After your offer is accepted, there’s just one final thing to organise before the property is officially yours – settlement. Rolf Howard, managing partner at Owen Hodge Lawyers, looks at your rights and obligations during property settlement to ensure a smooth process
The very last step in the conveyancing process is settlement. This is the phase during which ownership of the property legally passes from the seller to the buyer.
A well-advised buyer should thoroughly understand the process and be prepared to:
• conduct a final inspection of the property
• do a last review of any title issues
• organise insurance
• prepare for payment of the remaining purchase price
• prepare for payment of taxes and fees
• collect the keys and security codes
Settlement is usually attended by the buyer’s legal and financial representatives, but it is the buyer who remains ultimately responsible for monitoring the process to ensure that all goes as intended.
WHAT HAPPENS ON SETTLEMENT DAY?
- Your lender will provide the funds to the vendor to finalise the purchase of your property.
- As the buyer, you will receive the title of the property.
- As the vendor, your solicitor or bank will arrange for the Registrar General to register the transfer and home loan (if applicable).
- The new mortgage will be noted on the title until the term of the home loan is completed.
- Both parties are required to advise the real estate agent in writing (usually via your respective solicitor) that settlement has occurred.
- Keys are released to the buyer.
- Your solicitor will provide a settlement statement outlining the financial aspects of the deal, such as disbursements and adjustments (ie council rates the vendor has paid, which are adjusted as of settlement date).
- Celebrations commence!
Following is a detailed overview of what to expect during the settlement process, and how to minimise your risks along the way.
A last look at the property
At settlement, the property should be exactly as described in the contract: clean, in the agreedupon state of repair, and with fixtures included or excluded as specified. The hot water system, heating and cooling units, walls, light fittings, windows, floor coverings and locks are among the items that deserve special attention. The savvy buyer will also check measurements.
The final inspection should take place in daylight, in the presence of the seller’s agent and as close to settlement as possible, certainly within the preceding week. The buyer should raise any issues as quickly as possible so that they may be resolved without delaying the settlement. So, what should you do in the last few hours before settlement if you do notice something wrong? Let’s say you stop by the house, and it hits you: Where is the chandelier? What happened to the unique and attractive deck furniture? This is not at all what you expected. What can you do?
Breathe, retreat to your car and call your lawyer. It’s time to take another look at your contract.
The key thing to consider when reviewing the contract is whether the changes to the property relate to fixtures or chattels.
Fixtures are the things that are bolted, screwed, nailed, or otherwise permanently attached to the property. Unless the contract specifies otherwise, fixtures, like the chandelier, usually pass with the property. Chattels and personal property, on the
other hand, are not permanently attached and are relatively easy to carry off. Absent some provision to the contrary, chattels such as furniture go with the seller.
Most standard sales contracts include a schedule entitled ‘Excluded Fixtures/Included Chattels’. Only excluded fixtures may be removed by the seller at settlement. Included chattels (sometimes called ‘reserved items’) remain with the buyer.
If the chandelier was not excluded or the deck furniture was included, then your attorney may be able to negotiate an adjustment in the purchase price due at settlement.
A LAST LOOK AT THE TITLE
» The title search will have already been conducted by your lawyers on your behalf, soon after your offer was made.
» However, it is wise to take a last look to ensure no new ownership interests have been created since the search was completed.
» In addition, it is important to make sure that any caveats on the property have been lifted.
» These steps will ensure that a smooth change of ownership may occur.
"The key thing to consider when reviewing the contract is whether the changes to the property relate to fixtures or chattels"
Make sure you are insured
In NSW, the risk of loss passes at settlement or, if earlier, on the date the buyer takes possession of the property. In theory then, buyers don’t need insurance coverage during the period from the exchange of contracts until the date of settlement, unless they take possession first. That, however, is a terrible idea.
There are too many stories of underinsured sellers and the fires, floods and typhoons that seem to stalk them during the weeks before settlement. Besides, most mortgage lenders will insist that buyers maintain building and contents insurance effective from the date of signing the contract. Lenders, understandably, want to secure their investment in the property.
Building insurance covers the cost of building replacement if, for example, the house burns down or some portion of it is damaged.
Contents insurance covers what the building contains. Even though buyers may have little interest in chattels the seller intends to remove, it is important to realise that contents insurance generally also covers carpets and draperies that are more likely to be left with the buyer.
If a building is substantially damaged, the buyer may rescind the contract within 28 days of becoming aware of the damage.
The buyer may receive the deposit back and be released from any obligations under the contract, unless the damage was caused by a wilful or negligent act or omission of the buyer.
If the damage is substantial, the seller cannot force the buyer to complete the contract if it would be unjust and inequitable to do so. The legal question of what damage is ‘substantial’ can become quite complicated.
"Buyers don’t need insurance coverage during the period from exchange of contracts to the date of settlement … That, however, is a terrible idea"
Courts are very reluctant to allow a contract to be rescinded, so the more realistic question may be, whose insurance pays?
Prior to settlement, the seller’s insurance kicks in first.
If coverage is insufficient to restore the property to contract condition, the buyer may seek a price adjustment or take back a debt from the seller. Another alternative, at that point, would be for the buyer to make a claim against his or her coverage.
Depending on the particular situation, a buyer may need more than building and contents insurance. If the property is a rental unit, the buyer may also want to consider landlords insurance or, if there are unusual environmental risks, the buyer may want to cover those as well.
Taxes can catch buyers by surprise
Taxes triggered by the transfer of property include stamp duty and GST. Buyers should factor these into their final calculations.
State and territory stamp duty is imposed on some transfers of land and dealings with interests in land, as well as on dealings in some interests in a company, trust or partnership. Sliding scales apply, with the top rates between 4.5% and 7.0%. Stamp duty is usually paid by the buyer, although both parties may be liable.
GST is an area in real estate that can catch some property investors and developers by surprise.
Firstly, it should be noted that ‘residential premises’ and ‘commercial premises’ are separately defi ned in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). According to the ATO, while there may be some similar features, they are not the same.
The ATO advises that: “Properties are ‘residential premises’ if they can be occupied, are occupied, or are intended to be occupied as residences, or for residential accommodation, regardless of the term of occupation.
If you are registered, or required to be registered for GST, you must pay GST on the sale of new residential premises you sell as part of an enterprise you carry on.
“You are not liable for GST if you sell residential premises that have been previously sold as residential premises (known as ‘existing’ residential premises).
“If you construct new residential premises for one purpose and then use them in a diff erent way, you may have to make an adjustment to your GST credits. You do not pay GST on rent or bonds received from residential premises.”
Overall, the federal 10% GST applies to supplies of goods, real property and services, subject to some exemptions and concessions, including:
• exemptions for sales of going concerns and some farmland
• a ‘margin scheme’ concession (which broadly applies GST only to the difference between the sale price and the acquisition price)
If you are required to pay GST on the sale of your property, the buyer will usually pay GST to the seller at settlement, who then remits it to the federal government.
GST generally only applies to brand-new goods, so if you are purchasing a second-hand or existing dwelling, GST shouldn’t apply.
IT’S ALL ABOUT THE MONEY
» The buyer’s solicitor generally holds the remainder of the purchase price in escrow until the date of settlement, at which point it is paid to the seller. It is the buyer’s responsibility, however, to make sure the settlement amounts and payees are correct before that date.
» All outgoings such as council rates and other charges will be adjusted between the buyer and the seller. The seller is responsible for rates up to and including the day of settlement. The buyer is responsible as of the day after settlement.
» As a word to the wise, always make sure that cheques have correct spellings. Incorrectly issued non-negotiable bank cheques can delay a settlement and cause completely unnecessary last-minute headaches.
Other unexpected surprises
What could possibly go wrong? Lots, actually. Usually, the things to worry about fall into two categories: first is financing and second is failure to remove a condition.
"Sometimes the seller’s problem is a tenant who fails or refuses to vacate. This is a special kind of issue because it involves three, rather than two, parties"
If the buyer is unable to go forward on the date of settlement because of some glitch in the financing, the seller can generally charge penalty interest for each day that settlement is delayed, and also issue what is commonly known as a Notice to Complete.
This gives the buyer a brief additional period of time, usually 14 days, to fi x the problem. If the buyer is not able to settle by that date, the seller may be able to terminate the contract and keep the buyer’s deposit.
If the seller cannot settle, it may be because he or she is buying or building another property that is not yet ready.
It may also be because some condition in the contract has not been met. It might be a roof issue that has not yet been resolved, or a problem with permits or title. In any event, the purchaser may similarly issue a Notice to Complete, with the same additional period of 14 days to settle, after which the buyer may terminate the contract and retrieve the deposit. Penalty interest is not usually payable by the seller for a delay.
Sometimes, however, the seller’s problem is a tenant who fails or refuses to vacate. This is a special kind of issue because it involves three, rather than two, parties and the particular obligations related to tenant rights and protections.
No, a buyer cannot toss the tenant and all of his or her belongings to the curb. Most leases are not voided when a property changes hands.
If a periodic lease exists, the landlord can give the tenant 60 days’ notice to vacate. The notice can be issued during the settlement period or before the property is sold. With a fixed-term agreement, the new owner must look to the end of the lease term.
With a tenant whose lease has ended but who refuses to vacate, the new owner may be looking at eviction proceedings. This could surely be the subject of purchase price negotiations at settlement, because it will take the buyer some time and expense to resolve.
POTENTIAL CAUSES OF SETTLEMENT DELAYS
- Documents printed with incorrect information
- Bank delays related to discharging the previous mortgage
- Missing documents on settlement day
- Issues contacting other party and/or their solicitor
- Problems raised during fi nal inspection
- Bank cheques issued in wrong amounts
The final step: the keys!
Since buyers often do not attend settlement, it is important to organise who will deliver the keys and to whom – usually the buyer’s agent or attorney. Buyers should also make sure they have the codes for security devices, if any.
When collecting keys it’s important to request a full set, to avoid having to pay for unnecessary locksmith’s fees to update locks without keys. As you can see, settlement can be a complex process.
By engaging a great team to work with you on the property transaction and ultimately settlement, including your solicitor, accountant and broker, you can ensure the process of settlement is smooth and successful.
is managing partner at
Owen Hodge Lawyers, where he
has been in practice since 1986
and a partner since 1992
Can you afford to buy in this suburb? Find out how much you can borrow