WHAT ARE STATEMENT OF ADJUSTMENTS?
Towards the end of the conveyancing transaction statement of adjustments are prepared to ascertain the balance of the purchase price payable to the vendor and to adjust for outgoings such as council rates, water rates and owners corporation fees. In individual circumstances it may also be required that adjustments occur for items such as rental payments, land tax, rebates and security bond.
Outgoings that are adjusted tend to be recurring in nature and relate to a certain period, such as monthly or quarterly.
It is standard practice for the purchaser’s lawyer to prepare the statement of adjustments and forward to the vendor’s lawyer for validation purposes prior to settlement.
CONTRACTUAL CONDITIONS THAT RELATE TO STATEMENT OF ADJUSTMENTS
The obligation to prepare adjustments arise from the signed contract of sale. General Condition 23 of the Law Institute of Victoria (LIV) details this requirement.
HOW DO WE ADJUST FOR OUTGOINGS?
Outgoings can be adjusted on a paid or owing basis. When adjusting on a paid basis, the understanding is the the vendor has paid the outgoing. An allowance is then made in favour of the vendor in the adjustments. If the rates are unpaid, then a portion of the settlement funds payable to the vendor by the purchaser (from the amount due to the vendor) is used to pay the outstanding portion of the rates. The rates are treated as paid by the vendor and an allowance is again made to benefit of the vendor.
It is important that adjustments are accurate as the purchaser of property will be required to pay rates and all outgoings when due and payable to the relevant authority. This requires a payment of both arrears and current rates. An incorrect adjustment by the solicitor would leave a potential purchaser out of pocket post settlement.
Adjustments are based on the settlement date which is the date the purchaser becomes the new owner of the property by taking possession of the property. In circumstances where there is a delay in settlement, adjustments should be recalculated to take effect from new new settlement date. If the settlement delay is caused by the property purchaser, the vendor may seek that adjustments occur from the original contract of sale settlement date. This will compensate the vendor for any loss caused by the property purchaser’s delay.
WHAT IS PENALTY INTEREST AND HOW DOES IT RELATE TO THE ADJUSTMENTS?
Penalty interest is paid by a property purchaser who is in default of the contract of sale and the terms of the transaction. A delay in settlement can be classified as an event of default. General condition 33 outlines the interest payable on default.
Penalty interest will be calculated adjusted and payable to the vendor similar to the other outgoings.
WHAT HAPPENS IF THE PARTIES FAIL TO ADJUST?
A failure to adjust can lead to a waiver of the right to adjust. Similarly, if a vendor agrees to settle without adjustments, it can be argued the the vendor waived their right to adjust. A readjustment may be available if there is an error as opposed to a total failure to adjust. It may be argued that the obligation to adjust does not merge at settlement and a readjustment made in favour of the relevant party.
HOW IS RENT AND OTHER OUTGOINGS ADJUSTED FOR RENTAL OR INVESTMENT PROPERTIES?
For residential properties water and council rates are normally paid by the landlord. If the landlord/vendor pays these rates adjustments occur in the normal method outlined above.
If the tenant is responsible to pay these outgoings or expenses and they have been paid, then there would be no need for an adjustment.
However, if the tenant is responsible but has not paid, then the purchaser should propose an adjustment. The property purchaser will be able to recover these amounts directly from the tenant at a later stage.
Rent should also be adjusted on a pro-rata based on whether it has been received by the landlord.
HOW CAN OUR OFFICE ASSIST YOU?
Contact our office for all your property transaction whether you are a seller or buyer. We can provide legal advice in relation to preparing the statement of adjustments. Our Melbourne qualified lawyers will minimise any unnecessary expense and make sure all conveyancing documents are prepared accurately.
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Last updated: 14 December 2021 Article by: Halil Gokler
