It’s well known in the real estate industry that penalty interest can be charged by buyers or sellers if the other party isn’t ready to settle.
There are, however, some areas of penalty interest that are misunderstood. In this article, I’ll explain the basics of penalty interest, and share some information that may prove useful in your conversations with clients.
Penalty interest serves as compensation for the buyer or seller when the other party has caused a delay in settlement. The right of buyers and sellers to charge interest is set out in the Joint Form of General conditions, which in clause 4.1 states:
“(a) If for any reason not attributable to the Seller, Settlement is not completed within 3 Business Days after the Settlement Date, the Buyer must pay to the Seller at Settlement interest on: (1) the balance of the Purchase Price; and (2) any other money payable at Settlement.”
Clause 4.2 states:
“If for any reason attributable to the Seller, Settlement is not completed within 3 business Days after the Settlement Date the Seller must allow to the Buyer at Settlement, as a deduction from the Purchase Price, compensation on: (a) the balance of the Purchase Price; and (b) any other money payable at Settlement.”
Penalty interest is calculated based on the balance of the purchase price and other money due to be paid on settlement, and is charged for each day from and including the settlement date, but excluding the date on which settlement occurs.
A common misunderstanding is that if a ‘Ready, willing, and able’ notice wasn’t issued when the buyer/seller was ready to settle, then the party being charged penalty interest can dispute the charge.
It is generally common practice for settlement agents to issue a ‘Ready, willing, and able’ notice to a party that’s not ready to settle, letting them know that they’ll be charged penalty interest for a delay, but this is not a requirement – so in most situations, a notice not being issued is not a reason to dispute penalty interest.
A notice does need to be issued, however, if both the buyer and seller are not ready on settlement date, and one party later becomes ready (at this time, the notice should be issued).
A second misunderstanding regards when penalty interest needs to be paid. The obligation of the buyer/seller to proceed to settlement is subject to the penalty interest being paid – so penalty interest should be paid at settlement. Settlement should proceed even if penalty interest is in dispute – the penalty interest should be held in the trust account of the entitled party’s settlement agent pending legal action/resolution.
Do you have any questions about penalty interest? Or do you have something you’d like to add? Leave a comment and let me know.
Image by Rasmus Andersson via Flickr.