Buyers can often become confused when they receive settlement figures or a settlement statement in the lead up to settlement. It is common for buyers to misread the settlement figures and think that they are being hit with the seller’s outstanding rates or water bill.
This article aims to take the mystery out of settlement figures.
What are settlement figures?
Settlement figures are the calculation of the exact amount of money to be handed over at settlement. The standard conditions of the contract provide for adjustments required to be made. As a general rule, the seller pays for all expenses, and is entitled to any rent income, until settlement. The buyer pays for expenses and is entitled to any rent income after settlement.
Settlement adjustments allow the parties to compensate one another for expenses that may be paid in advance or maybe in arrears, or for rent the seller may have received which relates to a period after settlement.
How are rates, water access charges and body corporate levies adjusted?
The common outgoings that are adjusted are water usage and associated charges, body corporate levies and Council rates.
To give an example –
Say settlement was 1 November. The seller may have already paid Council rates until 31 December 2016. Therefore, an adjustment would be made so that the buyer would pay a greater amount at settlement to compensate the seller for the rates paid until the end of the year (when the buyer will be the owner).
Land tax is not usually adjusted under contracts for residential land and buildings. Under normal standard conditions, the seller must pay for all land tax owing for the financial year in which settlement takes place.
The reason for this is that not all buyers are going to be required to pay land tax after settlement. Therefore, it is not reasonable for a seller to ask a buyer to pay part of their land tax bill.
The only time an adjustment may be made for land tax is if the property is commercial in nature (and some other criteria apply) or where the contract is for property sold “off the plan” (unregistered land or unit). It is common for off the plan contracts to not use standard contract terms and for the seller to alter the usual position to their advantage.
What about water consumption?
The way water consumption is adjusted differs depending where the property is located. Sometimes, local Councils supply water. In these areas, water usage and charges are usually included in the rates notice. Other times, the water is supplied by a third party such as Unitywater or Queensland Urban Utilities.
Regardless of the supplier, the seller will pay for all water usage and charges calculated up to settlement.
The buyer is required to order a special water meter read which will allow them to work out (as accurately as possible), the water usage and charges payable by the seller up to settlement. This amount will be deducted from the amount payable by the buyer to seller by way of adjustment, so that once the new water bill is issued, the seller’s share has been pre-paid to the buyer.
PLEASE NOTE: If this search is not obtained by the buyer, the seller is not required make an adjustment for water usage or water charges under the terms of the contract.
What is the seller’s release fee?
If the seller has a mortgage over the property, the Land Titles Office will charge a fee to the buyer for that mortgage to be removed, prior to registration of the new ownership.
An adjustment is made in favour of the buyer so that the seller compensates them for this expense.
What happens to electricity?
Electricity is not adjusted between the parties. The seller will cancel their account for power and the buyer must open a new account. The reason electricity is not adjusted is because the seller remains liable to pay for power usage and charges if the account is unpaid or is not cancelled by settlement. This means that the seller’s power bill never gets passed onto the buyer in contrast to other expenses (such as rates, water and body corporate levies).
Power accounts stay with the individual, no matter where they move to.
Do I pay the seller’s interest on outstanding bills?
NO, absolutely not! That is one of the main reasons that buyers will order searches. The search will show if there are any outstanding amounts plus any additional legal costs, debt recovery costs and interest. This gives the buyer the information needed to require payment by the seller out of the settlement proceeds.
This is a general explanation of settlement adjustments. The actual intricacies of each sale or purchase, can differ from contract to contract.
In conveyancing as with all legal matters, it is important to get the details right. Ferguson Cannon Lawyers Property team can provide a more detailed explanation of the settlement adjustments directly applicable to you. Please contact our team today to see how we can assist you.