By Russell Cocks, Solicitor
First published in the Law Institute Journal
Recurring outgoings, such as rates and taxes, are adjusted between the parties as at the settlement date. This right/obligation has long been a part of the standard form contract of sale of land and its present incarnation is general condition 15. Whilst requiring apportionment of outgoings between the parties at settlement, the general condition does not specify the actual method of adjustment and logically there are two such methods.
If the vendor has paid the outgoings in advance then the adjustment is achieved by simply calculating the number of days after settlement that the vendor has prepaid and allowing an appropriate amount, calculated at a daily rate, by way of addition to the purchase price. If the vendor is in arrears as at settlement, it may appear simple to likewise calculate an amount on a daily basis and deduct that amount from the balance of purchase price paid to the vendor. The problem with this method is that the purchaser is then immediately in arrears in respect of the outgoings and the vendor may be entitled to argue that a debt issued in the name of the vendor remains outstanding.
It is therefore arguably ‘more correct’ to adjust on a ‘rates paid’ basis so that, even if the vendor has not paid the outgoings, the adjustments are prepared on the basis that outgoings are paid and the full amount (or balance outstanding) is deducted from the amount due to the vendor and remitted by the purchaser (after sighting by the vendor) to the rating authority. This complied with s 175 Local Government Act 1989 which (previously) required a purchaser to pay any outstanding rates in full after settlement.
The advent of quarterly charges for rates is a relatively recent consideration that may justify a review of past practices, at least in relation to rates or instalments of rates which are not presently due and payable. In this regard s 175, whilst still requiring payment of any arrears in full, now entitles a purchaser to the benefit of any instalment payment plan that was available to the vendor.
When rates were properly regarded as an annual charge it was appropriate that adjustment was made on an annual basis, calculated by reference to the number of days between the end of the rating period and the date of settlement. This accorded with s 53 Supreme Court Act 1986 which, whilst not applying directly to rate adjustments, indicates that apportionment is generally conducted on a daily basis. However such logic is equally applicable to a daily adjustment in respect of a period of time of less than a year, such as a quarter.
Water rates were also in past times assessed on an annual basis and therefore usually adjusted on that basis, but s 139 Water Industry Act 1994 now allows the Minister to authorise annual, half yearly or quarterly payments and it is fair to say that quarterly instalments are the rule. Most water authorities now issue separate assessments for service and related charges, which are adjustable; and usage, which is not adjustable as the authority accepts liability for recovery of the usage charges from the outgoing vendor. However, as of 1 July 2013 City West Water has reverted to treating existing usage charges as a charge on the land, thereby passing responsibility back to purchasers to allow such charges as an adjustment at settlement and remit payment to the authority after settlement. Other authorities may well follow suit.
The other common outgoing requiring adjustment is owners corporation fees. Section 28 Owners Corporations Act 2006 makes the owner for the time being responsible for payment of fees and therefore, whilst they are not a charge on the land as rates are, effectively the purchaser becomes liable for payment in the same way as rates. The Act does not specify how fees are to be levied and it is fair to say that, whilst annual and monthly fees are sometimes levied, the most common method is quarterly, including annual fees payable quarterly. It is also fair to say that it is normal to adjust owners corporation fees on a quarterly basis when they are levied on that basis.
It may now be time to step into the world of quarterly payments and adjust all rates and outgoings that are assessed on a quarterly basis, on that basis. This will add the complication that not all quarters are equal (most, but not all, are 92 days) but this additional calculation may be justified to achieve an adjustment process that accords with current assessment regimes.
Tips
Whilst written for Victoria this article has interest and relevance for practitioners in all states.