Adjustment of rates

An essential task in a conveyancing transaction is the adjustment, between vendor and purchaser, of liability to pay rates. Whilst this task is never simple, it is even more complicated in a rental situation where the lease may transfer responsibility to pay rates and outgoings to the tenant. Additionally, the entitlement to rent needs to be apportioned.

The first inquiry is to establish who is responsible for payment of the rates pursuant to the lease.

If the landlord/vendor is responsible for payment, then adjustments are made in the normal way:

if the rates are paid, the purchaser will allow the prepayment to the landlord;

if the rates are unpaid, the purchaser will draw a cheque from the settlement proceeds in payment of the rates and adjust on a “rates paid” basis. By this method the vendor pays the rates up to settlement the purchaser pays from settlement.

If the tenant is responsible for payment:

if the rates are paid, no adjustment is required;

if the rates are unpaid, the purchaser is entitled to be satisfied that any arrears of rates are paid at settlement.

This conventional way of adjusting on a “rates paid” basis means that the vendor pays pre-settlement rates and the purchaser pays post-settlement rates, but both parties may take the view that they would prefer that the tenant pays.

In respect of arrears of rates, the purchaser is entitled to insist upon deduction and payment of arrears at settlement and it is no answer by the vendor to this contractual entitlement that the tenant is responsible for payment. That is a matter between landlord (the vendor) and tenant and does not reduce the purchaser’s right to adjustment.

In respect of current rates, the purchaser is entitled to adjustment up to settlement day even if the current rates are not due and payable. If adjustment is on a “rates paid” basis the purchaser will effectively pre-pay the rates until the end of the current assessment. Whilst the purchaser will be entitled to recover those rates from the tenant pursuant to the lease, the purchaser might prefer to adjust on an “unpaid basis” where the rates are adjusted to the day of settlement only. This requires the vendor to pay (by deduction) rates until settlement but leaves responsibility for payment of future rates to be determined in accordance with the lease.

The vendor in this situation is exposed to a loss. Pursuant to the sale contract the vendor has had to pay any arrears, including part of any unpaid current assessment by way of adjustment of the purchase price. Whilst the vendor, as landlord, had rights under the lease to recover rates from the tenant, that right passes to the purchaser at settlement – s.141 Property Law Act.

The vendor therefore needs to issue recovery proceedings against the tenant before settlement, or include in the contract of sale a Special Condition addressing this situation. This might be an undertaking by the purchaser to repay to the vendor the amount of current rates deducted by the purchaser when and if, the tenant pays those rates or it might authorise the vendor to issue proceedings against the tenant in the name of the purchaser to recover unpaid rates. That the parties are entitled to contract out of the consequences of s.141 Property Law Act was established by Ashmore Developments P/L v. Eaton [1992] 2 Qd R 1.

Great care needs to be exercised in drafting such a Special Condition, as is evidenced by Brinca Property Management P/L v Yeo & Rambaldi [2015] VMC 35.