Who pays rates for property sale/purchase settlement day?

Question

In New Zealand, properties pay rates to councils/local authorities. These are calculated yearly for periods with specific dates (e.g. 1st of April through to 31st of March, both inclusive).

When a property is sold, the title transfer occurs on what is called "settlement" day. This day is when the buyer becomes the owner. The rates owed by the property get apportioned between the vendor (seller) and the buyer: if the vendor has already paid rates beyond his ownership, the amount is added to what the buyers pays.

Now I am seeking a reliable source of information on which party is legally responsible for the rates on the settlement day.

On one hand, because the settlement day is the first/start day of buyer's ownership, one might argue that he/she is the one to pay rates for this day (and this is what I personally experienced when once purchasing a property in NZ).

On the other hand, there is an argument that "Settlement can occur anytime up until 4.00pm and the day of settlement is the vendor's responsibility in regards to rates.". This is what I am hearing from a tutor in a course called "Law Office Practice".

So, is it legally defined somewhere who pays rates on settlement day? Or is this up to the lawyers who perform the transaction to decide?

Answer 1

So, is it legally defined somewhere who pays rates on settlement day? Or is this up to the lawyers who perform the transaction to decide?

The rule for prorating the taxes is established by the real estate purchase and sale contract, so the status of the settlement day rate is a matter of contract interpretation. The contract could allocate the rate other than pro-rata if the parties agreed to that approach (the default rule is that the owner at the time the payment is due has to pay the entire amount).

Usually, the parties to the contract sign off on the settlement sheet calculation along with other documents at closing and this estops them from disputing the calculation later.

This detail of the calculation as a matter of contract interpretation is established by custom and practice, rather than statute, and there is probably no case law exactly on point due to the estoppel issue and because the amount in dispute would usually be tiny relative to the scale of the transaction as a whole.

My understanding is that the settlement day is generally allocated to the buyer rather than to the seller, but I wouldn't be stunned if local practice varied by region, or by which firm handles the closing, or by which software program (if any) is used to do the calculation.