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26-08-2013

Sunset clauses may burn investors

Landlords.co.nz

Investors may lose money unless a legal loophole is closed, a property expert says.

The loophole allows property developers to exercise a "sunset clause" in property purchase agreements where the agreement is entered before the property’s construction has been completed.

A sunset clause is often included in contracts where the property is still under construction. It puts an expiry date on an offer if certain terms within a contract are not met.

The director of Propellor Property Investments, Nikki Connors, says some developers are using the sunset clause to get out of a contract when they realise they could have sold a property for more.

Connors says a home buyer or property investor may enter into the agreement while the potential home is at "blueprint stage" and pay a deposit to secure the property.

That means the developer has a secured purchaser for the dwelling, which provides cashflow and security for their financier, she says.

“With this agreement the buyer proceeds in good faith with the understanding that as they view the ongoing progress of the building the contract terms will be met on schedule and they will take possession of the new property,” says Connors.

Connors says often buyers feel safe in the knowledge that construction is proceeding according to plan and the home buyer takes themself out of the property market, often for a year or more as construction continues.

During the course of that year the value of the property may rise so significantly, that it provides an incentive for developers to stall the final stage of construction in order to delay the council consent process and, subsequently trigger an exit/sunset clause in the contract.

“What this creates is a risk-free, capital investment for the developer who is able to evaluate whether it’s in their best interests to adhere to the terms of the contract or simply remarket the property in the final stage in order to get a better price,” she says.

Connors is calling on regulators to make legislative change which makes it harder for developers to exit contracts for their own financial gain.

She advises buyers to exercise caution when buying off the plans, maintain a close watch on the progress of construction and ensure all correspondence with the developer is well documented.

Tags: nikki connors

Source: Landlords.co.nz

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