Sunset Clauses – A Developer’s Dream And Buyer’s Nightmare

As seen in recent months, a number of first home buyers have had their contracts terminated under ‘sunset clauses’, leaving them without recourse in a considerably more expensive property market. In this article, our commercial and property law team examines the issues with sunset clauses and what the proposed law reform will mean for buyers and developers alike.

WHAT ARE SUNSET CLAUSES?

Buying a property before it is constructed under an off the plan contract can be a great way to save money and earn interest. This method of purchasing property is also commonly adopted by first home buyers who can obtain further grants and concessions, such as the First Home Buyer Grant. However, when buying under an off the plan development, buyers need to be sure they are across all the risks – including the ability of developers to terminate under sunset clauses.

A sunset clause is a clause inserted in a contract that sets out the date settlement of the property must have occurred by (‘Sunset Date’). Where the property has not settled by the Sunset Date or the Sunset Date has not been extended, and the Sunset Date has passed, either party may terminate the contract without penalty.

ISSUES

In Queensland, there are legislative sunset dates that provide termination rights to buyers (‘Statutory Sunset Date’). These Statutory Sunset Dates are as follows:

a) Body Corporate and Community Management Act 1997: When buying a proposed lot in a Community Title Scheme, the settlement must ordinarily occur within 3 ½ years after the contract is entered into. Conversely, this period can be extended for up to 5 ½ years if the contract provides for this.

b)  Land Sales Act 1984: Vacant Land must usually settle within 18 months after the date the contract is entered into. However, this does not apply to strata land (covered above), land subject to a reconfiguration into less than 5 lots and large transactions involving the sale of 6 or more lots to the same buyer.

While the above Statutory Sunset Dates only provide buyers with a termination right, most developers will insert their own sunset clause into the contract, setting out a Sunset Date that is either for the same period prescribed under statute or earlier. Moreover, sunset clauses inserted by developers will also usually provide both a buyer and seller (i.e. developer) the right to terminate the contract, which is where the issue arises.

Where a developer is entitled to terminate under a sunset clause, they are often drafted so that the developer does not need to stipulate a reason. In these circumstances buyers, cannot contest the termination of their contract under a sunset clause, and as seen recently many buyers have been left hundreds of thousands of dollars worse off.

PROPOSED CHANGES

As a result of recent discussions, the Queensland Government has begun working on proposed legislative changes to strengthen buyer protection and to limit the availability of sunset clauses in off the plan contracts.

Under these proposed amendments, developers will only be able to invoke a sunset clause and terminate a contract after the Sunset Date where:

a) They obtain the buyer’s written consent;

b) An order of the Supreme Court is granted; or

c) Another situation prescribed by legislation or regulations applies.

WHAT THIS MEANS FOR BUYERS

This reform will provide greater protection for buyers and, as said by the Attorney-General and Minster for Justice:

While property development is a vital part of the Queensland economy – we also need to make sure Queensland buyers are protected when they purchase land off-the-plan. We know property law is a complex and technical area that differs between states and territories, and we have listened to home buyers and property developers to ensure these changes reflect both party’s needs. Buying a home is one of the biggest decisions and investments a Queenslander will make in their lifetime, and we want to ensure they are protected and the process is fair. I am pleased to announce that work has started on law reforms that will better protect Queenslanders when entering a contract for the ‘off the plan’ sale of land.

These changes are also consistent with the position and approach adopted in New South Wales, in which there is no automatic right to termination after the Sunset Date has lapsed.

RAMSDEN LAWYERS – HOW WE CAN HELP

As outlined above, the proposed law reform will provide greater security for buyers in an already uncertain property market. But for now, off the plan buyers and those looking to purchase from developers must take caution since reform is still only in its early stages and may not come for some time.

If you are seeking legal advice or assistance with your conveyance, off the plan or otherwise, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.