The Case for Sunset Clauses.

Tight money markets and financial companies in strife can make the viability of property developments and renovations change overnight.

All developers from the scrupulous to the scurrilous can be affected.

I dealt with one case recently with a development in a small town where my client was looking to sign up to a new commercial development. He’d been led to believe a number of tenants had already been signed up, which suited him well, as he hoped to do business with his new neighbours. When I checked it out, I discovered there were no tenants signed up, no buildings underway on the site, and not even any signs of construction.

There are other cases where in good faith, developers are promoting new developments or renovations, only to discover financiers are telling them what was a done deal two weeks ago, is not a goer today.

The volatile market and uncertainty about funding for property development has raised the need to consider sunset clauses on property lease agreements to protect the interests of business tenants if developments don’t go ahead.

Just in the past two week, I’ve added sunset clauses into agreements for two clients. The sunset clause means that if a specific development or refurbishment doesn’t get completed by a certain time, then the sun goes down on the deal, the prospective tenant can pull out and there are no penalties incurred. If a sunset clause is set up in a lease agreement, we recommend the deposit be held in an interest-bearing trust account, and if the development does not go ahead, the whole sum is returned to the tenant. If the development goes ahead satisfactorily, then the deposit is released to the developer to be used as rent.

It’s not a clause that will work in every situation, and the negotiation needs to be looked at on a case by case basis. From where I am sitting, when we have tight money markets and financial companies are in strife I believe that when a tenant wants to secure their situation, the inclusion of a sunset clause in the property lease will offer more protection.

This entry was posted on Monday 7th July 2008 and is filed under Property Leasing. Both comments and pings are currently closed.