Buying or selling a property is a major financial transaction, and the settlement process involves more than just handing over the keys. An important aspect often overlooked is the settlement adjustment sheet (also known as the settlement statement). Settlement adjustments ensure a fair distribution of property-related costs between the buyer and seller.
Understanding settlement adjustment figures can be tricky, and we often have questions from clients seeking clarity on these calculations. The following overview should help shed some light on the process and calculation of settlement figures.
What are Settlement Adjustments?
Settlement adjustments are financial calculations that allocate certain property expenses between a buyer and seller at the time of settling their property transaction. Generally, figures are prepared by the buyer’s representative and sent to the seller’s representative for checking and approval before the conveyancing transaction is completed.
Adjustments are typically calculated as of the date of settlement, however, in some cases (for example, if a seller gives a buyer early occupation of the property), some calculations may be made from the date of possession.
The fundamental principle is that the seller pays for costs incurred up to the settlement date, while the buyer assumes responsibility for expenses from that point onward. These calculations ensure fairness and accuracy, preventing either party from bearing undue financial costs.
Common Types of Settlement Adjustments
Because certain property expenses like rates and taxes ‘attach’ to the land, it is impractical for the relevant authorities to issue individual accounts at specific times. Rather, these expenses are levied periodically (i.e., quarterly or annually) and must be apportioned between the buyer and seller, so each is responsible for their respective share at the adjustment date.
After settlement, the authorities are advised of the change in ownership, and future accounts are issued directly to the new owner.
The types of adjustments commonly made during settlement might include:
- Council and Water Rates: These are typically calculated quarterly or annually. Adjustments ensure that each party pays their proportional share based on the period they owned the property. For example, if the seller paid the annual rates in advance, the buyer reimburses the seller for the portion covering the post-settlement period.
- Body Corporate/Strata Fees: Applicable to properties in strata schemes, these fees cover the maintenance of common areas. Adjustments ensure the buyer and seller pay their respective portions.
- Rent and Security Deposits: For investment properties with existing tenants, prepaid rent and security deposits must be transferred and apportioned, as relevant, between the buyer and seller. If the property is managed, agents can provide details for calculating adjustments.
- Land Tax: In some jurisdictions, land tax may be applicable and, if relevant, adjustments ensure that the buyer and seller pay their proportional share of this tax.
- Water Usage: Water meters are not always read at the same time as rates are levied, and an estimate may need to be made of the seller’s usage up until settlement. Rates certificates usually provide an average daily consumption figure which can be checked verbally with the water authority. An estimate, based on this usage can then be made and adjusted between the parties.
- Other potential adjustments: Depending on the property and local regulations, other adjustments might include homeowners’ association fees or other prepaid services.
How Are Settlement Adjustments Calculated?
If rates or expenses have been paid in advance, then an adjustment is made in favour of the vendor. If rates or expenses are outstanding, the adjustment is in favour of the purchaser by way of deduction from the purchase price.
The calculation process involves determining the daily rate of each expense and then allocating the costs proportionally based on the number of days each party owned the property. To determine how to calculate these costs, the buyer’s representative usually obtains certificates from the relevant authorities detailing the annual or other periodic charges and interest, if applicable. The calculation also needs to factor in whether the account has been paid or remains outstanding.
Here’s an example:
Council rates are $2,000 for the billing period 1 January 2025 to 31 December 2025, and settlement occurs on 1 July 2025. The rates have been paid in full by the seller.
First, we determine the daily rate for the council charges:
$2,000 / 365 days = $5.48 per day (approximately)
Next, we need to calculate how many days the seller owned the property within the billing period, up to and including the settlement date (1 January 2025 to 1 July 2025). That’s a total of 182 days.
The seller’s portion of the council rates would be:
182 days × $5.48 per day = $997.36
As the seller has already paid the full $2,000, the buyer needs to reimburse the seller for the billing period they will own the property (from 2 July 2025 to 31 December 2025). This is 183 days.
The buyer’s portion of the council rates would be:
183 days × $5.48 per day = $1002.84
Therefore, at settlement, the buyer will need to pay the seller an adjustment of $1002.84 for the prepaid council rates.
What about Electricity, Telephone, Internet, etc?
These types of expenses concern direct private arrangements between a provider and consumer and adjustments are not relevant. In anticipation of settlement, buyers and sellers should notify their respective providers to make appropriate arrangements for connection or disconnection (as relevant) of these services.
Conclusion
When you buy or sell a property, calculations need to be made to determine the final amount payable by the purchaser and the amount the vendor will receive on settlement. Settlement adjustments provide for a fair distribution of certain property-related expenses between the buyer and seller. Accurate adjustments prevent post-settlement disputes and ensure fair financial outcomes for both the buyer and seller. Thoroughly checking all documentation is essential to avoid errors.
While settlement adjustments take time to understand, they form an essential part of the work undertaken by a conveyancer or property lawyer who are usually happy to explain the calculations to their clients.
This is general information only and you should obtain professional advice relevant to your circumstances. It is also important to note that terminology and processes for calculating settlement adjustments may vary between jurisdictions.
If you or someone you know wants more information or needs help or advice, please call (08) 8232 8446 or email [email protected].