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THE SUNSET STING

THE SUNSET STING
Heads they win, tails you lose.

by Neil Jenman

In the midst of the recent real estate boom David and his wife found the perfect block of land. The place to build their dream home.

Although the land was in the development stages, they didn't mind waiting. They paid their deposit, signed the contract and looked forward to the future.

Barely six months later, a letter arrived from the developer's lawyers. The contract was cancelled and a refund of the deposit was on its way. However, if David would like to pay a further $48,000, the developer would consider another contract for the block of land.

"It appears a deal is not a deal any more!" said David.

Well, not with that dodgy deal-changing gambit known as a "sunset clause".

Here's how it works. When buyers pay a deposit on a property that is yet to be developed - be it a block of land or an apartment - the contract has "a sunset clause". If the development is not completed by a certain date, either the developer or the buyer can cancel the contract.

Like all sneaky deals, sunset clauses sound fair. They are presented to buyers as a safety mechanism. "If something goes wrong," says the salesman, "and the property is delayed past a certain date, you get your money back. You can't lose."

Technically, the phrase "can't lose" might be correct. But, as David and his family discovered, in practice, sunset clauses can really sting.

The Courier-Mail (June 25, 2005) carried a story of 133 buyers who, two years ago, each paid around $200,000 for their own block of land in a subdivision near the beach on the NSW north coast. Today, each block is reportedly worth around $450,000 a block - an increase of a quarter of million dollars per block. Spread over 133 blocks, that's a cool $33 million increase.

So, enter the sunset clause and a massive group sting for these buyers.

On the basis that the subdivision has taken longer to complete than estimated, the developer is cancelling all the contracts and refunding all the deposits. It's perfectly legal.

Now, let's take another example of how the sunset clause stings buyers.

This time, instead of going up in price, the properties go down in price. Take those thousands of off-the-plan apartments that were sold to naïve investors during the boom. Most are now worth thousands less than their slickly spruiked prices. [Some Auckland apartments, for example, are reportedly worth around a third less than their selling prices of a year or so ago.]

As many stunned buyers are now discovering, these dud development deals are all being completed ahead of schedule.

Some agents and developers will argue that, once again, Jenman is using scare-tactics and that sunset clauses are "standard industry practice" (don't ya love that phrase?).

Well, here's what seems standard - when development properties rise in value prior to completion, the buyers are told, "Here's your money, get lost," yet when the developments fall in value, the buyers are told, "Come here and give us your money."

The coin is tossed and if it comes up heads, the developer wins; if it comes up tails, the buyers lose.

Okay, buyers, here's how to protect yourselves. Insist, when you pay your deposit and sign the contract to buy, that you are the only person entitled to invoke the sunset clause.

If an agent or a developer or a lawyer doesn't like it, tell them to get lost.


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This article was taken from the Articles page of the Jenman website.


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