SUNSET CLAUSES
A sunset clause is a term included in an agreement to provide a party with the ability to cancel an agreement if a specific event or condition has not been met by an agreed time.
Sunset clauses are common where property is being sold as part of a proposed subdivision, ‘off the plans’ or by a ‘turn-key’ agreement. Sunset clauses are commonly inserted into agreements for the purchaser’s comfort so that if the developer or vendor fails to deliver the section or property within an agreed time, the purchaser can cancel the agreement rather than being left in limbo with their deposit tied up and no home for section for a protracted period. In some cases, a developer will resist a purchaser’s sunset clause as its financier will require a minimum number of unconditional pre-sales before advancing finance for the development.
A developer may seek a sunset clause to allow the agreement to come to an end where the development cannot be delivered due to things outside the developer’s control such as being unable to obtain building or resource consent. Some sunset clauses are mutual allowing either the purchaser or developer to cancel the contract if the development is not completed by a specified date.
Purchasers need to be careful about developer sunset clauses. The exact wording of any sunset clause is important. A sunset clause linked to obtaining a resource consent will usually be a valid reason for the developer seeking the clause. However, purchasers should be wary of developers seeking an sunset clause simply because the development is not completed within a specified time. In those cases, there is the potential for a sunset clause to be misused by a developer as a device to cancel a contract where the cost to deliver the contract has increased (and those costs cannot be passed on to the purchaser) or where there is an opportunity to obtain an increased price for the property by selling it to another buyer.
In Titterton v Dynasty Capital Limited [2022] NZHC 1202, the parties entered into a fixed price agreement for a house and land package off the plans. The agreement contained a mutual sunset clause allowing either party to cancel the agreement if Code Compliance Certification (CCC) had not been obtained by the specified date. The developer purported to cancel the agreement in reliance on the sunset clause as CCC had not been obtained by the agreed date. The purchaser argued that the developer had an obligation to take reasonable steps to complete the construction of the house and, having failed to do so, it could not rely on the sunset clause as that would represent it relying on its own wrong. The developer argued that while it had an obligation to undertake the build with reasonable diligence, it denied that the purchaser had an arguable case that the delay in obtaining CCC could be sheeted home to the developer therefore breaching that obligation.
The Court found that the purchaser had established a reasonably arguable case that the vendor was not entitled to invoke the sunset clause because it was reasonably arguable the vendor breached its obligation to complete the build with reasonable diligence. This was because the developer allegedly had funding issues throughout the development and sought to pass on a price increase to the purchaser to complete the development despite the fixed price contract gave the purchaser an arguable case. The Court allowed the purchaser to maintain a caveat over the property preventing the developer from selling or dealing with the property until the substantive dispute could be resolved. The key takeaway from the Dynasty case is that a party will be unable to utilise a sunset clause to cancel an agreement where it has failed to proceed with the contract with reasonable diligence.
If you are considering buying a new section or home taking appropriate advice before you enter into any agreement is essential. Our property lawyers and legal executives have extensive experience advising clients in relation to ‘off the plan purchases’ and ‘turn-key’ agreements and can advise you about sunset clauses and any other fishhooks. If you are having problems with a builder or developer one of our property or litigation lawyers can advise you of your options to resolve the issue.
The information contained in this article is for general informational purposes only. The content of this article is not intended as legal advice and should not be relied upon as such. Please get in touch with us if you require legal advice in relation to any matter.
