Beware – make sure that you have arrangements in place to settle on time.
If settlement of the sale of a property does not occur on the contracted settlement date, the defaulting party may incur financial penalties.
Most contracts for sale and purchase will state that the party not in default is entitled to apply a penalty in the form of default interest. Standard form contracts vary in establishing methods of calculating penalty interest. A common definition used for application of default interest is ‘5 percentage points above the cash rate notified by the Reserve Bank of Australia’.
Why are Settlements delayed?
Settlements are commonly delayed because the Purchaser does not have financial arrangements in place or, they are experiencing difficulties in settling a prior sale (if the purchase contract was conditional upon settlement of the sale of the prior property, default interest could not be applied). In this instance the Vendor’s Conveyancer would seek instruction from their Client as to the application of any penalties. If default interest is charged, it is calculated on the full contracted purchase price less any amount of deposit paid, and applied at a daily rate from the contracted settlement date, to the eventual settlement date.
The Vendor (if not the defaulting party) is also entitled to still adjust rates and taxes calculated from the contracted settlement date. Any income derived from the property (e.g. a tenanted property) is re-adjusted to the date that settlement eventually proceeds. On the day prior to settlement the Vendor’s Conveyancer would notify the Purchaser’s Conveyancer of the final calculated amount of default interest to be charged. This amount is then collected by the Vendor’s Conveyancer at settlement.
A Vendor may not be in position to settle due to discharge mortgage documentation not being prepared in time or similar circumstances. On the rare occasion that a settlement is delayed due to the Vendor not being in position to settle, the Purchaser may also be entitled to charge default interest however, this is rarely applied.
If settlement does not proceed the party not in default is entitled to terminate the contract (subject to service and provision of required notices) and take legal action as deemed appropriate.