You've probably heard the term "sunset clause" before. It's a standard legal concept that pops up in a range of contexts – you've probably heard MPs talking about them before. Sunset clauses are also significant to the real estate world. If you're hoping to take out a construction loan and build a new home, you might want to make yourself familiar with them.

What is a sunset clause? 

A sunset clause is essentially a time limit on the construction of a property. If the job isn't done by a certain date agreed upon by the parties, the contract is void and all are free to do as they wish. 

What's the point?

Ostensibly, the clause protects both the buyer and the developer. For example, it can incentivises the developer to do all they can to prevent onerous construction delays. Rather than becoming locked in and being at the mercy of the developer, the buyer can simply walk away from the deal after the stipulated time period elapses.

For the developer, it can help ensure that they're paid by the buyer as soon as possible. 

Are there any risks?

There are a number of risks associated with sunset clauses, particularly for buyers. If a developer gets a better offer or market conditions see an upswing in their favour, then the developer can simply delay until time runs out, refund the buyer their deposit and find someone else. 

In other words, they can leave the buyer more vulnerable than they might've been without the clause. 

Don't let the sun go down on you

How do you protect yourself from the potential risks of a sunset clause? One way to do so is by trying to negotiate such a clause out of a building contract. 

If this fails, then build in enough time into the clause to help ensure the property does get completed. If you've gotten a home loan for a project that's in the middle of construction, find out what stage it's at, to make sure the lengthiest parts of the process have been and gone. 

Finally, research the developer and make sure they're trustworthy, and be sure to pop in frequently and check up on the construction's progress.

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DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.