Demystifying the money you pay at settlement

Many purchasing clients, particularly first home buyers, don't understand why they had to pay more than the balance of the purchase price at settlement. This is perfectly understandable. You fastidiously crunch the numbers before and after exchanging contracts: calculating duty payable and then what the rest of the purchase price is after the deposit is paid. But you then find out that instead of paying $450,000.00 at settlement, you are actually obliged to pay $451,489.78.  What you didn't know is that there are always "adjustments" to be made in the settlement figures, which tend to increase the amount of money a purchaser has to pay to the vendor at settlement.

What are these "adjustments"? Are they just a flow on from a Matt Damon movie? No, not really. Adjustments are done at settlement because a vendor is liable for council rates, water, strata levies etc up until and including the day of settlement and the purchaser is liable from after settlement for those charges. Adjustments ensure that both parties have paid their share of the charges for the property. For example, if the vendor has paid all the council rates for the year (which run from 1 July to 30 June) and settlement is to take place on 15 June, then the purchaser is to "reimburse" the vendor for the 15 extra days that the vendor has paid but for which the purchaser is actually liable.

Water usage charges are generally estimated for settlement and this will mean that the vendor, in effect, provides the purchaser with a "discount" for the costs of the vendor's estimated water usage (water usage is only recorded periodically and it is only fair that the vendor pays to the purchaser for their water usage, which will be payable down the track).

Sometimes I have purchasers asking me why they are paying council rates at settlement. The adjustments are done on the basis that the charges have in fact been paid. If the charges have not been paid, then a cheque is drawn from the money to be paid to the vendor to pay the council rates. For example, let's say that the council rates are $1500 for the year, but they have not been paid by the vendor. Settlement is on 15 June. This is how the adjustment would look:

   Council Rates $1500
   Purchaser allows 15 days (being 15 days from after settlement to the end of the year)
   $61.64 is payable by the purchaser to the Vendor

   Cheque at settlement: $1500 to Council

You can see from the above that the purchaser pays the vendor for their share of the rates and then from the overall settlement moneys a cheque is made to council to pay for the full rates (so the vendor pays for their share as well).

In certain situations, there may be more complicated adjustment calculations for things such as rent or strata insurances etc. The key thing to remember is to budget for some extra moneys at settlement so that you are not surprised when there is a bit extra to pay.

Jonathan Marquet
Emil Ford & Co - Lawyers