What is a retention of settlement funds and when is a retention of funds used?
What is a retention of settlement funds?
A retention of settlement funds is an amount of money agreed upon prior to settlement, to be held in a party’s trust account until an action has been complied with. A retention is used usually for an issue that arises before settlement but cannot be fixed before settlement.
Whilst the concept might be a straightforward idea, it can cause many arguments if the expectations and terms are not clearly set out prior to settlement.
When is a retention used?
If works agreed upon in the building and pest negotiations are not fixed prior to settlement – such as a building certificate has been applied and lodged with council however the final certificate will not be issued prior to settlement or emergency repairs which occurred right before settlement (such as a window breaking) and the sellers cannot get anyone out to fix the issue prior to settlement
If the buyer is still waiting on a council search for rates or water usage
Rubbish left behind and owners promises to come collect it.
What do the terms of the retention have to include?
The amount retained should be enough to cover the costs of whatever action the seller is required take. This is because if the action fails to be done the buyer has sufficient funds to arrange for a third party to attend to the items concerned.
It must state where the funds are to be held. In most cases the retention is held in either the buyer’s solicitors trust account or the seller’s solicitors trust account. There also needs to be a direction to the holder of the retention monies to disburse the retention in accordance with the terms of the retention.
The agreement must be clearly stated what the seller is required to do. For example, if the seller is required to remove rubbish off the block, then the extent of the works must be clearly stated. It must clearly state what the rubbish is and where it is located.
There must be a clear time period within which the seller must attend to the items.
It must be clearly stated what happens to the retention monies in the event that the seller fully complies with the terms of the retention, partially complies or fails to comply.
Thank you to Rebecca Petroff from Sunstate Conveyancing for sharing this fantastic tip with us.
