The Sun Never Sets On Clause Queries
Questions about sunset clauses can be difficult to answer, but there are some key steps investors can take.
1 March 2022
I’ve got a new build under construction, where the timeline has blown out and we are getting close to the sunset clause date. I’m worried that the developer will cancel and put up the price. Is there anything I can do? Can I claim a breach of the Fair Trading Act if they’re intentionally slowing down construction?
Questions about sunset clauses are difficult to answer in the abstract. Ultimately the outcome will be dependent on what the actual clause says. For example, a sunset clause can be inserted for the benefit of the purchaser, vendor or both.
There can be conditions or limitations on the right to cancel. There can be requirements that a vendor/developer take all reasonable steps to obtain consent (building or resource consent), to undertake certain works, etc, before invoking the sunset clause.
And there can be other clauses like a financial viability or margin clause that lets a developer change the price or take certain other steps. However, some general comments can be made.
(1) Negotiation. When you are negotiating speak to your real estate agent, lawyer and anyone else helping you to make the sunset clause as fair as possible. And in the context of a purchaser this means trying to make it for your benefit only, requiring the taking of steps to obtain all necessary consents and construction, to avoid price increases, and to make it sufficiently long.
(2) Caveatable interest. In a case called Mortre Holdings Ltd v ANCL Investments the Court of Appeal said “in the case of conditional contracts where the parties intend to be bound and to remain bound subject to the fulfilment of the condition, an equitable interest in the land may also arise”. Where those interests and rights in the land are breached, remedies may be available. However, if the contract is lawfully cancelled then the interest in the land will be extinguished. Whether a contract was lawfully able to be cancelled depends on what the contract says and what has actually happened. Depending on the answer to the above question, it is possible that a purchaser may be able to lodge a caveat over the title (or part of it) to protect an equitable interest conferred by the agreement. There will often be a “no caveat” clause. These clauses are not decisive as to the lodgement of a caveat and it is possible to still lodge, but the no-caveat clause will be a relevant factor: Care needs to be taken about describing the nature of the interest, describing the extent of the interest, understanding the implications of lodging a caveat, including the possible costs consequences. We strongly recommend speaking to a lawyer before doing so.
(3) Waiver. Even where there are clauses inserted for the benefit of one party, it is possible that the party can waive their ability to rely on the clause. In Globe Holdings Ltd v Floratos the Court of Appeal said “the legal principles are well established. A party may waive a condition or provision in a contract which is solely for that party’s own benefit and is severable. In such a case the other party is denied the right to treat the condition as unsatisfied and is obliged to complete notwithstanding the loss of that advantage.” One possible avenue of enquiry is to consider whether the vendor has taken any steps that would amount to explicit or implicit waiver of a sunset clause that has been inserted for their sole benefit. If waiver has occurred the party cannot rely on it and again a caveat may be lodged.
(4) Requirement to take steps to fulfill. Where a clause requires developers to take steps (reasonable or otherwise) to fulfil conditions, there can be a dispute as to whether that has occurred. If it has not it is possible to challenge the use of the clause on the basis those steps were not taken. A combination of injunctive relief and specific performance could be utilised to insist that the agreement remains on foot.
(5) Fair Trading Act. The act is a piece of consumer protection legislation that prevents people in trade from engaging in misleading or deceptive conduct. The Fair Trading Act may come into play if, prior to the contract being entered into, the developer, a real estate agent, or lawyer made statements to you as to how far advanced the development was, that the clause would not be relied on, or not to worry about certain things relating to the clause.
(6) Real estate agents and lawyers. The final avenue of recourse you may have is against a real estate agent depending on what they did and said to you in relation to the sunset clause. An example of a complaint being successfully made against a real estate agent is the decision re Benjamin Cartwright CAC C34592, September 24, 2020 where the Complaints Assessment Committee found there had been unsatisfactory conduct where a licensee told purchasers they could move into the property in July 2019 when the property would not actually be available for six-to-10 months. The salesperson was also criticised for saying to the purchasers “don’t worry about [the sunset clause]; it won’t affect you because you can move in next month.”
— Shane Campbell
Three years ago, my mother unfortunately passed away, and I inherited her property, mortgage-free, along with my two siblings. I thought it was a good investment so bought out their shares. With interest deductibility, I now want to sell it. Will I need to pay bright-line since it was an inherited property?
This is a tough one to answer. On the one hand where you inherit a property you are eligible for a rare exemption from the application of the bright-line rule.
In a straightforward scenario where a beneficiary inherits a property from a parent, for example, and then sells that property a couple of years later, there is no tax to pay under the bright-line rule due to this inheritance exemption.
The difference here is that it appears you have inherited one-third of the property and bought the other two-thirds. On this basis, the bright-line rule will likely apply to at least the two-thirds share of the property you bought from your siblings, assuming you acquired this on or after March 29, 2018 (this is the day the five-year bright-line period came into effect).
In recent times the IRD have issued confusing statements regarding the application of the bright-line rule where a joint owner of a property buys out one or more of their fellow owners, suggesting that a buy-out can constitute a restart of the bright-line clock in relation to the whole of the property. This could mean that you are taxed on the entire gain rather than just two-thirds.
We are hopeful they will soon clarify their position to the common-sense answer that the bright-line rule only applies to the proportion of the property you buy off your fellow owners.
Having said this, we always recommend that you get specific advice because you never know what other relevant facts can emerge when you sit down and talk through all the details with an experienced adviser.
— Matthew Gilligan
With the new lending rules and CCCFA, I’m considering using a non-bank lender. How much more can people borrow if they go non-bank?
This is a question that we are hearing a lot and I expect it to become even more common across 2022 as investors become more used to seeing non-bank funding as an acceptable way to move forward with financing their investments. It is not, however, a straight easy answer as there are a myriad of nonbank options which approach funding differently as well as huge variances in an individual client’s circumstances. As an example, in the past few weeks we have used one non-bank funder for a client who needed offshore income included which in this case the banks didn’t allow; another for a large property investor where banks were assessing the income and property types as commercial; and we are currently looking at another application where the funder doesn’t ask as many questions or require the same documentation hurdles. All of the above solutions price differently and fit different requirements. I’d recommend you have a chat with a mortgage adviser to see what best fits your needs.
— Kris Pedersen