O is for Outgoings
When purchasing a property it is important to understand the costs associated with ownership, in the form of outgoings. The standard ones are council rates, water rates and (possibly) land tax. When purchasing an apartment or townhouse or, for that matter, any structure that is associated with common property, there will also be what are known as Owners Corporation fees. These latter fees will vary depending on the size of the complex and, in some instances, can be quite significant especially where a large apartment complex has significant infrastructure such as gyms, swilling pools and the like.
Tip for Purchasers: make sure you inform yourself as to these outgoings and get as much factual information from the selling agent as you can. Don’t rely on what the agent says but have them obtain copies of annual council and water rate notices and owners corporation notices. By law a seller must include an Owners Corporation certificate in the selling documents (the Vendors Statement) but is only required to provide a reasonable estimate of the other outgoings; (2) consult your solicitor before signing the contract so you can be advised of the quantum of these outgoings and also advised of any other special levies that could be imposed on you. These levies might relate to maintenance of the structures within the Owners Corporation and, in some instances, will be costs that the seller can pass on to the purchaser as the purchaser will benefit from them in the future. An astute solicitor will seek to include a special condition that precludes the passing on of these levies or advises the purchaser to negotiate a lower purchase price to take account of them.
P is for Penalties
There are various penalties that can be incurred by participants in property transactions. Most of these penalties tend to fall on purchasers for two key reasons. Firstly, it is the purchaser who is quite often the defaulting party and secondly, it is far easier to quantify the losses that a seller faces (when a purchaser defaults) than the other way around. Typically, when a seller is in a defaulting situation or might possibly default, practical solutions and negotiations come to the fore rather than pure mathematics.
In a typical property transaction a purchaser can face penalties for the following (a) late payment of deposit; (b) failure to settle on time. This is not an exhaustive list but are the key ones most often faced. In both of these cases, the seller can elect to impose penalty interest. Penalty interest accrues on a daily basis and the rate is based on the interest rate that applies under the Penalty Interest Rate Act from time to time unless an alternative rate is specified within the Contract of Sale (and if this is the case it will always be a higher rate!). The current Penalty Interest Rate is 9.5%. In a lot of instances, the seller will seek to impose a higher rate within the Contract of Sale, either by reference to the prevailing Penalty Interest Rate (for example, 3% above the Penalty Interest Rate) or by specifying a particular rate of interest (for example, 18%)
If the purchaser fails to settle on the due date, a seller cannot simply rescind the contract but must first issue what is known as a Notice of Rescission. This notice requires the purchaser to rectify the default within 14 days, imposes the penalty interest referred to above and will also entitle the seller to recoup the reasonable legal costs of the issuing of the notice and associated work. The amount claimed by the seller’s solicitor will vary (a standard range would be $400 to $800).
Tips for Purchasers: (1) DON’T default; (2) have your solicitor review the contract special conditions prior to signing so that a high penalty interest rate can be negotiated downwards; (3) remember that the late payment of a deposit incurs penalty interest so do not agree to pay a deposit that you cannot pay by the due date. This not only results in the possibility of penalty interest but means you are in default of the contract for which a Notice of Rescission could be issued-remembering that the seller will not necessarily enforce the notice but will definitely impose the costs associated with the notice.
Tips for Sellers: It is always worthwhile including a special condition in a Contract of Sale imposing a higher rate of penalty interest but care must be taken to not have a rate which is too high as it could be regarded, by a court, as a penalty rather than a realistic measure of the loss suffered, which would then be disallowed. Having this higher rate in the contract does not mean that it has to be imposed but it can represent a significant incentive for the purchaser to move rapidly to settle if in, or approaching, default.
R is for Related Party Transactions
Some property transactions involve transfers between what are referred to as “related parties”. While there may be various legal issues that such transactions throw up (such as tax related considerations), for our purposes we will focus on the stamp duty implications and requirements.
The fundamental principle is that where a transfer of property involves related parties (such as relatives or associated entities) the State Revenue Office will require additional evidence, over and above the normal documents submitted to them, to validate the market value of the property being transferred. In this respect it is important to note that stamp duty is imposed on the market value of the transaction and not the consideration noted in the Transfer of Land. In most cases where a seller and purchaser are not related, the consideration in the Transfer of Land and the market value will be regarded, for stamp duty purposes as the same. A classic example of where they are not the same is where one party “gifts” a property to another party. Many people believe that no stamp duty is payable when such a gift is given which is not the case. Stamp duty will be payable on such a transaction and the market value will need to be determined in accordance with the requirements of the State Revenue Office.
Tips for purchasers and sellers: (1) understand that, unless an exemption applies, stamp duty will be payable on the market value of the interest being transferred, where the transaction is between related parties. If you are obtaining a loan to acquire the property and do not factor any or enough stamp duty in to your calculations, you may face a shortfall at settlement; (2) ascertain what the evidentiary requirements are in order to establish the market value; (3) if in doubt, always check with your solicitor to understand if the transaction you are contemplating is a related party transaction.