The most exciting part of any property purchase is the settlement day. This is the day that buyer finally gets the keys to their new property and sellers are paid the amount that is owing. But there’s a lot more involved in the land settlement process than meets the eye.
What is a settlement?
Real estate settlement happens when the land is transferred over to the buyer. Settlement day usually marks the end of the transaction. Aside from handing over keys, there are several things that happen on settlement day. A settlement day checklist includes:
- The final property inspection to make sure it is what the buyer expects
- Both parties sign the transfer documents
- The transfer of ownership is registered with the land titles office
- The Statement of Adjustment and Settlement Statement is completed
- SRO duties form is completed
- Final payment is transferred to the seller
- The buyer’s mortgage settlement is finalised
- The seller hands over the keys to the buyer
Each of these steps is important to ensure that you don’t have any after settlement problems.
What is a Settlement Statement?
The Settlement Statement or closing statement is a document that outlines what the buyer has to pay to the vendor on settlement day. It includes all payments and receipts that are related to the settlement. This may include stamp duty, the First Home Owner Grant and the Statement of Adjustments. It also includes the total purchase price less any deposit paid. The Settlement Statement is usually put together by your conveyancer or property lawyer when they are getting ready to settle the property purchase.
Settlement Statements are usually incorporated into the Statement of Adjustments because the income and expenses related to the property also need to be settled between the parties. These expenses may include things like municipal rates, land tax and other periodic expenses related to the property. The income may include things like rent if the property has tenants.
Generally, the settlement adjuster will include income or expenses that are paid periodically. That means they are paid or received weekly, monthly or annually. The seller must pay these expenses and can receive the income up to and including on the settlement day. After that, they are then the responsibility of the buyer. Because settlements rarely occur at the end of the year or month, adjustments need to be done to make sure both the buyer and the seller only pay (and receive) their fair share. If for some reason the settlement date is delayed, then the adjustments will need to be recalculated. If the delay is caused by the buyer, then the seller may be able to receive penalty interest or claim rent from the buyer.
What does a Statement of Adjustment include?
If you use the common form of contract in Victoria under the Estate Agents (Contracts) Regulations 2008, how certain adjustments are made is outlined in General Condition 15. If you have had your contract drafted by a property lawyer, then it’s important to make sure that they’ve included how expenses and income will be adjusted between the buyer and seller.
There are many things that may be included in a Statement of Adjustment and how to calculate settlement adjustments can vary depending on what the expense is. Some of the most common include:
- Municipal Rates: The seller is liable to pay for the rates up to settlement day. Rates adjustments are a relatively simple calculation for some properties but can get complicated if the property is part of a larger piece of land, like a subdivision. How the rates are to be adjusted in this situation will depend on the contract, the nature of the subdivision and what has already been paid. Ideally, the rates will be paid in full before the settlement date rather than individual buyers taking responsibility for just a part of it.
- Water and sewerage charges: These are adjusted based on the number of days, rather than the amount of water consumed, up to settlement date. Because water meters are usually read every quarter, the Statement of Adjustment may use the average usage in the period preceding the sale to estimate the amount of water and sewerage charges that the seller must pay.
- Rent: If the property is rented and the tenant has paid up to the settlement date then there will be no adjustment. After the settlement date, the buyer will receive rent directly from the tenant. If the tenant owes money to the seller on the settlement date, then there will be no adjustment either. The seller can ask the tenant for the rent owing to them.
- Security bond: If the tenant has paid a security bond for the property, this should also be included in the adjustment. If for some reason the bond hasn’t been paid or some of it has been spent, the seller may need to make an adjustment so that the buyer receives the benefit of the full amount of the bond.
- Land tax: In Victoria, land tax is charged to the owner on December 31st each year. Land tax adjustment at settlement in Victoria can be a little complicated. The rate of land tax depends on how many properties the seller owns and the land tax liability for their properties. If the property is to be the principal place of residence for the buyer it will be exempt from land tax. But a buyer can only claim this exemption in the next calendar year, so they will still have to pay the seller’s land tax from the settlement date until 31st December of that year.
- Owners corporation charges: Whether these fees are charged monthly, quarterly or annually, they should be adjusted in the Statement of Adjustments. The only charges that don’t need to be adjusted are one-off costs like repairs to the property.
The Statement of Adjustment doesn’t usually include adjustments for electricity and gas. Instead, the seller usually cancels their power account on the settlement date and it’s up to the buyer to open their own account.
The Statement of Adjustments will be calculated assuming that all of the expenses have been paid. If they haven’t then they will be paid out of the total money that is to be paid to the seller. This means that the seller will effectively pay them up to settlement date. Sometimes this involves having a bank cheque for settlement drawn up so that these expenses can be paid.
While it may seem relatively simple on the surface, Settlement Statements and Statements of Adjustment can be quite complex. If you need assistance putting together your Settlement Statement or would like to see an example settlement statement get in touch with us.