Settlement day

Settlement day… often much anticipated, yet so underwhelming as a process step.

First time buyers almost always ask us about settlement day, and often in a bit of a frenzied state. For the uninitiated, this looming ‘big day’ can fray nerves for many. Converse to expectations though, it’s usually a short, sharp event that is conducted without fuss, and performed with high levels of system automation.

It’s when settlement isn’t uneventful that we get worried.

Settlement occurs when a property is formally transferred from one owner to another. The balance of payment, closure/opening of the mortgage account, adjustment of paid rates and handover of keys all takes place in a short space of time, (typically within minutes) and a congratulatory phone call is then made to both parties to advise of the settlement and to nudge the purchaser to collect the keys.

However, a lot happens behind the scenes, and things can, (and often do) go wrong. Understanding the process and the various roles that the buyer plays in the process is critical.

First and foremost, not all property purchases can be settled on the designated settlement date. Some properties are yet to ‘title’, (meaning a subdivision is still making its way through the Land Titles Office), some are still caught up in a legal process such as probate, VCAT or the Family Court. Others fail to make it to settlement for varying reasons, including late paperwork, inability to obtain funding, lost titles and bank delays, (to name just a few).

Buyers generally only sign a contract to purchase a property when they are either; pre-approved, paying cash, or very confident that obtaining finance won’t be a challenge. The risk of not making it to settlement extends past residential pre-approval though. Being certain that the property is indeed considered a residential product is imperative. Too many people get caught out when they buy an exciting property and discover later that it’s not covered by a residential loan.

Likewise, not allowing enough time for funding can bite when optimistic or unknowing buyers don’t appreciate their timeline. We often hear the term, “accessing equity” and this relates to taking out a second loan against a property they already own which has exhibited capital growth. An equity access can sometimes be coordinated in a few weeks, but they often take longer than this. If the equity release itself delays the primary loan application for the newly purchased property, the buyer can find themselves squirming uncomfortably as settlement day approaches. Other types of less mainstream purchases, (such as self managed superannuation leveraged purchases) also require a longer-than-usual settlement period, and falling prey to agent pressure, vendor requests or excitement to settle early can be devastating. At worst, it could cost a buyer their deposit, along with legal action for losses if they fail to settle.

….which leads me to discuss rescission.

Rescission is a last resort and it’s a horrible thought. According to Svenson Barristers citing a specific case;

“…..if a vendor validly rescinds a contract upon the failure of a purchaser to complete in accordance with an essential time stipulation, then, in the absence of fraud, accident or mistake or other conduct of the vendor which has in some significant respect caused or contributed to the breach of the essential time stipulation, the contract will be at an end and the purchaser will have no basis for seeking specific performance.”

In other words, once a vendor determines that they are not prepared to allow a purchaser any additional time to complete the settlement, they can serve a rescission notice.

The vendor or seller can issue a ‘Notice of Default & Rescission’ which means the purchaser has only 14 days (including weekends and public holidays) to settle the purchase. The vendor is entitled to charge the purchaser interest for the number of days settlement is delayed. The contract general conditions stipulate the default penalty interest rate, although plenty of contracts have nasty heightened penalties that vendor’s solicitors have included as special conditions also.

“When a ‘Notice of Rescission and Default’ is issued and the settlement is not completed within the 14 day period, the vendor may terminate the contract and keep the deposit, and can legally place the property back on the market to sell.” Source: Prestige Conveyancers

As mentioned earlier though, rescission is a last resort, and in over two decades of buyer’s agency, real estate and mortgage broking, I have only seen a couple of cases first hand. In most cases, vendors grant extensions and ill-prepared buyers find a way to sort out the settlement; often with financial penalties invoked.

Assuming the buyer and seller are both prepared for, (and able to) settle the purchase, the steps leading up to, and on settlement day are as follows:

• If a mortgage is required, once the loan(s) is approved, documents are issued for signing, and the purchaser’s solicitor or conveyancer will prepare other supporting documents for signing (including the Transfer of Land). A purchaser must action every item requested of them by their legal representative. Leaving loan documents and other forms on the kitchen bench can lead to costly (and stressful) settlement delays.
• A pre-settlement inspection should take place around 7 days prior to settlement. We are always armed with a checklist and a copy of the building inspector’s report, and we check appliances are all working, cupboards, sheds, roof spaces and subfloors are clear of junk, debris and belongings, keys and bins are available and the dwelling is neat and undamaged. Any concerns should be channelled immediately to the purchaser’s legal representative if the property raises any concerns.
• When the bank is ready to settle, the legal rep will book in the settlement time and will prepare the ‘adjustments’, often including any State Revenue Office concessions, grants or incentives. The purchaser will be required to arrange their balance of payment for the settlement, which includes stamp duty, bank fees, government fees and the pro-rata amount to be credited back to the vendor for rates and land tax (if applicable) that has already been paid in advance.
• Some lenders will permit direct debit for this ‘adjusted’ set of payments, while others will require specific amounts and/or cheques. The legal representative will advise and some buyers may need to plan for trips to the bank in the days leading up to settlement.

Unless delays have occurred or unexpected issues have arisen, a buyer is most likely not required to be present to action anything other than key collection on settlement day. Even prior to PEXA, (the mainstream settlements online system), the old fashioned way that property purchases were settled was still a relatively short exercise. Cheques were swapped, forms were ticked off and documents were exchanged in a tiny settlements office. These days, settlement is facilitated online.

Ensuring that settlement is smooth usually only requires diligence, responsiveness and an ability to finance the property. It is only when settlement is under threat that we appreciate the incredibly intricate things that happen in the days and weeks leading up to settlement.