What are Sunset Clauses and how do they work?

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 Claire or Bridget