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What is a Sunset Clause?

A sunset clause usually refers to a provision in legislation or a statement in a contract that limits the duration of the document’s effectiveness. In other words, it acts like an expiry date. In this article, we explain how a sunset clause works in the context of real property transactions.

Purpose of a sunset clause

A sunset clause allows a party to exit a contract after the expiry date has been reached. Generally, this kind of clause can be used in any contract, although the most common usage of this is in real property transactions. There are two instances where a sunset clause is particularly useful.

Subject to sale clause

If a buyer is purchasing property, they may wish to first secure the sale of their existing property. This is also known as a subject to sale clause. It works by having a fixed expiry date inserted into the contract of sale for the new property. If the buyer fails to sell their property before that date, the sale of the new property will not proceed.

Off the plan developments

The second most common usage of sunset clauses arises out of contracts of sale of a development off the plan. Just like the above example, it can be inserted into the contract to limit the time that both parties have to complete the transaction. If a developer experiences delays in completing the project, and prolongs it past the expiry date, then a sunset clause will allow both parties to be released from their contractual obligations.

How does a sunset clause protect parties to a contract?

Sunset clauses generally benefit the buyer in the context of real property transactions. For example, if an individual is looking to buy property but is uncertain about whether they can manage to sell their existing property in a reasonable time frame, then a sunset clause will be beneficial. They can continue to shop the market and even put down a deposit without fearing that they will not be able to sell first. A sunset clause may even encourage a property buyer to market their existing property at a higher price. That’s because the risk that they will fail to sell is now largely irrelevant.

Likewise, a sunset clause benefits a person who intends to buy an off the plan development. The contractual clause gives security to the buyer as it allows them to exit a contract if the development has been delayed. This also provides a person with the ability to confidently place a deposit on a property. By doing this, a buyer can ‘get a foot in the door’ while still having protection against unforeseen circumstances.

What happens when the contract expipres?

If a contract of sale expires due to a sunset clause, then the contract will be rescinded. The parties may then exit the contract with no further obligations to one another. Rescission places the parties back into the position they were in, prior to the contract’s formation. Ultimately, the final outcome is that the contract technically never existed. If you’re looking to get more advice regarding sunset clauses, you can always find help from an experienced property lawyer.

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