What Is a Sunset Clause? Definition, Uses, and Examples

Sunset clauses or sunset laws are provisions in contracts, agreements, policies, and legislation that establish temporary terms and conditions that expire after a set time period or on a specified date.

Because these provisions are only enforced for a short term, it's crucial to understand what they mean and what they entail, especially when making a deal or signing a contract with another party.

Read on for a detailed sunset clause definition, the importance of this kind of provision, and some real-world examples in contracts and legislation.

Sunset clause key takeaways

What is a sunset clause? A sunset clause is a provision in a law, contract, or regulation that expires after a specified date. Also known as a sunset provision, sunset law, or termination clause, it repels or renders the specifics of the agreement or law void once the deadline arrives.

The following are some key takeaways of a sunset provision:

• Unlike other laws that remain in force indefinitely, sunset laws expire on a specific date.
• The expiry date in the law or contract is known as the sunset date.
• Sunset provisions establish temporary terms to ensure the statute or agreement remains relevant during the set period.
• These provisions often address short-term concerns or adapt to changing circumstances.
• Sunset laws can undergo review and receive extensions that surpass the initial sunset date.

Types of sunset provisions

Sunset provisions have many applications and can be used in various ways. For instance, lawmakers may create a sunset law at the state level or a party might include one in a real estate agreement. Because they're so versatile, several types of sunset provisions exist and are associated with contracts, legislative riders, fiscal policies, regulatory measures, and trial program acts.

• Contracts. Two parties can add a sunset clause to a contract, such as a house purchase deal, insurance contract, or partnership agreement, agreeing to certain terms for a specified time period.
• Legislative riders. Legislators may tack on a sunset clause to a larger law as an additional provision, making the statute more flexible and attractive to other lawmakers so they'll sign it.
• Fiscal policies. Lawmakers use sunset clauses to implement temporary tax measures, such as tax cuts or tax incentives, or to allocate short-term budgets for a limited time.
• Regulatory measures. A government agency may use sunset provisions to monitor and evaluate temporary regulations to determine their success and whether to renew, amend, or terminate them.
• Trial program acts. Sunset clauses are sometimes added to pilot programs to help determine their effectiveness before implementing them for a longer term.

Sunset provision examples

With a better understanding of sunset clauses, why they're created, and how they relate to contracts and legislation, let's review some examples of when you may come across them.

Prenuptial agreements

Prenuptial agreements are premarital contracts that specify the division of assets and help protect each party's financial interests in the event of a divorce. Basically, a prenup outlines the consequences of what-if scenarios after the dissolution of a marriage.

Typically, prenuptial agreements are valid until a couple decides to separate or divorce, except if they included a sunset provision in the contract. In this case, the sunset provision may have set a date for the conditions to expire, such as on their 10th wedding anniversary. At this point, the prenup would become invalid unless the couple agreed to renew, revise, or extend the provision.

Commercial leases

Sometimes, sunset provisions are included in commercial leases between tenants and landlords, providing them with an opportunity to renegotiate the leasing terms after a certain date.

For instance, after one or two years, the landlord may want to reassess the cost of rent based on the property value and current market conditions, so a sunset provision would set an expiration date for the lease, allowing the landlord time to review and update the terms. In another scenario, a sunset provision in a lease could set a deadline for when the tenant can renew or extend their lease before the terms expire.

Real estate sales

There are a lot of contingencies associated with real estate sales, so it's no wonder real estate purchase agreements often include sunset provisions. These clauses set time frames for certain obligations to be met to encourage timely decision-making and prevent the sale from dragging on.

For instance, the deal may include a sunset provision that creates a deadline for securing funding, obtaining permits, getting appraisals, conducting inspections, or completing repairs. Moreover, a sunset provision could even specify a deadline for transaction completion.

Trusts

Trusts, which establish the relationship between a grantor, trustee, and beneficiary, often include sunset clauses to instruct how to handle assets over time.

Some sunset clauses may determine when the trust expires, like on a certain date or following the grantor's death. Other sunset clauses may establish certain conditions for distributions, such as when a trustee reaches a specific age or earns a college degree.

What are the benefits and drawbacks of sunset clauses?

There are some pros and cons associated with sunset clauses, so it's important to consider these factors before agreeing to a provision.

Benefits

Sunset laws and provisions have their fair share of benefits, as they help protect both parties' interests and offer an exit strategy from the agreement. Here are some specific benefits of sunset clauses:

• Risk management. They prevent risks associated with long-term agreements and allow parties to prepare for the eventual termination of the contract.
• Flexibility. They allow parties a set time to reassess and adjust terms and conditions as needed.
• Clarity about the present. They establish clear instructions and deadlines, eliminating surprises and misunderstandings.

Potential drawbacks

While sunset provisions are great in terms of flexibility and adaptability, there are some disadvantages associated with them.

• Uncertainty about the future. They can cause uncertainty and confusion about future agreements after the contract expires.
• Potential for delays. They can encourage a party to delay action or stall while waiting for the deadline to occur.
• Instability. If parties are unable to negotiate new terms and reach a consensus once the deadline approaches, the conditions can expire and cause misunderstandings or disputes.

FAQs

Here are some of the most common questions about sunset clauses:

Should I include a sunset clause in my contract?

There may be advantages to including sunset clauses in your contract, but it's best to consult with a lawyer for legal guidance on your specific circumstances. Lawyers understand the ins and outs of the law and can help you draft a sunset clause that is legally sound and beneficial to you.

What happens when a sunset clause expires?

Once the sunset clause expires, the terms and conditions that it relates to are void. This means contract, act, or statute obligations subject to the sunset clause are no longer valid (although, the clause may not apply to the whole contract).

Should a party want to reenact the conditions, it must renegotiate the terms with the other party and update or extend the clause. If approved, the new terms will go into effect.

Can a sunset clause be renegotiated or modified?

Yes, a sunset clause can be renegotiated or modified. To do so, all parties involved must review the clause, negotiate the terms, and come to an agreement. They might agree to change the conditions or extend the deadline. When updating the clause, the parties should hire lawyers to ensure the revised version meets legal requirements.

What is an example of a sunset clause?

A common example is a clause regarding financial contingency in a real estate sale contract. In this scenario, the provision might require the buyer to secure the appropriate funding within 30 days of signing the contract. The agreement will expire if the buyer fails to gather the money by that deadline.

Are sunset laws used in the legislation process?

Yes, most legislative bodies vote on a sunset law to create a temporary policy, program, or agency for the general public. For example, they may enact a pilot program to test out a new education requirement or activate troops for relief efforts after a natural disaster.