Possession prior should be used sparingly.

The risks of possession prior, and what you can do to avoid them

Granting possession prior can help to smooth out sticky situations before settlement, but it should be used sparingly, because there are serious risks attached.

Often, buyers are keen to get into their new home. When the vendor has already vacated the property, it’s not uncommon for buyers to want to move in prior to settlement date – after all, they ask, what’s the harm?

One of the staff members at Residential Settlements is currently studying for their conveyancing license, and as they have discovered, possession prior is not as simple as it initially seems.

When a buyer takes possession of a property before settlement has occurred, the contract becomes a terms contract. As a result, the buyer becomes exposed to the following risks and consequences:

  • Risks relating to the property become the buyers responsibility. As per section 8.1 of the Joint Form of General Conditions, “Despite any rule of law or equity to the contrary, risk relating to the Property passes from the Seller to the Buyer at the time when the (a) Purchase Price is paid in full; or (b) Buyer becomes entitled to possession of the Property; or (c) Buyer is given possession of the Property; whichever first occurs.” As a result, the property generally is no longer covered by the vendor’s insurance policy, and the buyer should take out their own insurance.
  • They become liable to pay rates sooner. As per section 14.9 of the Joint Form, the buyer must “promptly pay all Outgoings“, such as land and water rates, from and including the date they are given possession of the property.
  • They risk thousands in stamp duty. Section 107 (2) of the Duties Act 2008 states that a terms contract is not considered a cancelled transaction “if the person liable to pay duty on the transaction has under the contract, obtained exclusive use or control of the dutiable property, whether or not that contract is not fully carried into effect for any reason.” In other words, the buyer is liable to pay stamp duty even if settlement doesn’t occur – no matter who causes the deal to fall over.

These are significant risks to a buyer. To avoid these risks and consequences, it’s best to use possession prior only as a last resort. If the buyer is given possession prior, it’s up to both the agent and the settlement agent to inform them of the risks and advise them to complete their due diligence.

Image by Jonah West via Flickr.