So your house hunting is over: you’ve received the news that your offer to purchase your dream home has been accepted. Or you’ve put your property on the market and found a happy buyer. Once you’ve taken a moment to celebrate, it’s time to make sure you’re on top of the legal things that can halt the sale or purchase of your property.
In this article, we discuss the factors that can result in failure to settle a property, delayed settlement penalties, what you need to know about extending the settlement date on a signed contract, and how you can do your part to make sure settlement proceeds smoothly.
House Settlement Problems
Here are the most common settlement problems that can arise with a house purchase or sale:
Buyers: Failure To Settle A Property
Delayed Financial Approval
Problems with obtaining timely financial approval are one of the most common causes of settlement delay for buyers.
Buyers need to sign loan documents and other associated documentation before settlement. These documents often need to be witnessed by a Justice of the Peace, Commissioner of Declarations or a Solicitor and then must be verified by the buyer’s bank or financial institution. Many buyers are surprised to discover this process can be more lengthy and time-consuming than they expect. This is especially the case when original documents need to be returned, so reliance on the post can slow things down further.
It’s important to give yourself enough time between financial approval and the Settlement Date. It can take up to 14 to 21 days to receive financial approval, in some cases even longer. Since most contracts are only 30-day contracts, if you receive financial approval on the 21st day, you have only 7 days left to finalise everything with your bank and for them to be ready to feel comfortable to advance the funds to you on the Settlement Date. So it’s important to be organised and proactive from the start (get those loan documents signed and returned to the bank ASAP!) to ensure everyone has enough time to complete settlement at the same time.
Shortfall of Funds For Settlement
It’s not uncommon on the Settlement Date for an unexpected adjustment in the settlement figures or an unexpected expense from the bank, meaning that you realise you are a bit short of the funds required at settlement.
There are a number of ways that this shortfall can be remedied, but ultimately you will have to come up with the funds to make up the shortfall amount at settlement. When buying a property, it is always good to give yourself a buffer for such circumstances,
so keep some money aside in case a situation like this arises.
It’s not uncommon for buyers to visit the bank to get finance, only to realise they are $1,000 to $5,000 short of the funds required at settlement.
Not All Documents Are Provided On Time For Settlement
For buyers, paperwork for stamp duty and the Transfer of Land must be completed on time to prevent delays for settlement. By going through a conveyancing solicitor, you’ll ensure you are in a good position to complete this documentation on time.
Difficulty Selling Another Property
This is a common settlement problem that occurs when one contract is dependent on the sale of another property. In order to fund the purchase of one property, the Buyer may find they need to successfully sell their current home.
If this applies to you, you need to make sure that before the contract is signed you have a special condition in the contract so that your rights are protected if you are unable to sell your home.
Late Pre-Settlement Inspection
A pre-settlement inspection is your buyer’s opportunity to inspect your property before the final payment is made. Occasionally, buyers leave it too late to perform a pre-settlement inspection and discover that something unexpected has happened to the property since they signed the contract. This problem (and its rectification) could be essential to the sale of the property going through.
However, contacting your solicitor an hour before the settlement is scheduled will not give you enough time to get the advice you need from your Solicitor and it will be very difficult for them to negotiate any amendments to the settlement figures at this late stage in the day. Getting organised with pre-settlement inspections will ensure you have enough time to properly assess the property and get the advice you need from your Solicitor.
Sellers: Failure To Settle A Property
Late Requests To Change Settlement Proceeds
Sellers are able to dictate how they would like the sale proceeds to be split. You should communicate this one week prior to settlement to ensure that there is enough time for the figures to be drafted to reflect this. The Buyers Financier often requires cheque directions the day prior to settlement, so if you want a last minute change to the cheque directions or realise the night before settlement that you have paid rates and the figures don’t reflect this, if you tell us on the request this on the morning of settlement, this may, unfortunately, be too late to change settlement figures. It’s important to finalise these figures well before the date of settlement.
Delayed-Release of Mortgage
If the seller has a mortgage on the property, they will need to apply for a release of mortgage. Each financial institution has a different turnaround time for releasing a mortgage, but often they require a minimum of 21 business days. If this paperwork is not completed on time by the seller, the bank will not be ready to release the mortgage on the property. Some sellers do not give the release authority to the bank until the property goes unconditional and this may leave only one or two weeks before settlement. Some banks can turn it around with such short notice, but we certainly do not recommend this approach.
Shortfall of Funds For Settlement
A shortfall occurs when the value of a seller’s remaining mortgage is greater than the property’s sale price, forcing the seller to pay the difference to discharge the mortgage. Most sellers are aware of whether they have a shortfall or not. However, occasionally a seller will overlook this issue until deep into the settlement process, resulting in a last-minute rush to acquire the necessary funds.
For sellers, if they have a mortgage and the sale proceeds are not enough to pay out the mortgage, the bank will refuse to release the mortgage and you cannot settle.
If you are concerned that the sale proceeds will not be sufficient to pay-out the loan, your solicitor will be able to guide you on the options to make up this shortfall. Be proactive and talk to them about this as soon as you become aware of the shortfall.
Not All Documents Are Provided On Time For Settlement
If the seller forgets to return the transfer documents (which will transfer ownership of the property to the buyer), this can cause significant delays to settlement. That’s why we recommend that all sellers have a conveyancing lawyer who can attend to these details and remind the seller when documents are due.
If you are going to be overseas during your settlement, you should discuss this with your conveyancer to see if you can execute Transfer Documents before you go overseas. If the transfers cannot be executed before you go overseas you may need to arrange for execution aboard and arrange for the original Transfers to be couriered back to Australia. There may be other options such as settling the matter on the PEXA platform, so its best to talk to your conveyancing solicitor about the options.
Extending Settlement Date On A Signed Contract
Time is of the essence in Queensland, so each party must strictly comply with the due dates under the contract. Either the buyer and the seller can request an extension to the settlement, but there is no obligation for the other party to agree. If one party is unable to settle on the Settlement Date and no extension is agreed, the other party (amongst other things) will gain the right to terminate the contract.
Delayed Settlement Penalties
If the buyer is unable to settle on settlement date, the seller can choose to terminate the contract, retain the deposit and may sue the buyer for damages and/or specific performance. If the Seller agrees to extend the settlement date, they can also charge penalty interest. This is the amount that’s payable per annum, as noted on the contract. Most people are unaware of where to find this on the contract. If this section is left blank, a penalty interest rate at the date of the contract will apply. At the date of writing this blog, the interest rate is 9.07%.
The Seller or Buyer may also penalise you in other ways, such as agreeing to the extension if you cover the additional costs they will incur as a result of the extension such as legal fees, storage costs, etc.
Key Takeaways: How To Avoid House Settlement Problems
Whether you’re a buyer or a seller, it’s vital to get organised early to ensure you can proceed smoothly toward settlement. Make sure you have enough money and deliver documentation on time. We recommend following the clear, simple steps in our settlement checklist.
Nominate an account with your financier to draw funds from in the event of a shortfall of funds. Be organised and don’t leave setting this up until the last minute. At Brisbane Conveyancing, we issue all the documentation you are required to settle when you engage us. We send out these details in the first letter, so you have this information from the outset of the transaction.
The team at Brisbane Conveyancing are happy to help guide you through the settlement process. Need help with the conveyancing or just want to talk it through? Contact Queensland’s conveyancing experts, Brisbane Conveyancing, on 07 3077 6566.