Picture this: you’ve bought a new house and are getting ready to move. You discard your old VHS collection, sell your mismatched couches for 50 bucks on Gumtree and painstakingly pack the rest of your worldly possessions into a thousand boxes. The day of settlement arrives and you fill the moving van to the brim, leaving nothing but a magnet that fell behind the fridge and the dust mites that collected under the bed. You wait for your lawyer to say it’s ok to collect the keys to your new home. And then you find out that it’s not ok. Settlement has crashed.
WHAT is a settlement crash?
Put simply, settlement is the final step of the conveyancing process, where the purchaser pays the balance of the purchase price to the vendor, who in return transfers ownership of the property. Once settlement has occurred, the purchaser can move in.
Settlements that do not take place on the due date are said to have crashed.
WHY do settlements crash?
Settlements crash for many reasons, but they generally fall into 2 categories – ones that you can reasonably anticipate, and ones that you can’t. In the first category, if the lender is still not ready to book in settlement a couple of days beforehand, warning bells should be ringing and pressure should be placed on them to get a move on. Similarly, caveats registered on title should raise red flags, as they need to be removed prior to settlement.
In the second category, sometimes things happen on the day that are beyond anyone’s control. With paper settlements, I have heard horror stories where building evacuations or lock downs have prevented any settlements from occurring, or where people get stuck in lifts with the cheques. Less dramatically, there may simply be a typo in a cheque, or a document may be misplaced.
With electronic settlements, there may be a technical glitch with Pexa or your bank. Or your lender may be having a busy day and get around to signing off in their own sweet time. If all parties are not ready, the system will automatically reschedule settlement in half hour increments until 5pm.
WHO is liable for a settlement crash?
Ultimately, the parties themselves are liable. Even if the crash is caused by your bank, you will still be responsible under the contract. If the crash is caused by the vendor, purchasers have very little recourse other than to issue a default notice, requiring settlement within 14 days and payment of related costs, or else the purchaser may terminate and be refunded their deposit. If the crash is caused by the purchaser, the consequences are more severe as you will be liable for penalty interest for every day of delay. At the standard rate of 12% pa this quickly adds up.
If the purchase price is $1 million, the purchaser will owe approx $300 per day of default – or more depending on the contract.
The vendor can also issue a default notice and terminate the contract, in which case they may keep the deposit and sue for damages, or resell and recover any deficiency in price.
HOW can you avoid a crash?
To help prevent a crash, make sure you agree to a sufficient length of time between signing the contract and settlement. Purchasers should give themselves and their lenders plenty of time to arrange finance (usually 60 days is enough), and vendors will need this time to discharge any mortgages and caveats. Try to avoid simultaneous settlements if possible – this is where a party buys and sells on the same day. You might save on bridging finance but you can also find yourself in the situation described above! If the vendor is amenable, they may let the purchaser move in by way of a licence agreement pending settlement.
In any event, I always advise my clients to make contingency plans in the unlikely event that something happens at settlement that is beyond our control, in which case you may not be able to move into the property that day. Quite simply, hope for the best but prepare for the worst!
Aliza Taubman is the Principal Solicitor at Prime Property Lawyers
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