What is a Sunset Clause?

A sunset clause refers to a provision in a contract that limits how long a contract is valid for – meaning that after the specified date, the document will no longer be effective and the parties involved in the contract will be able to legally exit the contract. For example, a contract may include a sunset clause which specifies that the settlement on the sale of a property must occur by the 31st of December 2021. If this has not been fulfilled by this date, both the buyer and seller are released from their contractual obligations. 

When can a Sunset Clause be used?

Although a sunset clause can typically be used in any type of contact, it is most commonly used in real estate transactions. Generally, a sunset clause is most useful in the following instances:

1. Off the plan sales
   • This is where a sunset clause is placed to limit the time that a developer must finish the property project
     • Eg. if a developer fails to complete a project within the expiry date specified, the sunset clause will enable both parties to walk away from the contract 
2. Purchasing established properties 
   • This is where a sunset clause is placed to limit the time that a buyer is able to sell their current property – as they intend to purchase a property on the basis of their current home being sold.
     • Eg. The property seller may insert this clause so they can pull out of the contractual obligation if the buyer fails to sell their home by the specified date provided 

What are the pros and cons of a Sunset Clause? 

The biggest advantage of the inclusion of a sunset clause is the fact that the clause protects both buyers and sellers.  Both the buyer and seller are protected in the case that unforeseen circumstances occur and prevent the task from being completed within the timeframe; either party is able to withdraw from the contract. This is both in the instance of off the plan sales and purchasing established properties. 

Nonetheless, a disadvantage that has been brought to light is that developers may take advantage of buyers in off the plan sales.  A sunset clause has come under scrutiny as developers may purposely run overtime to allow the clause to nullify the contract. As a result, this leaves buyers at a disadvantage as their money is tied up in the off the plan development – meaning that they cannot make offers on other properties. 

In summary

A sunset clause acts as an expiry date. Thus, if the contract has not been fulfilled within the timeframe specified, rescission will take place and both parties are relieved from their contractual obligations. It is a contractual clause that is mainly used in real estate transactions even though it can be used in any type of contract. If you need more advice on sunset clauses, contact one of our experience property lawyers now at 1300 337 997.