Deposit Bond or Guarantees

[Procon]

What is PEXA's proposed workaround for Bank Guarantees and Deposit Bonds post 1 October 2018?

Are we entitled to not settle by PEXA despite all instruments being required to settle electronically because a bank guarantee or deposit bond has been accepted?

[TheDoctor]

Great question.

I tried to explain this dilemma on these boards once before but I don't think PEXA really understand the problem.

I can't find that post now.

From memory they said this was no a valid exclusion reason.

Basically:

• Incoming Mortgagee will not hand over funds unless they have their Bank Guarantee handed back.
• Vendor will not hand back the Bank Guarantee without their settlement funds.
• This cannot be accommodated electronically.

[Procon]

Exactly. I have tried speaking with Joe James at Land Registry who also had no idea what I was talking about and dismissed it as an issue that they need to be considering, passing the problem back to PEXA claiming that they must have a solution as they have confirmed they can accommodate the mandate of 1 October 2018.

I cannot see how Deposit Bonds or Guarantees will work after the mandate unless an employee of the provider/bank physically attends the location of where the bond/guarantee is being held and watches the settlement take place electronically with the Vendor's representative. Ludicrous.

Have found one other post with a similar question and note no response from PEXA on it. I'd be interested to see what PEXA have to say along with how other members have circumvented this issue as I have an off-the-plan matter coming up for registration where a deposit guarantee  has been given by my purchaser client.

[Accounts]

We act as agents for SAI on settlements.   We have just been advised that we will be doing "Hybrid Settlements" - this means that we will collect the paper guarantees - YEP 2 settlements - one on PEXA and us collecting the documents !!

[TheDoctor]

Hi @Accounts

As an Incoming Mortgagee, will you release your funds before you hold your original Bankers Guarantee?

In your example (simultaneous physical & PEXA settlements) will you sign the FSS before the physical settlement is completed?

Or, will the Vendor hand over the Bankers Guarantee before they receive their funds (PEXA Disbursement complete).

I understand that the Bankers Guarantee is not an LTO concern.

PEXA/LTO need to understand that sometimes settlements involve more than just the registrable documents and the sale/purchase funds.

To expect Participants to have to perform two settlements for the one sale/purchase seems ludicrous.

Especially when that arrangement is likely to lead to, by design, failed settlements.

[Ames]

Hi all

this is certainly something we've thought about in the context of developments and the Projects platform. We've also already worked on a solution with the banks as part of the refinance compliance dates, over 18 months ago.

In relation to developments, our previous advice has been:

Where a bank guarantee has been delivered in lieu of a deposit, it must continue to be dealt with outside of PEXA. Unlike a paper settlement, the original bank guarantee cannot be returned at the settlement table. Instead, pre-settlement, the Vendor should ensure the original bank guarantee is held by the appropriate stakeholder (e.g. the vendor’s practitioner). Post-settlement, the original guarantee should be returned to the Purchaser or their representative.

If the Purchaser requires secured monies (or assets) to be released in order to be able to settle, then as with paper, the Purchaser must, before settlement:

• make arrangements to provide a replacement deposit into trust;
• collect the original bank guarantee from the vendor;
• arrange for it to be returned to the bank and the funds or assets underpinning the guarantee to become unsecured; and
• complete arrangements for settlement including necessary finance.

In summary, the desired outcome is that the bank guarantee should be "settled" with the bank before the PEXA settlement. 

Ames

[TheDoctor]

Hi @Ames, thanks for responding.

The issue is that Vendors, in general, will not hand over the Bankers Guarantee until they have received their funds. This is understandable.

The Incoming Mortgagee will not provide the funds unless they have their Bankers Guarantee returned. This is also understandable.

So, these two actions (return of Bankers Guarantee & sale/purchase settlement) must be simultaneous. Neither action can occur prior to the other action.

This cannot occur as both physical & electronic and still be simultaneous.

It is easy to say that the Purchaser must arrange an alternate solution, to enable hand over of the Bankers Guarantee, prior to the financial settlement. But in practice, the Bankers Guarantee exists because the Purchaser does not have an alternate solution.

If we are forced to have a separate physical settlement for the Bankers Guarantee, why does this not fall under the acceptable exemption category of being linked to a non-PEXA settlement?

[Procon]

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Exactly. Most Purchasers generally do not have 10% of the purchase price just lying around in their bank account in addition to the 10% already secured by a Bank Guarantee in order to exchange the bank guarantee prior to settlement just to ensure it is able to be settled electronically (wouldn't that almost defeat the purpose of the guarantee in the first place?).  And if they did have those funds, they are generally already required to complete the purchase. How is a purchaser supposed to find an additional 10% in cash funds to settle the bank guarantee with the bank prior to settlement other than through another loan (with what security?) or borrowing from a friend or family member?

That answer does not give me any confidence in dealing with Bank Guarantees or Deposit Bonds on future transactions and I cannot see how they can be accepted in a property transaction going forward. 

They absolutely should fall under the category of exceptional circumstances to an electronic transaction and the fact that Land Registry are washing their hands of it is unacceptable in my opinion.

@TheDoctor wrote:

It is easy to say that the Purchaser must arrange an alternate solution, to enable hand over of the Bankers Guarantee, prior to the financial settlement. But in practice, the Bankers Guarantee exists because the Purchaser does not have an alternate solution.

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[Kate_Camilleri]

Currently for a Refinance transaction where a Bank Guarantee is involved and it can not be swapped prior to settlement, Land Use Victoria will accept this transaction in paper providing the cover sheet stating the reason is provided with the paper documents. This process/cover sheet is currently under review in the industry working group for applicability to the transfer mandate on 1 October. More information will be posted soon. 

[Bre]

Hi @Kate_Camilleri,

Is there any further developments to this query? I have read the latest Land Vic Bulletin which provides the cover sheet for a request for a paper lodgement, however nothing on the form provides for where a Bank Guarantee or deposit bond have been included in the settlement. My direct request with the PEXA support centre has been marked as "resolved" and directs me to this thread, however there is no resolution here for settlements involving transfers.