Settlement is not an event that occurs on the day when ownership of a property is transferred from the seller to you – it’s a process that begins when the exchange of contracts is made. Knowing what both entails, and what is expected of you at each stage, will help ensure a seamless handover.
What settlement actually involves
Property settlement, also known as conveyancing, is the process of transferring legal ownership of a property from one party to another. It’s not an event, but a dynamic process involving several steps that must be finalized before the next steps can proceed.
Settlements are usually scheduled between 30 and 90 days after contracts are exchanged. That timeframe is necessary because the buyer’s finance needs to be prepared, transfer duty (formerly known as stamp duty) must be ascertained and paid, the seller’s financier must be ready to release their mortgage, and identity verification and authority forms must be exchanged before any money can be transferred. If any of these requirements are delayed, the settlement is postponed.
This preparatory work is not busywork. It’s all important legal and financial matters. And most of them are too important to risk mistakes or oversights.
The shift to electronic settlement
Paper-based conveyancing is almost gone, with the vast majority of residential property transfers in Australia occurring through a digital platform called PEXA (Property Exchange Australia) that brings legal representatives, banks, and government land registries together in one online workspace. Both the buyer’s and seller’s legal representatives are in the same transaction workspace, upload any needed documents, verify the figures, and confirm readiness for settlement. On the day of settlement funds transfer and lodging documents occur in one hit, not two. Not sequentially. This is important as cheques and documents got swapped at the old paper-based settlement, which created room for error between groups.
Settlement delays due to paperwork glitches have dropped 75% since legacy paper-based times. Over 95% of property transfers in active Australian jurisdictions now settle digitally. The benefit for buyers and sellers is speed and transparency – you can see the process in real time rather than waiting on the next fax or courier.
Regional differences that change the legal picture
Property law can be different from place to place, making knowledge of local systems invaluable.
The Australian Capital Territory (ACT) is an interesting case in point. The ACT operates on a system of Crown leases, rather than the freehold title that you’ll find in most of the rest of the country. The ACT government owns the land in a technical sense and grants buyers a leasehold interest. But holding the lease on a parcel of land comes with strings attached, which can include restrictions on what the land can be used for, restrictions on development, and other obligations which ‘run with the land’.
This means that when it comes to reviewing a Crown Lease under a contract for sale in the ACT, a different set of due diligence checks will be needed. Buyers and sellers in the capital region should consult specialized canberra solicitors property experts who understand these obligations, rather than relying on generalist conveyancers who may not be across the territory’s specific disclosure requirements. In other words, what does the Crown Lease permit and prohibit?
In the past, buyers have had to back out of a property deal after discovering too late that what they wanted to do with the property post-purchase (renovate it, use it for their business, or subdivide it, etc) wasn’t compatible with the lease. This could have all been avoided if a solicitor had conducted the appropriate lease review before the contract went unconditional.
How settlement adjustments are calculated
When ownership of a property changes during a billing cycle, the expenses don’t just stop. Council rates, water usage charges, body corporate levies, and land tax remain in place, and someone’s been paying those right up until settlement day. Adjustments are how the buyer and the seller cover off these costs in a fair and balanced manner.
The process operates on a settlement day-forward basis. If a seller has already paid the council rates in full until the end of the current quarter and settlement is, for example, two-thirds of the way through that quarter, technically the buyer owes the seller one-third of the quarterly rates and must reimburse the seller for that sum. Conversely, if the seller hasn’t yet paid the rates due for the current quarter, those sums must be deducted from the seller’s proceeds at settlement.
It’s the same calculation for body corporate fees on a strata or townhouse purchase. The exact figures appear on a draft settlement statement produced by legal representatives and generally, both parties agree to those figures before moving to settlement. There can and have been disputes following settlement in cases where the adjustments weren’t done quite right and the seller had already relocated the funds.
Discharging the seller’s mortgage
Sellers who have an existing mortgage are often surprised by how much in advance their bank requires to prep and lodge the discharge of mortgage, the legal document processed through PEXA which eliminates the lender’s registered interest over the property so clear title can transfer to the purchaser.
In our experience, most banks and other mortgagees want three to four weeks’ notice of settlement to have sufficient time to process the discharge request. Lodge it too late and the bank won’t have its paperwork ready to be lodged at settlement. That either pushes out settlement – typically at the cost of the party seeking the extension, and often with legal consequences if the purchaser’s finance or other obligations have been locked in – or requires completion of the sale to be rescheduled.
Unfortunately, dealing with the discharge of mortgage is one of many seller-side responsibilities that comes as a surprise to people, particularly those who have not sold real estate in the last few years. But if you have an existing mortgage, failing to get this task right can dramatically transform a straightforward settlement into the most expensive transaction of your life.
The pre-settlement inspection
Buyers are entitled to visit the property in the days before settlement, usually one to three days prior. This is your last chance to ensure the property’s as expected.
Specifically, check that: all inclusions you expected from the contract are still on site (that’s things like fixed appliances, light fittings, window coverings, and anything specifically named in the contract), there’s no new damage, the property is reasonably clean, and any rubbish or seller chattels have been removed.
The rule is that the property should be as “at settlement” in that period of time, allowing for minor damage due to natural causes or incidents. If there is something not right, broken, or missing you need to raise it with your legal representative before you settle. Once you’ve paid the money and the contract goes through, your leverage is limited.
If you’ve got a legitimate gripe, for example, the dishwasher was there during exchange but has been removed, or the property has been flooded due to a plumbing error, your legal representative can look at a reduction in the settlement amount, retention of a sum from the settlement proceeds, or in severe cases, a refusal to settle until the matter is sorted.
What can go wrong on settlement day
Even the best-planned transactions can hit a bump at the last minute. Knowing what the typical failure points are will keep you cool when your lawyer phones to say there’s a hitch.
Bank delays are by far the most common. If the buyer’s lender hasn’t lodged its funding confirmation in the PEXA workspace by the scheduled settlement time, the settlement can’t proceed. This is usually sorted out within a couple of hours, but in some instances, the settlement will roll over to the next day.
Document mismatches occur when the details in the transfer documents don’t line up exactly – an incorrect spelling of a name, an address variance, or a number that’s different to the one that was agreed. Again, these can usually be rectified on the same day, but your legal reps will need to stay on the phone to work it out.
Seller-side rubbish is more often a problem than you’d think. If a seller hasn’t entirely moved out, or has abandoned rubbish, that gives the buyer an entitlement to delay settlement. This comes under the ‘vacant possession’ clause that most contracts will include, and your lawyers will deal with it by negotiating either an amount off the sale price or an extension for the removal of rubbish.
In most cases, settlements that play up will resolve on the day. It really does pay to have experienced legal reps on both sides here – this is all about making quick, assured decisions under time stress.
After settlement completes
Completing the settlement does not mean that the property is officially yours. Once the transfer has been completed, and the paperwork has been submitted through PEXA, the land registry will process the transfer and update the Certificate of Title to reflect the new owner. This registration usually takes a couple of business days.
Then there are the little administrative notifications. Local rating authorities, i.e. the entity responsible for council rates, must be alerted to the change in ownership so that future bills come to the right recipient. Water utilities must also be updated. These notifications are generally handled as part of the conveyancing service, but you should confirm this with your representative and keep an eye out for the updated bills.
For buyers, you will also want to keep a copy of the settlement statement, the transfer, and notice of title, as these all prove you are the rightful owner. This paper trail will be key if you go to sell, refinance, or find yourself in any other property-related legal scenario.
Getting the process right
Closing a deal doesn’t need to be a tension-filled experience. The vast majority of closing hiccups – overlooked mortgage discharges, inspection problems not mentioned in the seller’s filings, accounting mistakes – can be prevented with proper planning and the right guidance. The timeline is designed to help. There’s plenty of time for everyone to do their part. So maintain that breathing room and do what you need to do, when you need to do it.
