YO U R I N V E S T I N G
When the Sunset Clause Goes Down With many Kiwis now buying off the plans, some buyers are worried about ‘sunset’ clauses. Tessa Doherty of Morrison Kent explains what they are – and whether you need one, too.
When you’re buying a new build, sometimes things go wrong or there are delays. If that happens, either the builder or the prospective buyer might want to pull out.
which to cancel following the relevant milestone date specified in the clause.
That’s where a ‘sunset clause’ comes in.
If the buyer doesn’t give notice within that window, then they can’t cancel and the contract continues on. You can’t exercise the cancellation right after that.
In the case of a new build or buying off the plans, a typical sunset clause will allow the purchaser or the vendor (or even both) to cancel the contract.
Here are some of the protections a purchaser gets, where you have a sunset clause giving only the purchaser the ability to cancel (and not the vendor):
The overarching purpose of a sunset clause is to prevent the parties from being locked into a contract for what could potentially be a long and indefinite period of time. You might want to cancel A sunset clause may come into effect when the development hasn’t reached a certain milestone by a particular time, say if the title has not been issued within two years of the date of the contract. For the most part, sunset clauses in a newbuild contract will only allow the purchaser to cancel. However, in some circumstances, the vendor also has the ability to cancel – and this is more of a worry for the buyer. Sometimes a sunset clause will have a time by which you have to exercise the cancellation right. On occasion we see buyers given a window of time, for example five working days in 58
INFORMED INVESTOR |
SUMMER 2021
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If an unexpected event occurs which significantly slows down or halts the development altogether, like a major consenting issue, the purchaser can cancel the contract and find something else to buy, rather than waiting around for what could be a lengthy period of time.
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If the vendor doesn’t meet their obligations by the sunset date, they can’t cancel the contract and sell the property to another buyer for a higher price.
The sunset date is either a set date or a period of time following an event, such as 24 months following entry into the contract. The vendor usually sets the sunset date based on how long they estimate the development will take, what their funder requires, and a contingency period for unexpected delays.
As a purchaser, you should expect a sunset clause to be included in a new build contract. Two-way or vendor-only clauses Where a purchaser should be concerned is when there is a ‘two-way’ or ‘vendor-only’ sunset clause included in the contract. A two-way sunset clause lets both the vendor and the purchaser cancel the contract. In a vendor-only sunset clause, only the vendor and not the purchaser can cancel the contract. In both situations, there’s cause for concern
