In a recent TNG webinar, Jack Rafiei, a partner at Doug Cowan Barristers and Solicitors, discussed sunset date clauses and some key things to look out for when entering into sales and purchase agreements regarding property.
What Are Sunset Date Clauses?
A sunset date clause is a clause that allows a party in an agreement to cancel the agreement if certain conditions are not met in a specified timeframe.
As with any legal clause, the wording of sunset date clauses is extremely important. This may seem pedantic to the average person, but when it comes time for the clause to take effect, a single word can be worth thousands of dollars.
Case Studies
In order to illustrate his points, Jack discusses four case studies that show just how important wording, and therefore paying attention to them, can be.
In the first two case studies, the sunset clause allowed either the purchaser or the vendor to cancel once the sunset date had passed.
This led to the vendor being able to increase the price after the fact when the value of the property rose. In the second, the vendor could also extend the sunset clause, effectively locking the purchaser into the agreement.
In a case where the developer increased the price, the purchaser – being financed – would have to come up with the shortfall on their own.
The third case limited the ability of the purchaser to cancel within five days of the sunset date and, like the second case, allowed the vendor to extend the date in the event of “unspecified events.”
Again, this gave the vendor the ability to lock the purchaser into what could end up being a bad investment.
The fourth made a similar extension allowance, granted the vendor was making “reasonable” progress.
Issues
These case studies illustrate three potential issues:
– The clause favours the vendor.
– The vendor has the ability to lock purchasers in, increase the price, or cancel and find another buyer.
– “Unexpected” (read vague) circumstances allow the vendor to do the above.
In summary, the wording of these clauses ultimately gave vendors an advantage over purchasers. As a purchaser, you want to protect your interests as much as possible.
Solutions
To guard against this, Jack advises that you seek the advice of an experienced lawyer. There are many angles for the average buyer to cover, but an experienced lawyer will know exactly what to look for and do.
A perfect sunset date clause
A perfect clause should:
– Allow ONLY the purchaser to cancel
– Allow ONLY the purchaser to extend the date
– Require any deposits to be refunded in full immediately upon cancellation, including any interest.
Minimising risk
To end off, Jack offers some helpful tips to minimise risk.
He advises buyers to avoid purchasing “emotionally.” Buyers should take it slow and enlist the help of a lawyer. Their lawyer should draft the S&P agreement, not the vendor’s lawyer. Buyers should make sure that there’s a due diligence condition provided by the vendor. If there isn’t, negotiations are unlikely.
Negotiations are key. The buyer’s lawyers should negotiate from the outset and set a “milestone condition” as well as a sunset date. The milestone condition allows for cancellation if the vendor misses a defined minimum start date.
He also advises that a buyer get a guarantee, in writing, that the vendor won’t increase the price.
Finally, he advised buyers to look for developments close to completion rather than ones that haven’t begun yet and to look for the ability to pay a low deposit.
Conclusion
As you can see, there’s a lot to consider, but if you take it slow and thorough, you’ll be able to ensure a good buy, with maximum protection for yourself.
Jack ended by stressing that this summary is by no means absolute but a good starting point for thinking about sunset clauses.
