It’s increasingly common during the COVID-19 pandemic, where property prices are rising and employment is less stable, for purchasers to struggle to get finance ready by the agreed settlement date.
The best way to avoid this issue is to make your offer subject to finance. If you haven’t been able to negotiate this, and are concerned that your bank won’t be able to arrange finance by the settlement date, what will happen?
A delay in settlement as the purchaser
As the purchaser, once a contract of sale becomes unconditional, any delay in settlement may incur fees as stipulated in the contract.
If you fear you may delay settlement, your first approach should always be to request if the vendor is agreeable to an extension to the settlement date as early as possible. If an extension is not granted by the vendor, you may be subject to penalty interest and additional fees.
Default Notice
The vendor may serve a default notice if settlement does not occur on the scheduled date. In this event:
- you will have 14 days to remedy the default;
- you are liable to pay penalty interest on each day of delay, and the reasonable costs incurred by the vendor as a result of the delay (set out below).
If you then fail to settle within 14 days, it may result in your deposit being forfeited to the vendor, and you not owning the house. The vendor may also seek further damages for breach of contract.
Penalties
Subject to the general and special conditions of the contract, a delay in settlement may incur penalty interest. The exact amount for penalty interest will be determined by the contract and is calculated on a day-by-day basis.
In Victoria, the standard is generally calculated as 2% per annum plus 10% per annum pursuant to the Penalty Interest Rates Act 1983,
plus any additional interest outlined in the contract. Without any additional interest, this currently equates to 12% of the money owing per annum, payable to the vendor per day of delayed settlement. By way of example, if you bought a house for $800,000 and paid a deposit of $80,000, your daily penalty interest would be approximately $237 before adjustments.
However, it is important to note special conditions in the contract may vary this percentage rate.
You would also be liable for any reasonable costs that the vendors may impose as a result of rescheduling settlement. This may include legal fees or other any fees incurred by delaying settlement.
A delay in settlement as the vendor
As the vendor, you will probably not be subject to pay any penalty interest if you are responsible for the delay of settlement as there is no money owing.
However, the purchaser may serve a default notice if settlement does not occur on the scheduled date. In this event, you will have 14 days to remedy the default.
A failure to remedy the default notice within 14 days will generally result in the purchaser being repaid any money paid under the contract (including the deposit) and be paid any interest and reasonable costs payable under the contract. The purchaser may also seek to recover any loss otherwise recoverable.
To avoid this, the purchaser will often request a license agreement for early occupation of the property in line with the original settlement date. This means the purchaser is able to move into the property on the planned date and avoid any rescheduling costs.
In some circumstances, where the purchaser is a developer, there may be significant costs that are incurred because of the delay.
Pre Contract Negotiations
Whether you are the purchaser or the vendor, it is important to consider the reasonableness of settlement dates when the contract is being drafted and negotiated. There is often a need for special conditions to deal with late settlements and penalties, as well as other costs that are incurred. For developers significant Land Tax may occasion if a settlement is delayed past 31 December of any year and it is important that parties get thorough legal advice.
If you have questions about your property purchase, send through your section 32 and Contract for a complimentary review to
[email protected]. Make sure you include your phone number.
Nicola Drakeford
is a partner at Forty Four Degrees. She leads the property and commercial teams.
