Back in the bad old days, in an overheated market, developers could deliberately delay completion of a unit block, return your deposit then re-sell your unit at a higher price. Now, thanks to covid, supply issues and storms, those delays could be genuine and the sunset clawbacks may be on again.
A few years ago I was chatting with then NSW Fair Trading minister Victor Dominello about all things strata and I mentioned an upcoming newspaper report about a sunset clause scam.
Sunset clauses were originally intended to allow either the developer or purchaser of a unit to pull out of the deal if the building wasn’t completed on time, due to circumstances beyond their control.
However, especially in a hot market with fast-rising prices, some developers were deliberately delaying completion of their projects so as to trigger the sunset clauses.
They would then offer the properties to the original purchasers at a higher price, or put them back on the market, returning the deposit which would obviously have lost a lot of its purchasing power in the interim.
Flat Chat Wrap co-host Sue Williams had been approached by off-the-plan buyers of an apartment in Sydney who had noticed that work had ceased completely on the site in the weeks leading up to the deadline.
The developer was offering purchasers the option to pay more for their units or, alternatively, accept the return of their deposit while the units were put back on the market. He would later admit he had bought the block from the original developer with the specific intention of exploiting the sunset clause provisions.
We dubbed the practice “Sunset Clawbacks” and to his credit Mr Dominello immediately pushed through changes in the laws so that the purchasers had to agree to the contract being rescinded or the developer had to get the approval of the Supreme Court, at their own expense.
The NSW law changes in 2016 were soon followed by similar moves in Victoria and more recently the ACT. There is also ongoing agitation for similar protections in developer-friendly Queensland.
So why raise this now? The fact is that disruption to the availability of labour during covid lockdowns, followed by supply chain issues and then the horrendous weather of late summer means that some unit blocks will inevitably be bumping up against their sunset clause deadlines.
Now, developers and purchasers can mutually agree to extend those deadlines, if they wish. But genuine delays could lead to opportunist developers exploiting their sunset clauses, albeit with compelling reasons for doing so.
To be clear, the law doesn’t prevent sunset clauses from being invoked – where it exists, it just makes the criteria harder , but not impossible to meet.
If you block has suffered genuine delays and it’s in an area where house prices have gone up by 20 or even 30 percent, the developer could be eyeing the approaching sunset deadline and wondering if it’s worth, not so much applying the brakes as taking their foot off the accelerator.
So what can an average off-the-plan purchaser do? First of all, check your contract to see if the completion date is near, then call the developer and ask how they’re going.
If you are in an area where property prices have been rising quickly, you might want to visit the building site on a weekday and see how much activity is going on.
If, during normal working hours, the site is empty but for a security guard, take a picture with your phone (which will automatically date stamp it) and then come back as often as you can to document any lack of work.
This will be valuable information if the developer attempts to get a “sunset clawback” approved by the Supreme Court.
Conversely, if you are in an area where unit prices are falling and your developer has gone over the sunset deadline, you might consider pulling the plug, especially if your deposit might be put to better use in another investment.
If interest rates do go up this year, prices in areas that are already under pressure will fall fastest and farthest.
The sunset clause law changes in NSW, Victoria and the ACT have restored the protections for both parties.
Honest developers will seek mutually agreeable extensions, but there are those who will try to exploit the tiniest loopholes to their advantage and your cost.
A version of this column first appeared in the Australian Financial Review.