A financial adviser is warning people buying properties off the plan to be wary of sunset clauses allowing contracts to be cancelled by developers, suggesting they run a mile if the clause isn't removed.
The original intention of the 'sunset clause' was to protect property purchasers from being perpetually stuck in a contract that was never going to complete, John Stirling, partner at law firm Turner Hopkins, told Newshub. It gave them a finite date when they could choose to pull out of the contract and get their deposit back.
Over time, application of the sunset clause has varied, Stirling said. It's now common for off-plan contracts to include a sunset clause that can be exercised by either party (purchasers or vendors).
In some cases, the clause gives the vendor (seller) the right to extend, or to cancel the contract for missing the deadline specified.
Dylan Mann, CEO of financial advisory firm The Advice Hub and owner of a Harcourts franchise in Auckland, says those signing off-plan contracts containing a sunset clause in favour of the developer should insist it is removed.
That's because the clause may be used as a reason to cancel the contract and refund the deposit, potentially leaving purchasers in the lurch.
Any developer insisting on its use should "raise alarm bells". If the developer won't remove the clause, he suggests the purchaser "run a mile".
"A good lawyer, who is experienced in handling off-plan property purchases, will cross it out," Mann said.
"The real estate agent should not allow a sunset clause favouring the developer to proceed."
While most developers do their sums and act in good faith, supply issues, rising material prices and building disruptions during COVID-19 put developers under increased pressure, he said.
This increased the risk that the clause is used to exit the contract as a short-term fix. Although it's not standard practice and would be damaging to a developer's reputation, it's possible one may hope to cash in on property price rises since the contract was signed, he said.
In one example, a sunset clause within an agreement was removed for the buyer, with the developer's consent.
"After delays in completing the project, that developer did attempt to invoke the sunset clause, but was unsuccessful with our client….the client told them to carry on building because they do not mind waiting," Mann explained.
To assist new-build purchasers buying off the plan, Mann provides the following three tips.
1. Buy from reputable developers
Research who the developer is and how reputable they are.
For example, what is the developer’s track record, how good is the quality of their work and have their properties sold for more once completed?
"A higher price for the completed property versus off-plan is an indicator of quality," Mann said.
2. Use experienced off-plan solicitors
Not every solicitor (lawyer) has experience working with off-plan contracts.
This means they may not realise that a sunset clause favouring the developer is highly unusual and should not be allowed to go through, Mann said.
3. Delete the sunset clause
"The sunset clause is meant to allow only the buyer to exit the contract in the event of unacceptable delays."
"It is not, and should not, be used to allow developers to escape their obligations," Mann said.
John Stirling said while he agrees that sunset clauses favouring vendors should be avoided wherever possible, in a competitive housing market, outright refusal of the clause may mean the purchaser misses out.
As building properties off-plan is not an exact science, in a practical sense, new-build contracts allow vendors some flexibility, he said. An example might be discretion to install a replacement oven if a specific model isn't available, or a variation in land size to what was originally proposed.
"There's a lot of things in these [off-plan] contracts that allow a lot of flexibility and changes that the developer can make without having to get the purchaser's consent," Stirling said.
A lawyer acting for a purchaser will try to limit as many of those discretions as possible, he said. If a sunset clause is included for the benefit of the vendor (seller), purchasers could query it directly. If it's in case costs get out of hand, that's obviously a red flag.
"Before they sign anything, [purchasers] should get advice so at least they're going in with their eyes open and appreciating what the risks are," Stirling added.
A recent case involving a purchaser who accepted a sunset clause in favour of a developer despite his lawyer's warning highlights the importance of taking legal advice. In this case, the purchaser told Newshub they abandoned their effort to change the developer's mind and accepted the contract cancellation.
"We didn't have a good legal reason to challenge the clause because we had advice about the clause before we signed the contract," the purchaser said.
