Buying a home using a “sunset clause” - that is, buying a home with the condition of selling your home to complete the purchase.
Many home owners do not feel comfortable selling their home prior to buying a new home. They feel too nervous that they won’t be able to find and buy a suitable home before theirs is sold and settled and they don’t like the prospect of renting and having to make two moves.
The solution to this is for the buyer to make an offer on the property they intend to buy, that is subject to the sale of their own property. This is commonly known as purchasing subject to a sunset clause. This is a solution that is often used and it does have its advantages but also has its pitfalls.
I have sold many properties that are subject to a sunset clause, and the large majority of them work out well, however, there are occasions where the buyer can lose out on the home of their dreams.
Bridging finance can also be used as a solution, however, this can be costly and stressful.
The Sunset Clause summarised
The buyer puts a contract on a property subject to the sale of their own home. There is a time limit placed on how long the buyer has to obtain a contract on their property and how long they have for their property to settle. Settlement usually occurs concurrently for both properties.
Should the conditions within the clause not be fulfilled, either party has the right to rescind the contract without any penalty. The terms can also be extended by mutual agreement.
During the period of the contract, the seller has the right to continue marketing their property and accept a more favourable contract should it come along. In this instance, the buyer will have a specified time period (usually 2 days) to go unconditional with the purchase or their contract will be rescinded.
Potential advantages and disadvantages for the buyer
This enables the buyer to secure a property prior to selling their own home.
Settlement is usually concurrent and thus it saves the buyer from having to move their belongings twice.
The buyer does not have as strong of a bargaining position in the initial negotiation of the purchase price.
Should the seller find someone that gives a more attractive offer during the term of the sunset clause, the buyer could lose out on the home.
Potential advantages and disadvantages for the seller
Offers made by buyers that are subject to a sunset clause are usually higher. This is due to the fact that the buyer likes the home and does to want to lose out on owning it and they are aware that if the offer is not attractive, the seller will not enter into the contract.
The seller can continue to market their property, and should someone be willing to make a more attractive offer, the seller is free to accept it, after the buyer is given due notice.
The sale will not go unconditional until the buyer’s property is sold and goes unconditional. This can cause the seller to have an extended period of uncertainty.
The buyers property may not sell within the period of the clause and thus the contract may be terminated.
Example of a sunset clause
1. This Contract is subject to and conditional upon the Buyer:-
Entering into a Contract for the sale of their property situated at 22 Example Avenue, Robina QLD 4226 within 60 days from the date hereof; and Effecting satisfactory settlement of such sale within 90 days from the date hereof.
In the event that either of the above special conditions are not fulfilled by the respective time limits, then either party may elect to terminate this Contract by notice in writing whereupon the deposit paid hereunder shall be refunded to the Buyer and neither party shall have any further claim against the other and this matter shall be at an end.
2. During the term of this Contract the Buyer agrees that in the event that the Seller's selling agent referred to herein receives another Contract of Sale for the property duly signed by a prospective Buyer denoting the Seller's selling agent as agent therein then the Seller may cause to be served upon the Buyer notice in writing requiring the Buyer to waive the benefit of all precedent conditions so that this Contract is unconditional and for settlement to be effected 30 days from such notice.
3, In the event that the Buyer fails to give notice in writing electing to make the contract unconditional within two (2) business days after receipt of the Seller's notice then it is agreed by and between both parties that the Seller may elect to terminate this Contract by notice in writing whereupon the deposit paid hereunder shall be refunded to the Buyer and neither party shall have any further claim against the other and this matter shall be at an end. It is agreed that this Clause is for the sole benefit of the Seller.
4. Settlement shall occur simultaneously in accordance with the settlement of the buyers property situated at 22 Example Avenue, Robina QLD 4226.