Insight
Property Development Pitfalls
Protect Yourself with a Sunset Clause Before Buying Off the Plan
Buying off the plan is an exciting opportunity for many home buyers. It allows you to secure a property before it’s built, giving you a chance to be part of the process without the stress of designing or managing the build yourself. However, there are risks involved in property development that could leave you waiting years for your new home. One key safeguard to include in your purchase agreement is a sunset clause. This article will explain why a sunset clause is essential, what it entails, and how it protects your investment.
The benefits of buying off the plan
When you buy off the plan, you can secure a new property at today’s prices, often before construction even begins. Here are some of the advantages:
- Locked-in pricing:
The purchase price is typically set in advance, allowing you to budget effectively without worrying about price increases due to market changes. - Ease of process:
You avoid the hassle of designing a home and managing the construction, as the developer handles the entire process. - Involvement without the stress:
You get to be part of the journey as your dream home comes to life without the stress of day-to-day project management.
Tip: Make sure your purchase agreement specifies that the price is either fixed or capped to avoid unexpected costs.
The risk of delays in property development
While buying off the plan can be advantageous, it’s important to be aware of the potential for significant delays. Property development projects can take months or even years to complete due to:
- Council approvals and compliance certificates.
- Delays in securing building materials.
- Shortages of contractors.
- Poor weather conditions.
These delays can push back the expected completion date, leaving buyers in limbo.
What is a sunset clause and why do you need one?
A sunset clause is a provision in your purchase agreement that sets a specific deadline for the completion of the property. If the build isn’t finished by this date, the buyer has the option to cancel the agreement and walk away without penalty. This clause protects buyers from being stuck in an endless waiting game.
Key benefits of a sunset clause:
- Flexibility:
You can end the agreement if the property isn’t completed on time. - Protection:
It provides peace of mind, knowing you have a safeguard in case of prolonged delays. - Avoid long waits:
The timeframe in a sunset clause is usually much shorter than the protections offered by the Property Law Act, allowing for a quicker exit if needed.
What happens if you don’t have a sunset clause?
If your agreement doesn’t include a sunset clause, the Property Law Act 2007 provides some limited protections:
- Under Section 225(2), you can give written notice to the vendor to cancel the agreement if the property isn’t completed within two years from when the resource consent was granted.
- You can also cancel the agreement one year after signing if the vendor hasn’t made reasonable progress, such as submitting a survey plan for council approval.
However, these legal protections can result in much longer wait times compared to a well-drafted sunset clause. It may take years before you can end the agreement under the Act.
Our recommendation
We strongly advise including a customised sunset clause in your purchase agreement when buying off the plan. This clause sets a reasonable deadline for the completion of your new home and provides a simpler way for you to cancel if things don’t go according to plan.
Need help with property development agreements?
If you’re considering buying off the plan or need advice on property development agreements, contact our experienced team. We’re here to help you understand your options and ensure you’re protected throughout the process.
