Settlement is the final stage in the conveyancing transaction. The parties’ lawyers and lenders usually appoint professional settlement agents to attend settlement on their behalf, to check and exchange documents and cheques. When everyone at settlement is satisfied with the exchange, the matter is declared “settled”.
The representatives meet at an appointed time at an appointed place (usually the office of the lender who holds the Certificate of Title). Each representative checks that everything is in order, collects the documents or cheques they require, and the matter is declared “settled”. As the representatives scurry off to the next settlement (some attend 10 or more per day), they call in to confirm that settlement has taken place.
The vendor and purchaser are told that settlement is complete, the estate agent is told to release the keys, and everyone is happy.
Settlement often involves 4 parties, sometimes more. Settlement cannot take place unless and until each party is present at settlement at the same time, and each party has all of it documents in order. Understandably, human error is more likely to occur when there are more than two parties to a transaction, and sometimes a settlement can “crash”. If settlement crashes, it is may not settle for another 3 days, possibly more.
NOTE: You must always be prepared for a settlement crash. This means that, as a purchaser, you should not assume that you will be entitled to take occupation of the property on the appointed settlement day, and as a vendor you should not assume that you will receive your settlement funds on the appointed settlement day. You must always have alternative arrangements in place, just in case settlement crashes.
Do I need to attend settlement?
No. Your legal representative will either hire a settlement agent, or they will attend settlement personally, to ensure your bank (if applicable) receives the necessary documents and that your interests are protected.
What happens when settlement “crashes”?
A settlement “crash” occurs when settlement fails to proceed at the appointed time and date. Settlements can crash for all kinds of reasons, some of them quite bizarre (one bank crashed a settlement because one of the parties was stuck in a lift, and the bank representative would not wait for her to be released). Most settlement crashes occur because of bank errors, such as lost title deeds, misprinted cheques, or clerical errors on documents.
Invariably, there are numerous parties affected by a settlement crash including not only the vendor and the purchaser, but also the parties’ lawyers and lenders, and related transactions (sometimes the proceeds from a sale settlement are needed for a purchase settlement taking place simultaneously). In addition, there may be incoming tenants, removalists, cleaning and other services booked in anticipation of settlement taking place.
In short, a crashed settlement can create a huge and costly mess. What can be done when settlement crashes, and who has to bear the costs? We have assembled the following Frequently Asked Questions to assist clients who find themselves in the unfortunate position of having to deal with a crashed settlement:
Can’t we force them to settle somehow?
The short answer is no. In past we have been asked whether the police can be called in to forcibly eject a vendor and “make them settle”. The only way to make the other party settle is to let them know that all rights available under the contract will be enforced. Bearing in mind that the other party is just as keen to settle as we are, and is probably doing everything they can to make settlement happen, pressuring them may do little more than create resentment.
But doesn’t the contract say that they MUST settle on time?
Yes, the contract does say that the other party must settle on time, and if they could settle on time there is no doubt that they would. But they can’t. This means that the other party is now in breach of the contract, and they are probably very worried about the consequences of their breach.
Can we tell them we’re cancelling the contract?
No, for two reasons. First, you’re probably bluffing, and if they call your bluff you may regret it. Second, you cannot unilaterally end the contract because of a failed settlement unless you had inserted a special condition into the contract allowing you to cancel in the event that settlement failed to take place on the appointed day.
I have to move out today, where will I go?
The first point to be made here is that some people say they “have” to move out, when really they could stay where they are for a couple more days. The law will not assist a person because they want to move out, and their plans have been upset. Having said this, if you have already vacated, all your possessions and family are loaded up, and you are forced to stay in a motel and put your belongings into storage, you will probably be able to claim your loss from the other party.
If my home loan expires can I cancel the Contract?
No, not unless you had made this a special condition of the contract beforehand. It will be up to you to negotiate a suitable arrangement with your lender, or to come to some agreement with the vendor to deal with the situation.
I’ve done everything right, why can’t anyone help me?
This is one of the most frequently asked questions, and the answer never satisfies. To answer this question all we can say is that we can advise you of your options, and you will have to select from the options available. Unfortunately, none of the options include a completely satisfactory solution to the problem, and compromises have to be made.
A philosophical view
Sometimes it becomes necessary to take a philosophical view of the situation, particularly when the person suffering the most is a purchaser who becomes liable for costs and penalties on a failed settlement because of something beyond the purchaser’s control.
Occasionally things just don’t go according to plan
The most common and frustrating situation for a purchaser is where the vendor’s conveyancer is unable to provide details of cheques required for settlement until the last minute, with the result that the purchaser is unable to order, collect and deliver the settlement cheques in the time remaining. The purchaser, having done everything right, finds that she is in breach of the contract because neither her bank nor her conveyancer can make settlement happen in time, and settlement is delayed.
When a purchaser promises to pay money on a certain date, their obligation does not change because trams are late, computers malfunction, or a bank officer is sick on settlement day. It’s simply a matter of bad luck for the purchaser.
Accept the situation and move on
Real estate transactions always involve some degree of risk. Most properties have hidden defects of one kind or another requiring expenditure of additional funds (e.g. cleaning, painting, new carpets, and son on), and most purchasers simply accept them and move on.
Perhaps a delayed settlement could be viewed as a minor defect or an unforeseen cost which, although annoying, should be seen as part of the risk any purchaser assumes when buying real estate.
Save on insurance
Perhaps one day it will be possible to insure against the costs associated with a delayed settlement. Would you take out such insurance? Probably not. Even if “delayed settlement insurance” were available, most purchasers would probably decide to carry the risk and save the insurance premium.
The insurance premium would probably not be much less that the cost of a delayed settlement anyway!
Factor it into the purchase price
The costs associated with a delayed settlement could be seen as a slight increase in the purchase price. Would you have walked away from the deal rather than pay this extra cost? Probably not.
Buying real estate is inherently risky, and one of those risks is the failure of settlement. Accepting the risk and dealing with it as one of life’s little mishaps may go some way to lessening the impact of a crashed settlement.
What is a Licence Agreement?
A license is a form of temporary permission, and a Licence Agreement in this context is a document used to formalise the granting of permission for a person to occupy another person’s property. If settlement fails, the purchaser is not entitled to take occupation of the property, but the vendor can give them permission to move in, even though the vendor has not been paid for the property. Because the vendor is still the owner of the property, she is entitled to charge a “licence fee” (similar to rent) for the period of occupation. The vendor is also entitled to require the purchaser to pay the legal costs associated with the preparation of the Licence Agreement.
Why do I have to pay them rent if it’s their fault?
Because settlement has failed, and the vendor has not been paid. The vendor does not have to let you into the property if he has not been paid, even if settlement crashed because of a problem on his side of the transaction. Also, it is arguable that you will not have to pay rent at your previous address, and therefore you will not be out-of-pocket. It could also be argued that the interest you save on the delayed settlement would offset the licence fee. We know that these propositions are of little comfort, but the fact of the matter is that the vendor does not have to let you occupy the property, and he is entitled to have you cover the cost of the Licence Agreement and to pay the licence fee.
Can you refuse the Licence Agreement, and stay in a motel? The law requires you to minimise your loss. If staying at the motel is a more expensive option that the Licence Agreement, you would not be able to claim the full loss from the vendor. In addition, you would have to move twice – very inconvenient.
Sometimes a vendor will allow a purchaser to occupy at no cost, or require the purchaser to pay only the legal costs of preparation of the Licence Agreement, but this is an act of goodwill on the part of the vendor, and not an obligation.
Can I make them pay for my accommodation costs?
The law requires you to do everything you can to minimise your loss, and then claim only unavoidable loss from the other party. If you are living with your parents rent-free, and they will allow you to stay with them until settlement can be rescheduled, you will have no accommodation expenses to claim.
If the vendor allows you to take occupation under licence, you would have to off-set any savings in terms of interest saved on your undrawn home loan, and any other incidental savings accruing as a result of your not settling, and claim only the balance from the vendor.
If you are forced to stay in a motel and to put your belongings into storage you may be able to claim your accommodation costs (after off-sets have been taken into account).
NOTE: Being entitled to claim loss and expenses from another party is one thing, but actually getting the money from them may be another. See “Can I make them pay for legal costs?” below)
Can I make them pay for the inconvenience?
No. You can only claim against the other party according to the law and the contract you have signed, and this means that the loss has to have been “foreseeable”. You may have planned a huge house-warming party, with catering booked, and no expense spared, but it is unlikely that anyone on the vendor’s side to the transaction was aware of this.
It can be very upsetting if a plane flight has to be cancelled, or holidays have been planned to start on settlement day, or friends and family were going to assist with moving in, and everything is messed up because of a settlement crash, but such inconveniences are unlikely to give rise to a claim against the other party.
Can I make them pay penalties?
In most circumstances, only a vendor will be able to claim penalty interest.
The standard Contract of Sale of Real Estate provides for penalty interest to be paid on moneys due under the contract. Penalty interest is not about “punishing” a party for breaching the contract, rather it is part of the agreement between the parties that if money is due and not paid a special rate of interest accrues until the money is paid.
A purchaser is not entitled to penalty interest because the purchaser is not owed any money in a real estate sale. Ordinarily, the purchaser’s only claim against a vendor will be compensation for loss. (See “Can I make them pay for my accommodation costs?” above.)
Can I make them pay for legal costs?
In theory, when one party causes loss to another party, and it was foreseeable that the offending party’s conduct would cause loss, then the party suffering the loss is entitled to recover the loss from the party who caused it.
It sounds great in theory, but what if the other party won’t pay?
Like any legal right, enforcing it means going to court and convincing a magistrate or judge to make an order against the offending party. And what if the order is ignored? What if the order is appealed to a higher court? What if, despite court action, appeals, enforcement proceedings and so on, the offending party has no money, and simply can’t pay?
Legal costs are generated as soon as a lawyer is instructed to act. In the context of a crashed settlement, legal costs are generated as soon as your lawyer is instructed to perform work that is outside of the normal conveyancing transaction, and it is the person who instructs the lawyer who is responsible for payment.
It is common for an angry client to suggest,
“They made the settlement crash, and I want you to do whatever it takes to fix it as soon as possible, and to charge it to them.”
It just doesn’t work that way. If you instruct us to take action, you will be billed for the work performed on your instructions.
You may have a right to claim our costs from the other party, but you will still have to pay those costs, and then take whatever action is necessary for you to recover them. If the other party refuses to pay your costs, you may have to take legal action to recover them, and this will generate even more costs.
- DO NOT assume that you automatically have the right to claim costs.
- DO NOT assume that the other party’s lawyers will agree with your lawyers regarding costs.
- DO NOT assume that the other party will respect your right to claim costs.
- DO NOT assume that the other party will pay your costs, even if they have agreed to do so.
- DO NOT assume that the other party has enough money to pay your costs.
While this may all seem rather gloomy, it is important to understand that being entitled to make a claim is just the first step in a long and costly process of confirming, formalising and enforcing a claim. Often it is cheaper and less stressful to go no further than to request payment, but to stop short of taking legal action.
Is a crashed settlement included in my conveyancing fee?
No. We do not build into our fee structure any allowance for settlement crashes, as we must assume that every settlement will take place as arranged.
Rescheduling a crashed settlement is no easy task, and can require a number of telephone calls back and forth between parties, negotiation over liability and costs, recalculation of adjustments and cheque details, and written confirmations. All of this has to be done urgently and accurately.
Costs associated with the rescheduling of a crashed settlement are determined on a time-plus-disbursements basis, and are added to the costs being collected at settlement in accordance with our Costs Agreement.
Can I refuse to settle until they agree to compensate me?
No. Settlement cannot be used as a lever to make the other party pay costs or compensation. Usually, the only way to recover loss and costs is to effect settlement, and then sue the other party. Sometimes a special condition in the contract may entitle a party to delay settlement unless all costs are paid at settlement, but this is rare and is regarded as unfair.
If it’s the bank’s fault can I sue the bank?
Of course, but this assumes that the bank will admit fault, and cheerfully hand over its money. (See “Can I make them pay for legal costs?” above, and regard banks as the most difficult and uncooperative opponents imaginable.)
What is a Default Notice?
A Default Notice is a formal document served on a party who has breached the contract. The Default Notice states the nature of breach, and declares that the offending party has 14 days within which to remedy the breach, failing which the aggrieved party may issue a further notice with a view to cancelling the contract. (See General Condition 27 of the Standard Form Contract of Sale of Real Estate which can be download from RealEstateDocuments.com.au)
In the context of a crashed settlement where a party has failed to settle, a Default Notice can be issued the day after the crash, and the offending party will have to settle within 14 days, and pay costs. Costs cannot be claimed unless a Default Notice has been issued.
The offending party will be liable for legal costs (preparation of a Default Notice costs around $440), even if settlement takes place within the 14 days.
Where the purchaser is in breach, the vendor may issue a Rescission Notice instead of a Default Notice. A Rescission Notice requires the purchaser to settle within 14 days, failing which the vendor may cancel the contract and forfeit the full 10% deposit from the purchaser.
Can they issue a Default Notice or Rescission Notice if it’s the bank’s fault?
If it’s your bank’s fault, it’s regarded as your fault. If the bank lets you down, and you suffer loss (e.g. if the vendor issues a Rescission Notice and you have to pay the legal costs, or if your deposit is forfeited), you may be able to claim your loss from the bank. But claiming from the bank is never easy, in any circumstances. (See “Can I make them pay for legal costs?” above, and regard banks as the most difficult and uncooperative opponents imaginable.)
What do you advise when a settlement crashes?
Like any emergency situation, a crashed settlement requires an assessment of the situation, consideration of the options available, and the making of well-reasoned decisions. We suggest that clients consider the following when dealing with a crashed settlement:
The first thing we advise people is that they should try to remain calm. When told that settlement has crashed, some clients react angrily:
- “They can’t do this!”
- “What am I supposed to do now?”
- “Why didn’t you see this coming?”
- “Can’t you do something?”
- “I’m paying you to prevent this sort of thing.”
- “Who dropped the ball, I want to sue the daylights out of them!”
- “I don’t care what it takes, you settle this today!”
- “It’s OK for you to say ‘Don’t shoot the messenger’ but what am I going to do?”
Angry reactions are not helpful, and just add to the stress everyone suffers when a settlement crashes.
Accept the reality of the situation
There is no-one who can listen to both sides of the problem and declare that settlement must proceed. If the other side will not settle, it must be accepted that settlement will not proceed.
Sometimes settlement cannot be booked for a few days after the crash. A Thursday settlement may crash, and the other party declares that they can settle on the Friday. But what if the other parties associated with the matter are unable to reschedule settlement that quickly? As frustrating as it may be, the rescheduling of settlement may take longer than anticipated.
Consider the available options
Think about the options available to you. Having read through the above FAQs you will have some understanding as to what you can and cannot do to relieve the situation. Don’t be too concerned about who is responsible and how you will make them pay for the mistake at this stage; settlement is the first priority.
Make a good decision
A good decision is one that gives you the best outcome in the circumstances. Sometimes making a good decision can be tough. For example, you may be desperate to move in and the vendor tells you that you cannot occupy under licence unless you agree to forgo compensation for the delay. Don’t get angry, get decisive, and make a decision that will limit not only your costs, but also the stress.
Provide us with your written instructions
Remember, rescheduling a crashed settlement can be extremely frantic and stressful for all concerned, and we must be sure that we have precise instructions from you. We will need to have your instructions promptly and in writing, whether by email or fax.
Keep us involved
Of course, we will keep you informed about what is happening, but sometimes clients make private personal arrangements with the other party, or through the estate agent, without telling the lawyers and conveyancers.
This can lead to confusion, and legal problems if the agreement reached is not appropriate. For example, a vendor who privately agrees to allow a purchaser to store large amounts of paint (flammable material) at the property pending settlement may not realise the risks associated with such a seemingly harmless arrangement (such as illegal storage of dangerous goods, invalidating insurance etc.)
Be prepared to do some running around
The rescheduling of settlement often requires “all hands on deck”, including yours.
For example, if settlement cannot be rescheduled quickly because a cheque for additional funds has to be delivered somewhere in the outer suburbs, we may have to ask you if you want to accept responsibility for it.
Of course, the decision will be entirely yours. You may decide to attend to the matter personally, you may arrange a courier, or you may instruct us to deal with it on your behalf (at your cost).
Usually a client will be only too pleased to do whatever is necessary to have the matter settled.
Don’t allow others to “advise” you
Estate agents are often bothered when a settlement crashes, because if may affect payment of their commission or they may be concerned that the sale itself could be jeopardised, resulting in the loss of a commission already paid.
Problems can arise when the estate agent gives a client advice that is contrary to ours, creating confusion and additional stress.
If anyone, including the estate agent, mortgage broker, lender, accountant or others attempt to offer advice that is contrary to ours, please contact us to discuss the advice with us first.