In Victoria, the party responsible for a delay may be required to pay penalty interest in property settlements in Victoria. For buyers and sellers alike, this is one of the most financially significant consequences of a settlement going wrong.
Understanding how penalty interest in property settlements in Victoria arises, how it is calculated, and who bears the cost is essential knowledge for anyone navigating a Victorian property transaction. This article explains the key principles of delayed settlement interest Victoria, with reference to the standard Law Institute Victoria (LIV) / Real Estate Institute of Victoria (REIV)
What is penalty interest?
Penalty interest in property settlements in Victoria is a contractually prescribed rate charged on the unpaid purchase price when settlement does not occur on time. It is designed to compensate the party ready and willing to settle for the financial cost of the other party’s delay.
Unlike general damages, the default interest contract of sale is typically quantified by a specific rate set out in the contract, making the settlement penalty interest calculation relatively straightforward once a default is established..
How penalty interest arises under the contract of sale of land?
The obligation to pay penalty interest in property settlements in Victorian arises under General Condition 33 (GC33) of the standard contract of sale of land document which states:
“Interest at a rate of 2% per annum plus the rate for the time being fixed by section 2 of the Penalty Interest Rates Act 1983 is payable at settlement on any money owing under the contract during the period of default, without affecting any other rights of the offended party”
The rate prescribed by GC 33 is calculated by reference to the Penalty Interest Rates Act 1983 (Vic). Under section 2 of that Act, the penalty interest is fixed by the Attorney-General by notice published in the Government Gazette, having regard to prevailing commercial rates of interest and any applicable penalty adjustment. The current rate, which has been in effect since 1 February 2017, is 10% per annum.
Under the standard form of GC 33, interest accrues of a rate of 2% per annum above the rate fixed under the Penalty Interest Rates Act 1983, giving a default contractual rate of 12% per annum under an unamended contract.
However, this rate can be, and frequently is, amended by special conditions. It is essential that parties check the contract carefully before signing, as the uplift percentage above the statutory rate may be increased or decreased. In the event no amendment is made, the standard rate of 2% above the prevailing Penalty Interest Rates Act rate applies.
GC 33 operates alongside General Condition 34 – DEFAULT NOTICE, which sets out the procedure a party must follow to exercise rights arising from the other party’s default. Importantly, GC 34.1 makes clear that a default notice is not required before a party can claim interest, the right to receive interest arises automatically from the date of default.
When it applies?
Penalty interest in property settlements in Victorian typically applies in the following circumstances:
- The buyer fails to pay the balance of the purchase price on the agreed settlement date.
- The seller fails to be able to transfer clear title on settlement day.
- Settlement is rescheduled due to a party’s default, including a failed settlement that must be rescheduled.
- There is a delay caused by one party’s failure to have documents or funds ready on the day.
Importantly, penalty interest in property settlements in Victoria runs from the settlement date until the date settlement occurs. The Victorian State Revenue Office has confirmed that late settlement interest paid by a buyer also forms part of the dutiable value of the property, meaning it can increase the amount of stamp duty payable. This is an often-overlooked consequence of delayed settlements.
How penalty interest is calculated?
Penalty interest accrues daily on the amount outstanding. The calculation is straightforward once you know the relevant figures: the outstanding amount, the contracted penalty interest rate, and the number of days of delay.
Daily rate calculations
Daily interest = ((Outstanding amount x Annual penalty interest rate) ÷ 365))
The total penalty interest in property settlements in Victoria is the daily rate multiplied by the days of delay. It is important to note that both the principal outstanding and, in some circumstances, the deposit may be relevant depending on which party is in default and what the contract specifies.
Call us if you need assistance with your property conveyancing
- Same-day contract of sale and section 32 review
- Expert advice by qualified property lawyers
Special Offer: $50 Discount on your first contract of sale and section 32 review
(valid until 30 April 2026)
Example scenario
Example : Buyer default
A buyer is purchasing a property for $850,000 and has paid a deposit of $85,000 (10% deposit) at the time of signing of the contract of sale of land. The contract nominates a penalty interest rate of 12% per annum. Settlement is delayed by 10 days due to the buyer’s finance not being ready.
- Daily interest: ((($850,000-$85,000) × 12%) ÷ 365) = $251.51 per day
- Total penalty interest for 10 days: $2,515.07
- Additionally, as this interest forms part of the dutiable value, stamp duty would be reassessed on $852,515.07 rather than $850,000.
Who pays penalty interest?
The party whose default caused the penalty interest in property settlements in Victoria is responsible for the cost. In practice, determining fault is not always straightforward, and disputes about who caused a delay are relatively common. The contract’s general conditions will ordinarily govern how this is determined.
While buyers assume default interest contract of sale terms apply bilaterally, they usually only apply to “money owing,” meaning the entitlement often rests solely with the seller. If a seller defaults, the buyer may instead seek damages or a manual adjustment.
Buyer default
A buyer is in default if they fail to pay the balance of the purchase price on settlement day. Common causes of buyer default include:
- Finance not unconditionally approved in time
- Delays in arranging settlement funds or bank cheques
- Failure to execute settlement documents on time
- Errors in settlement figures not identified until the day
Where a buyer is in default, the seller is entitled to penalty interest in property settlements in Victoria on the balance of the purchase price from the scheduled settlement date until actual settlement. The seller is not required to demonstrate actual loss, the contractual rate applies automatically.
Seller default
A seller is in default if they cannot complete settlement on the agreed date. This can occur where:
- An existing mortgage has not been discharged, or the lender’s representatives are not ready
- A caveat or encumbrance has not been removed from the title
- The seller has not executed the transfer documentation
- There is a dispute over the title that has not been resolved
While buyers often assume that penalty interest in property settlements in Victoria applies bilaterally, most standard-form contracts tie interest specifically to “money owing.” Since it is the buyer who typically owes the balance of the purchase price at settlement, the entitlement to penalty interest usually rests solely with the seller.
However, a seller’s delay does not leave the buyer without remedies. Depending on the specific terms of the contract and the nature of the breach, a buyer may be entitled to:
- Serve a rescission or default notice: requiring the seller to remedy the default within the prescribed timeframe (typically 14 days)
- Claim damages: seeking compensation for reasonably foreseeable losses arising from the delay, such as additional storage costs or bridging finance interest
- Negotiate an adjustment: requesting a reduction in the settlement sum via a manual adjustment to reflect the losses incurred
- There is a dispute over the title that has not been resolved
The most appropriate course of action depends on the specific wording of the contract and the factual circumstances of the delay.
- Expert Tip
In Victorian property law, penalty interest in property settlements in Victoria (GC 33) is notoriously asymmetrical: because it triggers only on “money owing”, it almost exclusively penalises the purchaser while leaving the vendor largely immune.
At the standard 12% p.a. rate, a mere 48-hour finance delay on an $850,000 balance costs over $558, plus an unrecoverable stamp duty hike due to the State Revenue Office’s “double sting” on interest paid.
To protect your clients, ensure all PEXA workspace members are marked “ready” before settlement to avoid these costly technical defaults.
Can penalty interest in property settlements in Victoria be negotiated or waived?
Yes. Penalty interest in property settlements in Victoria is a contractual entitlement, not an automatic obligation that a court will enforce without any discretion. In practice, many delayed settlements are resolved commercially, with the parties agreeing, often through their conveyancers or lawyers, to waive or reduce the penalty interest in exchange for a prompt settlement.
Factors that commonly influence whether penalty interest is waived or negotiated include:
- The length of the delay and the amount of interest involved
- Whether the delay was caused by circumstances partly outside the defaulting party’s control
- The broader state of the transaction and the parties’ relationship
- Whether there are competing or offsetting claims between the parties
- Practical considerations around getting settlement completed quickly
It is important to understand that a waiver of penalty interest in property settlements in Victoria must be expressly agreed, it cannot simply be assumed. Furthermore, if a party intends to reserve their right to claim penalty interest, they should make this clear in writing at the time of any communications about the delay.
Where the amount of penalty interest is significant, obtaining legal advice before agreeing to a waiver is advisable. For buyers in default, it is worth noting that even where penalty interest in property settlements in Victoria is waived by the seller, the stamp duty implications of any late settlement interest that was actually paid cannot be unwound, the State Revenue Office’s position on dutiable value is determined by what was paid, not what was contractually owing.
How conveyancers and property lawyers minimise penalty interest risk
A significant part of a conveyancer’s role is to manage the settlement process in a way that minimises the risk of delay and its associated financial consequences. Proactive management at each stage of the transaction is the most effective safeguard against penalty interest exposure.
Key ways a conveyancer works to protect clients from penalty interest risk include:
- Reviewing the contract before signing to identify the nominated penalty interest rate and flag any rate that is unusually high.
- Ensuring settlement dates are realistic given the client’s circumstances, finance timeline, and any special conditions in the contract.
- Monitoring key dates and deadlines throughout the transaction, including finance approval and building and pest inspections.
- Coordinating with lenders, financial institutions, and the other party’s representatives well in advance of settlement to ensure all documents and funds are ready.
- Using electronic settlement platforms such as PEXA to reduce the risk of manual errors and last-minute delays that can cause failed settlements.
- Acting quickly if a delay appears likely, contacting the other side to negotiate an agreed extension, which can avoid a technical fault and the liability that follows.
- Acting quickly if a delay appears likely, contacting the other side to negotiate an agreed extension, which can avoid a technical fault and the liability that follows.
- Advising clients of their rights and obligations if the other party defaults, including the correct procedure for issuing default notices and preserving the right to claim penalty interest.
It is worth noting that penalty interest in property settlements in Victoria is borne by the purchaser (transferee) where it results in additional stamp duty liability, even if the interest itself arose from circumstances that were partly the seller’s fault. This makes early and careful coordination even more important.
Looking to buy property in Melbourne and concerned about penalty interest?
Understanding how penalty interest works and the associated risks can make your journey to homeownership much easier.
Contact us today to get started on your path to owning property in Melbourne
