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Oct 6, 2014

Penalty interest – what is it and who pays?

If one or other of the buyers or sellers delay settlement beyond 3 business days from the Settlement Date, the other party (ie the party not causing the delay) can charge the delaying party penalty interest to be paid over at settlement.

This is all contained in the separate 20 page (often purple) document called “The Joint Form of General Conditions for the Sale of Land” that forms part of the standard REIWA contract.

The Settlement Date is the date specified in the contract of sale, or another date subsequently agreed to in writing by both buyer and seller.

"But what if my bank is causing the delay and it’s not my fault?" Good question, but unfortunately for you, your bank is not a party to the contract so therefore, under the contract, you are the one causing the delay and therefore you have to pay. It may well be that you can make the case to your bank and have them reimburse you for the cost of the penalties but these approaches are not always successful, in our experience.

How much are the penalties? 9% per annum calculated daily on the outstanding balance. This is generally taken to mean the price of the house, less the deposit, multiplied by 9% and divided by 365 to get a daily rate. As a rough rule of thumb, it’s about $50 a day per $200,000. So if you are buying or selling a house for $400,000 with a small deposit such as $1,000, you’ll be up for around $100 a day.

When are penalties applied from? Penalties can only be applied once the three day grace period has expired and as long as the non-delaying party was ready, willing and able to settle within the three day grace period and the appropriate notice was issued, penalties can be applied from the original date settlement was to have taken place under the contract. This generally means, even if settlement takes place on the 4th day and the other side were only ready on the 3rd day, that 4 days’ penalties will be applied, for the original settlement date plus the three days of grace.

If that’s not bad enough, a weekend very commonly falls within the three grace day period and penalties are charged on those days as well. (Watch out for long weekends!)

A note of caution. It is our experience as settlement agents that short delays to settlement rarely cause that much inconvenience or extra cost in the scheme of things, but the imposition of penalties seems to really get people’s back’s up such that all good will disappears from a property transaction. Our world operates largely on good will and give and take and we urge caution before imposing penalty interest, even if you are entitled to it.

And buyers, remember it’s far more important for you to stay on good terms with the seller than the other way around – you never know when you might need to contact them to ask them something about the property, such as who built or installed what. There is a certain serendipity about having a particularly difficult buyer complaining to us that the seller won’t co-operate.

As the old saying goes, you catch more flies with honey.


DISCLAIMER: The above advice is intended to provide a summary and is not intended to be relied on in any particular case. It should NOT be construed as legal advice. For detailed advice specific to your circumstances you should seek specific advice from an appropriately qualified professional.

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