Bought a house in recent months? If not, take note that you can now be penalised for "last minute settlements".
Prompted by hold-ups with homebuyers handing over the dosh, the latest edition of the standard sale and purchase agreement contains a clause so that, if you don't settle before 4pm on the agreed date, you're up for penalty interest that day and each subsequent day you don't pay. Unless otherwise agreed, the penalty interest rate is twice the 90-day bank bill buy rate.
That can be sticky if you're like many people and choose Friday as settlement day: running late will cost you three days' interest. There's no excuse, either, if it's not your own fault; for example if your mortgage funds don't come through in time or the settlement of your own house sale is running late.
Jonathan Pereira, solicitor for Wellington law firm Fanselows, said there was a lot of discussion when the penalty clause was brought in (version seven of the sale and purchase agreement has been in use since late last year) "but I think it's worked as it intended to".
"I've been on both sides (of the transaction) in Wellington and people tend to be pretty friendly - it's still negotiable. Most of the solicitors I've talked with have taken a fair approach, and if their client is out of pocket there's no problem in enforcing (the clause)."
Pereira said the clause was included because there had been a number of settlements, particularly in the Auckland region, where settlements would take place well after 4pm on a Friday leaving the vendor holding a bank cheque and no time to bank it yet still covering a mortgage.
The sale and purchase agreement was drawn up by the Auckland District Law Society in conjunction with the Real Estate Institute. Institute president Max Oliver said that the penalty clause was an initiative of the solicitors, "However we weren't upset! It has worked very well".
One glitch that has shown up is if there's a chain of settlements on the same day and someone was using an auction contract while another was selling under private treaty (and using the standard sale and purchase agreement). "The chain of events could lead to someone being caught out," Oliver said. A new auction contract is currently being prepared which contains a similar penalty clause and that should be in use in about a month's time.
In a newsletter to clients, Auckland lawyers Fortune Manning listed a number of things you could do to avoid - or at least soften the blow of - last minute settlements. They included:
- Try to settle earlier in the week rather than the traditional Friday. If you're running late, you're likely to face one day's penalty interest not three.
- Allow enough time in the agreement between signing and settlement to satisfy all conditions and arrange necessary finance.
- Don't leave arranging finance until the week of settlement, because it's probably going to involve all of the following steps:Finance is approved by the mortgage lender; The lender instructs the legal firm (or whoever is carrying out the conveyancing for you) to act for it;The solicitor prepares documents which you sign and then sends a certificate back to the lender (often this is required one or even two working days before settlement); Finally, the lender checks the documents and pays the advance to the solicitor on settlement day.
- Arrange property insurance cover well before settlement day (the solicitor has to provide cover details to the mortgage lender in its certificate); and
- Carry out any final inspection of the property well before settlement, not on the last morning.
Fortune Manning even suggests having the penalty clause deleted before you sign the agreement to purchase your new property. Another option is to insert a clause in the agreement for selling your existing home which requires the purchaser to settle early enough for you to meet your own purchase on time or meet the cost of any penalty you suffer as a result.
