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Instalment Contracts – What to Look Out For

What is an Instalment Contract?

An “Instalment Contract” is a contract for sale of land in terms of which the Buyer is bound to make payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments.1

Buyers and sellers alike need to be aware that an instalment contract can be entered into unknowingly, for example a contract will be deemed to become an instalment contract if it obligates the buyer to pay more than 10% of the purchase price without an immediate conveyance of title. An instalment contract therefore may be an inadvertent result of, for example:

  • a buyer being required to pay certain amounts under the terms of the contract (in addition to the standard deposit) prior to settlement; or
  • a buyer is given a rebate of the purchase price before settlement; this arrangement may be interpreted as a reduction of the purchase price, which could cause the deposit paid to exceed 10% of the purchase price . 2

The decision of the Supreme Court of Queensland, in Watpac Developments Pty Ltd v Latrobe King Commercial Pty Ltd &Anor [2011] QSC 3923 , at least partially confirms that a released deposit will not necessarily by itself constitute an instalment contract. However it is worth noting that the outcome in this case may well have been different if for example, the money paid by the buyer was specifically described as non-refundable (or anything other than a “deposit”).

It is clear that instalment contracts can lead to a number of unintended consequences and developers particularly need to ensure specialist advice when drafting rebate clauses to ensure that any rebate will not take effect until settlement rather than immediately upon payment of the deposit (or reducing the deposit to factor in the rebate so as not to take in excess of 10% ).4

Statutory Protection for a buyer under an Instalment Contract

It is prudent to be aware that instalment contracts are governed by special laws that can drastically change the relationship between buyer and seller from that situation under a normal land sales contract .5

The Property Law Act 1974 (QLD) (the Property Law Act) provides a number of statutory protections for a buyer under an instalment contract, for example:

  • Section 73 of the Property Law Act prohibits the seller from selling or mortgaging the property. If the seller does mortgage the property in breach of this provision (without the buyer’s consent), the contract is voidable and the seller is guilty of an offence for which fines can be imposed.
  • Section 74 of the Property Law Act gives the buyer the right to lodge a caveat over the property. This type of caveat is deemed to be lodged with the consent of the registered owner and is therefore non-lapsing; it will prevent the registration of any instrument affecting the property until completion of the instalment contract. This can present complications for developers in relation to off the plan contracts where developers may need to use the land as security to fund the development.
  • Section 75 of the Act provides that a buyer who is not in default under an instalment contract may at any time after an amount equal to one-third of the purchase price has been paid provide the seller written notice requiring the seller to convey the land to the buyer conditionally upon the buyer at the same time executing a mortgage in favour of the seller or such other person as the seller may specify to secure payment of all money which would afterwards but for the execution of such mortgage have become payable by the buyer under the instalment contract. 6
  • Under Section 75(2) of the Act a seller who is not in default under an instalment contract may at any time after an amount equal to one-third of the purchase price has been paid serve a reciprocal written notice on the buyer requiring the buyer to accept conveyance of the property upon the buyer at the simultaneously executing a mortgage, or (if it is reasonable to so require) mortgages, in favour of the seller or such other person or persons as the seller may specify to secure payment of all money which would afterwards but for the execution of such mortgage or mortgages have become payable by the buyer under the instalment contract. 7

As outlined above instalment contracts can overcomplicate the contractual relationship for sellers and accordingly agents should be careful when specifying the deposit in contracts and advise sellers of the implications if a deposit in excess of 10% is accepted.

What are the consequences of a buyer or seller default under an Instalment Contract?

Buyer Default

The consequences of the breach will depend on the nature of the default. If the breach is a failure to pay the deposit the seller has an unrestricted right of termination. If the default is in relation to another sum of money due under the contract (e.g. payment of insurances, rates or a further instalment) the seller must provide the buyer 30 days’ notice of an intention to terminate the contract in the approved form. If the buyer rectifies the breach within the cure period, the contract remains on foot.

Seller Default

If the seller fails to transfer title of the property to the buyer, the buyer can seek a court application to force the transfer and the seller will be liable for a fine.

Considerations for Parties to an Instalment Contract

Stamp Duty

Upfront payment of stamp duty (within 30 days of the date of the contract) is required.

Due Diligence and Search Results

A standard REIQ contract provides the buyer a right to conduct due diligence which if the relevant searches reveal issues with the property may give rights to either terminate the contract or demand financial compensation from the seller. In a standard REIQ contract such rights remain active until the conveyance is completed. In an Instalment contract however, these rights are extinguished immediately upon the buyer taking possession of the property.

Equitable Interest in Property

A caveat over the property is critical to protect the buyer and notify the public at large that the instalment contract is in place because although a seller is prohibited from mortgaging the property the seller could, in practice, still charge the property with some form of equitable charge.

Title

Title to the property remains with the seller as owner until the Instalment contract is fully paid out. The seller therefore has “security’ for the payment of the purchase price.

Consent to Mortgages

A majority of vendor finance arrangements involve an existing mortgage over the subject property, and the buyer and seller usually contract for the mortgage to remain in place for the duration of the instalment contract. If there is an existing mortgage the seller must make full disclosure and the buyer must make contractual arrangements for the instalments to be paid directly to the mortgaging bank to ensure that that the seller isn’t simply pocketing the money and defaults under the terms of the mortgage.

Bankruptcy

Provided the buyer purchased the property at arms length on commercial terms (ie. at market value), if the seller goes bankrupt it is still possible for the buyer to enforce the contract against the trustee appointed to administer the bankruptcy.

Capital Gains Tax

Capital Gains Tax is widely thought to be assessable at the date of entering into an instalment contract rather than the date of receipt of the instalments (even in circumstances where the final instalment may not be due for years).

Consumer Credit Code/Interest

Due to the payment of interest in vendor finance arrangements such as instalment contracts a buyer will have all the protection that the National Consumer Credit Code provides and the seller bears the burden of compliance with the National Consumer Credit Code. 9

Usher Levi has extensive experience in the Real Estate sector and can assist you in ensuring a contract being entered into does not have the unintended consequence of being deemed an instalment contract or if you plan on entering into an instalment contract making sure you are adequately protected by way of appropriately worded special conditions.

Please note the information contained in this article is merely a guide and does not purport to provide a full explanation of the law or provide legal advice. This firm cannot take responsibility for any action readers take based on this information. We would be happy to assist you with any property related issues you may have, please get in touch via [email protected] or telephone our Brisbane office on (07) 3087 3463 or Sunshine Coast office on (07) 5413 9270 and one of our experienced property lawyers will respond to you.

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1Defined by the Property Law Act
2Moor v BHW Projects Pty Ltd as trustee [2004] QSC 060 considered the effect of rebate clauses in creating instalment contracts.
3Watpac Developments Pty Ltd v Latrobe King Commercial Pty Ltd & Anor [2011] QSC 392
4Moor v BHW Projects Pty Ltd as trustee [2004] QSC 060 considered the effect of rebate clauses in creating instalment contracts.
5Dixon, William M. (2008) Conveyancing Law update. In Queensland Law Society North Queensland Regional Symposium, 17, 18 October 2008, Palm Cove. (unpublished).
6Property Law Act 1974 section 75(1).
7Property Law Act 1974 section 75(2).
8http://findarticles.com/p/articles/mi_qa3736/is_199801/ai_n8759824/pg_19/
9Refer to section 10 of the National Consumer Credit Code, which is part of the National Consumer Credit Protection Act, 2009 (Cth).