While buying a new build property “off the plans” might not suit every purchaser, in a rising property market these types of agreements give purchasers the ability to lock in the key commercial terms (such as the purchase price) while building up their savings as the developer completes the development of the property. Settlement is triggered upon completion of the property, which is typically after the developer has obtained new titles and a code compliance certificate for the property. But what happens if something goes wrong, and the development gets substantially delayed? With all the recent challenges affecting the construction sector, it is no surprise that developments are taking longer to reach completion. A sunset clause can help avoid a situation where the parties are stuck indefinitely with an agreement under which settlement is not going to be triggered.
A sunset clause gives either the vendor, the purchaser, or either of the parties the ability to cancel the agreement if certain development milestones for the property aren’t completed by their target completion date. While section 225 of the Resource Management Act 1991 implies certain cancellation rights in favour of the purchaser into sale and purchase agreements for properties that are to be created as part of a subdivision, the ability to cancel under s225(2)(b) depends on whether the vendor has made “reasonable progress” towards obtaining approval of the survey plan, which could be open to interpretation. Some agreements will seek to wrongfully contract out of the section 225 cancellation rights or provide that these cancellation rights have been waived. By contrast, a sunset clause simply draws a line in the sand at a specific date to provide that if the events triggering settlement under the agreement aren’t met by the sunset date, the agreement may be cancelled.
At present there is no standard form of “off the plans” agreements in the market (and therefore no standard sunset clause), so it is important to get legal advice on the agreement and drafting options before signing. Some sunset clauses require notice of cancellation to be given within a certain timeframe following the sunset date, or else the right is lost. Others might provide for deemed cancellation or deemed waiver or provide for extensions to the sunset date in certain circumstances.
Generally, we recommend that purchasers seek to include a sunset clause in an “off the plans” sale and purchase agreement in their favour, and to ensure that the sunset date itself is reasonable in the context of the development. While there has been some media coverage relating to developers using the threat of cancellation under the sunset clause (where it is for the benefit of both parties) for raising the purchase price, this does not appear to be a widespread practice as developers generally have a duty to do all reasonable things to fulfil their contractual obligations and they will want to protect their reputation in the market. However, if the sunset clause is for the benefit of the purchaser only, this will eliminate any perceived leverage a developer has to raise prices. The developer might look instead to include specific developer’s conditions or a force majeure clause into the agreement to help manage its risks.
If you are considering buying or selling property “off the plans” we can assist you in the process. We have extensive experience acting for both purchasers and developers in all aspects of “off the plans” agreements. Please get in touch with our Property team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.