The Payment Puzzle – A Guide To Instalment Contracts
Suppose you have chosen to sell your property and are looking for an easy and quick sale. After some time, a buyer comes forward with an offer that is not quite what you were hoping for but offers an upfront deposit of 25% of the purchase price to demonstrate their enthusiasm and provide you with greater security. Content with the deal and not wanting to wait for property prices to decline any further, you accept their offer and enter into a contract for the sale of the property. However, in doing so, you may have inadvertently entered into an instalment contract. In this article, our commercial law team examines what this means and why instalment contracts can be problematic for sellers.
WHAT IS AN INSTALMENT CONTRACT?
Under section 71 of the Property Law Act 1974 (QLD) (‘PLA’), an instalment contract is defined as “an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments”.
In simple terms, it is a contract where the buyer is obligated to make a payment or payments (‘Instalment’), other than the deposit, before the property title is transferred into their name.
While this concept may seem relatively straightforward, an issue arises when considering the definition of an Instalment under the PLA. As a result, contracts that are not intended to be instalment contracts may be treated as such and a simple residential sale may become much more complicated.
TRIGGERS – WHAT TO LOOK OUT FOR IN Instalment Contracts
As noted in the definition, an instalment contract is a contract that requires payment of Instalments. Accordingly, any payment required by the contract (except the deposit) will mean a contract is an instalment contract. These payments may be for several reasons, and an example of an Instalment would be a special condition in a contract requiring the buyer to pay $1,000 before settlement.
Conversely, some deposits may not be considered ‘deposits’ under the PLA and be labelled an Instalment. The PLA states that a deposit cannot:
(a) exceed 10% of the purchase price of the property (or 20% for an off-the-plan property); or
(b) be retained by the buyer in the event of a breach or default by the buyer.
Therefore, to avoid entering into an instalment contract involuntarily, care must be taken to ensure:
- the deposit always stays below 10% of the purchase price or the relevant percentage;
- no other payments besides the deposit are due and payable; and
- the deposit is refundable if the contract is terminated due to the seller’s breach.
CONSEQUENCES OF Instalment Contracts – IMPACTS FOR BUYERS AND SELLERS
Instalment contracts impose several restrictions on the rights of sellers while simultaneously affording greater protection to buyers. The four (4) main impacts of instalment contracts are as follows:
Limited Termination Rights – s 72 PLA
Ordinarily, time is of the essence under a standard REIQ contract. This means that timing is essential to the performance of the contract and that the buyer must strictly perform their obligations within the specified time, or the seller can terminate immediately. However, under an instalment contract, this is not necessarily the case.
Under an instalment contract, there is no immediate right to termination where the buyer fails to pay an Instalment on time, and the seller’s rights are limited to giving notice of the breach. Such notice must be in the approved form and provide the buyer with 30 days to make payment of any Instalment overdue and payable. Should the buyer fail to make payment and rectify the breach within this time, then and only then can the seller terminate the contract or take any other action.
Restriction on Mortgages – s 73 PLA
A seller’s ability to sell or mortgage the land comprising the property is also restricted where a contract is an instalment contract. Accordingly, a seller can only sell or mortgage the land with the buyer’s consent.
If the seller does not obtain the buyer’s consent or goes ahead without consent, then:
(a) the seller will be in breach
(b) the instalment contract is voidable, and the buyer can terminate
(c) the seller will be guilty of an offence and liable for a fine*
*Currently, the maximum fine that can be imposed on a seller who breaches the above is $1,287.00 (9 penalty units).
Right to Caveat – s 74 PLA
Instalment contracts provide the buyer with the right to lodge a non-lapsing caveat against the land and over the property. The effect of this is that registration of any other instrument affecting the land is barred until the caveat is removed.
A caveat lodged under an instalment contract can only be removed by:
(a) the buyer consenting to its removal
(b) the instalment contract being rescinded or discharged by performance
(c) the court or the registrar being satisfied with any other ground which justifies its removal
Given the limited ways a caveat can be removed, it may be the case that a seller has to pay out the buyer to achieve removal.
Demand for a Conveyance – s75 PLA
Finally, and perhaps most interestingly, an instalment contract gives the buyer the right to call on and demand that a conveyance takes place once they have paid over one-third of the purchase price (provided they are not in breach). Conversely, the seller may also give notice requiring the buyer to accept a conveyance once this amount of the purchase price has been paid.
In consideration of a conveyance, the buyer must execute a mortgage in favour of the seller to secure the balance of the purchase price. By doing so, the seller essentially becomes the mortgagee for the buyer, and the property will not transfer to the buyer’s name until all remaining Instalments and the balance purchase price is repaid.
RAMSDEN LAWYERS – HOW WE CAN ASSIST WITH Instalment Contracts
While instalment contracts impose several restrictions on sellers, they can also be a useful tool for buyers looking to protect their rights. Developers should be especially cautious with this type of contract as it can substantially impede their ability to deal with the land and obtain finance.
If you are seeking legal advice or assistance with your contract or instalment contract, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.
The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.