By Eesha Karamchandani and Gaanesh Seger - 10 Feb 2022
Sunset clauses are conditions included in agreements to
provide purchasers, and sometimes vendors, the ability to cancel an
agreement by notice if a specific event has not occurred by a
certain date (i.e. the sunset date).
Sunset clauses are most common in "off-the plan" property sale
and purchase agreements and give a party (or both parties) the
ability to cancel the agreement if title and code compliance
certificate (CCC) have not issued by the sunset date. Sunset
clauses can also be found in commercial agreements, particularly
those with long settlement periods or long conditional dates (e.g.
a business sale and purchase agreement conditional on obtaining
licences/approval).
Where a vendor is selling a property as part of a proposed
subdivision and the survey plans have not been approved, section
225 of the Resource Management Act 1991 provides very limited
protection and ability for a purchaser to cancel an agreement. If
the purchaser has not cancelled within 14 days of the date of the
agreement, a purchaser's ability to cancel using this section is
dependent on whether the vendor has made "reasonable progress
towards submitting a survey plan" and what is "reasonable progress"
could lead to lengthy arguments between parties. Invalidly
cancelling the agreement under this section could amount to
repudiation and further issues.
In contrast, sunset clauses provide more certainty as to when a
party can rightfully cancel. Without a sunset clause, parties may
find themselves locked into an agreement for an uncertain period of
time with neither party having the ability to cancel unless
mutually agreed.
One way sunset clause
A one way sunset clause only allows one party (most commonly
purchasers) to cancel the agreement if a specific event has not
occurred by the sunset date. It gives usually that party the option
to cancel but they can often use that cancellation right to decide
if they will wait it out or try and negotiate an extension while
they confirm finance and other issues to get certainty around
completion.
One way sunset clauses are ideal for off the plan property
purchasers but can become problematic for vendors if there are
project delays. Vendors tend to include protections against sunset
clauses such as an automatic extension of the sunset date or strict
timeframes around how long the purchaser has after the sunset date
to cancel. Purchasers do need to watch out for these!
Vendor's financiers are often resistant to these clauses as they
want certainty that the vendor has the sale locked in.
Two way sunset clauses
Two way sunset clauses allow either party to cancel the
agreement if a specified event has not occurred by the sunset date.
It is now commonplace for vendors to push for a two way sunset
clause, particularly in off the plan property agreements. The
rationale behind this is because for various reasons (Covid-19
being a good example) there can be delays on completion which in
turn lead to increased costs of materials, leaving vendors in a
position where they may not want to be locked into the original
terms of the agreement.
Sunset clauses have been quite the topic in the media as of
late, with some reports of property developers allegedly misusing
two way sunset clauses to cancel agreements to ultimately resell
for higher prices.
This highlights the need to obtain legal advice before signing
an agreement regardless of which side you sit, so you understand
the implications of it.
If you are about to sign an agreement with (or without) a sunset
clause come speak to our property or commercial team specialists
who have extensive experience in this area.
Contacts
Eesha
Karamchandani
Gaanesh
Seger