still want it … otherwise I’ll sell it to someone else.”

How is that legal? Well, it’s called a sunset clause, and in this article you’ll learn what a sunset clause is and how you can negotiate them to protect yourself from a developer putting the price up on you.

Definition

What Is a Sunset Clause?

A sunset clause is part of a sale and purchase agreement (your contract) that allows the contract to be cancelled if the property isn’t completed by a certain date.

Put simply: if the property’s construction runs way over schedule, then the contract has a legal get-out-of-jail free card where the contract can be cancelled.

This date is usually the expected completion date + 12 months.

For instance, let’s take a look at a development on Coronation Road, Auckland, which some of our investors at Opes Partners bought into.

The estimated completion date is July 2023, and the sunset clause is set for August 2024.

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This means if the construction is not finished by August 2024, the contract can be cancelled. In this case either the developer or the purchaser can cancel. So really, you want the property to be finished before mid-2024.

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Should I Be Concerned?

Should I Be Concerned About A Sunset Clause?

One benefit to investing in New Builds is that the value of the property tends to rise during construction. That’s because: a) the market may increase in value, and b) a property that has been fully built is worth more than when it was just lines on a piece of paper.

That tends to benefit investors because you “lock in” the price at the time you sign, and then by the time you settle and pay for the property its value may have increased by the time you pick up the keys.

But you as an investor don’t get to reap that benefit until settlement – the day you pay and become the owner of that property.

So the issue is what if the developer uses the sunset clause and you never settle?

For instance, sunset clauses became an issue during the Covid-19 pandemic. That happened for two reasons:

  • There were large build delays because builders weren’t allowed on site, and materials were held up at shipping ports
  • But also, house prices rose.

This meant if construction went past the sunset clause, the developer could cancel and re-sell at a significantly higher price.

This also gave some developers an incentive to deliberately slow down the build to get more money.

So, investors missed out on owning the property, and the capital gains they would have had if they had settled. Not forgetting how big a blow it could be to first home buyers who didn’t have the extra money to keep their, now, much more expensive property.

Is This Legal?

Hold on, is that legal?

 

Yes, developers are legally within their rights to do this. It’s within the contract.

But there may be a blurry line here of what’s legal and what’s moral.

Legal? Yes. Moral? You decide. The real question is how you protect yourself, and what you can actually do.

Negotiating The Sunset Clause

How Do I Negotiate My Sunset Clause So That Doesn’t Happen To Me?

 

Before you get too despondent, there are ways you can negotiate this clause to protect yourself.

It’s really important to note that all negotiations to any clauses, including the sunset clause, are done through your lawyer. They are the ones who are going to negotiate with your developer (through their lawyers), rather than doing so directly.

You don’t call up the developer's lawyer and start demanding changes to your sunset clause. It doesn’t work like that.

Here are 3 ways you can negotiate a sunset clause to your benefit:

#1 Change the wording in the clause so only you can use the sunset clause

The gold standard is to negotiate the sunset clause so that only you can use it.

This means you can cancel the contract if construction runs over the sunset clause, but your developer can’t.

In this scenario you would word it, with your lawyer, to say something along the lines of: “This clause can only be exercised by the purchaser, and not the vendor”.

While this is the ideal situation, it’s not always possible.

Why? Well, the developer can say: “No”.

This isn’t necessarily a red flag. Just because your developer doesn’t agree to it doesn’t automatically mean they have plans to cancel on you.

Rather, it’s because they want to have some protection too.

For example, what if they start digging to lay the foundation and discover a body. That halts the project for several months, or indefinitely. The developer can then use this clause to cancel and halt construction if some major unforeseen event happens.

So, while you can ask for this (and you should), be prepared that you might not automatically get a “yes”.

#2 Word it in a way to ensure the developer can’t use the sunset clause to sell the property for a higher price.

As an alternative, you could adapt the sunset clause to say something along the lines of: “This clause cannot be used to resell the property at a higher price”.

This means the developer can still cancel if they find a body, but they can’t then sell the property to someone else for more money.

It’s a fair enough ask, right? You’re basically saying, “I don’t want to give my deposit to fund your lending, only for you to turn around and try and do me wrong for a higher price”.

#3 Ask to push the sunset date out further

If your developer refuses to negotiate the sunset clause like the above, all is not lost. Finally, you can ask to extend the sunset date period.

For instance, if the project is expected to take 12 months, you could ask for the sunset clause to be 24 months out from the estimated completion date.

This means that something would have to go seriously wrong in construction for the developer to have the ability to use the sunset clause.

This happened with one of the listeners of our daily podcast – The Property Academy Podcast.

The purchaser signed a contract for a townhouse development, which had 6 townhouses.

As part of the negotiation the purchaser added an extra 12 months to the sunset clause.

When the project took longer than expected, every single one of this purchaser’s neighbours had their contracts cancelled. The developer then said they had to accept a $159,000 price increase, or he would cancel the contract.

Some of those purchasers couldn’t get the extra money and so lost the property. Others had to cough up the extra cash. That happened to everyone except the person who listened to this episode of the Property Academy Podcast, who had pushed out the sunset clause.

He settled the property at the original price and made a substantial capital gain.

Why? Because his lawyer had negotiated a 12-month extension to the sunset clause.

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Is Deleting An Option?

Why Do We Have To Have A Sunset Clause? Why Not Delete It Completely From The Contract?

Some people hear in the media that ‘sunset clauses are bad’ and then decide to remove the clause completely. That can be a mistake.

While a lot of people might argue to just chuck the clause out the window, there might be instances where you really want to have a “get-out-of-jail free” card.

Think about it. Do you want to be locked into buying a property that drags on for 1, 2, or 50 years?

Because if you don’t have a sunset clause it’s a never-ending contract.

And there might just come a time when you want the opportunity to say “enough is enough”, get your deposit back and invest somewhere else.

Conclusion

What Happens If I Try To Change The Wording And The Developer Does Not Agree, Should I Walk Away?

 

It’s important to know from the outset, you’ll never end up with a contract worded exactly how you want it to be.

The contract has to be fair for both you and the developer and that means you both share in the risks.

So if you ask for a lot of changes that will benefit you, the developer will sometimes say “no”.

Ultimately, you need to weigh the risks and the rewards. If the property you buy is a great deal, then you might pursue it even if there is some risk in the contract. You take the risk to get the good deal.

But similarly, if you’re going to lie awake worrying about the wording on your sunset clause, then it may be a good idea to look elsewhere.

LM b W

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.