What is LVR?
Buying off the plan can be a cost-effective way of getting into the real estate game, but it comes with a number of variables that purchasing an existing property doesn’t. If you’re buying any type of property off the plan, you may notice the sunset clause mentioned within your contract. But what is a sunset clause and do you need to be worried about it?
Buying off the plan generally refers to purchasing a property before it is completely built and passed final occupancy inspections. Buying off the plan can be a great way to get into the property market (from a financial standpoint), but can be risky as you are purchasing a property without being able to inspect it before it has been fully completed. Therefore, the final product may not be what you expected.
For these contracts, the sunset clause (or sunset period) is the maximum amount of time given to the developer to complete the project. This period of time is stated within the contract of sale and gives the purchaser, builder or developer rights to cancel the contract under certain circumstances.
If the developer does not meet the period of time for completed construction, set out by the sunset clause in the contract, the purchaser of the property is usually legally entitled to walk away from the agreement and have their deposit returned in its entirety.
There is no universal period of time for sunset clauses, as a determination of this period is based upon the property’s size, as well as a number of other dynamic factors.
As with anything relating to purchasing property, there are risks associated with buying off the plan. There have been instances in the past where developers have intentionally activated a sunset clause by going overtime with their construction in an attempt to re-sell on the market at a higher price. This issue is two-fold for the purchaser. A developer who employs these tactics will likely have noticed a spike in the market to their advantage, so not only will you lose your property (don’t worry, you will receive your deposit back in full), but it’s possible that the market may have moved beyond your means by the time you get your money back. There is also potential to have wasted a significant amount of time in the property market without having anything to show for it, as well as missing out on significant capital growth, which can be incredibly frustrating.
As with everything property-related, it’s important to do your research before you dive in and make a purchase. While it’s rare to have a developer default on the sunset clause, it’s great to have the final timeline for completion in the back of your mind so you can track the progress of any build. Before you sign the contract, it helps to ensure the developer has a good track record at completing similar jobs on-time, and are well-known within the industry.
There are laws in place to protect purchasers from dodgy development company tactics, which include the right to request a notice from the builder outlining why the property was not completed by the sunset date. If the property purchaser is not satisfied with the reasons for slow progression outlined by the developer, then the building company can be forced to go through the judicial system to have their reasons approved – at their own cost.
Remember, it’s unlikely your purchase off the plan is going to fall through due to the sunset clause but not impossible. As such, it is an important part of the contract that will allow you to track the progress of the build.