Sunset clause: when it is appropriate to include, and when it isn’t

A sunset clause generally permits the termination of a contract if certain milestones are not met within a given period of time. For example, the seller may terminate a contract after a period of three business days from the seller notifying the buyer that they have a backup contract, if the buyer does not declare the contract completely unconditional. There are many other examples of a sunset clause. So, when is it beneficial to include a sunset clause, and when might it introduce avoidable risks?

Director of GM Law, Gerard Pagliaro shares his thoughts on this matter:

1. In What Cases Is It Appropriate to Indicate a Sunset Clause in Contracts and In What Cases Is It Not?

It is appropriate to include a sunset clause in a contract in the following situations:

Off-the-plan Purchases: When buyers purchase a property that has not yet been constructed, a sunset clause protects the buyer by ensuring that if the developer does not complete the development by a specific date and obtain titles for the property, the buyer has the right to terminate the contract and receive a refund of their deposit. This clause provides certainty and protection for buyers in case of delays in the construction process.
Conditional Contracts: If the contract is dependent on the fulfilment of certain conditions—such as obtaining finance approval, securing planning permissions, or resolving legal disputes—a sunset clause may be used to set a deadline for these conditions to be met. If the condition is not satisfied by the sunset date, either party may be entitled to terminate the contract.
Unforeseen Delays: In some cases, a sunset clause may be included to manage risks associated with unforeseen delays in title transfer, registration, or other legal formalities that are beyond the control of the parties involved. By setting an end date, the clause limits the period during which the contract remains open.

In contrast, it is not appropriate to include a sunset clause in the following cases:

Established Property Sales: When purchasing an existing, established property, there is usually no need for a sunset clause, as the transaction can proceed on a set timeline, subject to finance, inspections, and other standard contractual conditions. Sunset clauses in such contracts may complicate an otherwise straightforward transaction. An exception to this is in circumstances where the contract entered into for the existing property is subject to the buyer selling their property beforehand. In these circumstances a sunset clause may make a contract with this type of condition (generally referred to as a ‘subject to sale condition’), more attractive to a seller. Typically, a sunset clause in these circumstances would require the buyer to declare a contract completely unconditional by the sunset date, after the seller notifies the buyer of the second offer.
Inflexible Market Conditions: In markets where construction timelines are uncertain (such as during a building boom or periods of labour shortages), including a sunset clause may be risky for developers, as they may not be able to meet the deadline. In such cases, buyers and developers may prefer more flexible contract terms that allow for extensions, rather than strict sunset clauses.

Example: A buyer purchases an off-the-plan apartment in Brisbane. The contract includes a sunset clause that states the development must be completed within two years. If the developer faces delay due to unforeseen circumstances like a shortage of building materials or weather disruptions, the buyer may terminate the contract if the sunset date is reached, protecting their investment.

2. What Are the Risks of the Sunset Clause?

While sunset clauses are designed to offer protection and certainty in real estate transactions, they also carry several risks, particularly for developers and buyers in off-the-plan purchases.

Developer Manipulation: In some cases, developers might deliberately delay the completion of a project to let the sunset clause lapse, allowing them to cancel the original contract and resell the property at a higher price in a rising market. This unethical practice leaves the original buyer at a disadvantage, as they lose their contractual rights to the property and potentially face higher market prices if they try to buy another property.

Loss of Opportunity for Buyers: If a sunset clause is triggered and the contract is terminated, the buyer may lose out on an opportunity to purchase the property at the originally agreed price. Given the often-lengthy development timelines for off-the-plan purchases, real estate prices may have increased significantly by the time the clause is activated. This leaves the buyer at a financial loss, as they may have to pay more for an equivalent property in the current market.
Delay-related Costs: Sunset clauses can result in unanticipated costs for both buyers and sellers if the clause is triggered. Buyers may have invested time and resources into planning their move or securing financing, and a cancelled contract can result in financial and emotional costs. Sellers or developers may also face legal disputes if buyers believe that delays were caused by negligence or deliberate actions.
Contract Termination: The primary risk of a sunset clause for both parties is the termination of the contract. If either party is unable to meet the deadlines set by the clause, the deal may fall through, resulting in the loss of the transaction. This can be especially problematic for buyers who have emotionally or financially invested in a property or development.

Example: A buyer purchases an off-the-plan townhouse in Queensland, with a sunset clause that states the project must be completed within 18 months. The developer faces unexpected delays due to construction challenges and fails to meet the deadline. The sunset clause is triggered, and the buyer is left without a property after waiting for over a year. The buyer now faces increased property prices in the market, making it harder to find a comparable property.

3. If the Contract Between the Buyer and Seller was Terminated as a result of the Sunset Clause, can they Enter into a New Contract?

Yes, if a contract between a buyer and seller of real estate has been terminated as a result of a sunset clause, the parties can enter into a new contract, but this depends on mutual agreement. In Queensland, as in other Australian states, a sunset clause is just a protective mechanism that allows either party (usually the buyer) to terminate the contract if certain conditions are not met by a specific deadline. However, after the termination of the contract, neither party is obliged to re-enter into another contract or make a new one; this depends solely on the agreement between the seller and the buyer.

4. What Period Is Usually Indicated in the Sunset Clause in a Real Estate Purchase Agreement?

The period indicated in a sunset clause in a real estate purchase agreement can vary depending on the type of property, the circumstances requiring the need for a sunset clause. (For example, if it is required because the development hasn’t been built yet then consideration needs to be given to the scope of the development, and market conditions.) For instance, the sunset clause period for a buyer to obtain financing from a bank is usually between 30 to 60 days, depending on the buyer’s financial circumstances and the lender’s requirements. However, the sunset period for off-the-plan sales typically ranges from 12 to 36 months.

In cases where the development is more substantial (e.g., high-rise apartments or large residential communities), the sunset clause may extend to 36 months or longer.

The sunset period is often a point of negotiation between the buyer and the developer. Developers prefer longer periods to accommodate potential delays, while buyers typically seek shorter timelines to ensure the project is completed within a reasonable time frame.

5. How often is the Sunset Clause needed in GM Law practice?

In the experience of the Directors of GM Law sunset clauses are almost always included in off the plan contracts but not typically used in sales of established residential property except in circumstances where a contract is negotiated that is subject to a number of lengthy conditions, such as the sale of the buyers property and the settlement of the buyers property.

We service the entire Brisbane metropolitan area

If you need help to get a contract sorted so you can secure a property for your client, we have set up the GM Law agent hotline.

You can email us at AgentSupport@gmlaw.com.au to get urgent personalized support.

We service the entire Brisbane metropolitan area

If you need help to get a contract sorted so you can secure a property for your client, we have set up the GM Law agent hotline.

You can email us at AgentSupport@gmlaw.com.au to get urgent personalized support.

Don't forget we offer the following:

1. In What Cases Is It Appropriate to Indicate a Sunset Clause in Contracts and In What Cases Is It Not?

2. What Are the Risks of the Sunset Clause?

3. If the Contract Between the Buyer and Seller was Terminated as a result of the Sunset Clause, can they Enter into a New Contract?

4. What Period Is Usually Indicated in the Sunset Clause in a Real Estate Purchase Agreement?

5. How often is the Sunset Clause needed in GM Law practice?

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