Instalment Contracts - What to Look Out For
What is an Instalment Contract?
An “Instalment Contract” is an agreement for the purchase of any property where the buyer pays the purchase price by gradual increments without obtaining a transfer of title into the buyer’s name until the final payment is made.
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 unintended consequence 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, particularly in circumstances where the amount paid under the contract exceeds market value; 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.
Whilst the decision of the Supreme Court of Queensland, in Watpac Developments Pty Ltd v Latrobe King Commercial Pty Ltd &Anor  QSC 392, at least partially confirms that a released deposit will not necessarily by itself constitute an instalment contract, legal advice should always be sought when drafting special conditions or negotiating amendments to prevent such unintended consequences. The result in this case may well have been different if (for example, the amounts paid by the buyer were specifically described as non-refundable, or they were described as anything other than a “deposit”.
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.
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 preventthe 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 Property Law Act gives to the buyer the right to demand a conveyance of the property once the buyer has paid one-third of the purchase price provided they are not otherwise in default under the contract. Simultaneously with the conveyance, the seller is entitled to demand that the buyer grant a mortgage back over the property for the remaining two-thirds of the price and the obligations concerning the payment of the remaining two-thirds will continue to be governed by the contract. Therefore if the contract provided for equal instalments to be paid over many years, then those instalments would continue to be paid by the buyer to the seller as usual, the only difference being that the buyer is now the owner of the property not the seller. In this scenario the amount that is left outstanding under the instalment contract must effectively be lent by seller to the buyer and secured by a mortgage over the land. This presents difficulty when there is already a mortgage over the land as the seller’s bank will require the existing mortgage to be paid out before the transfer takes place.
- Under Section 75(2) of the Property Law Act the seller has an identical right to demand that the Buyer take a conveyance of the property and a mortgage back. However, if the seller requires the conveyance, they are obligated to advance to the buyer an amount equal to the transfer duty imposed under the Duties Act and an amount equal to legal costs payable by the buyer in preparation, execution and registration of the conveyance of the land to the buyer. This advance however, would then be added to the contract sum and would form part of the secured mortgage debt to be repaid to the seller.
As outlined above instalment contracts can create unnecessary problems for sellers and accordingly agents should take care 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: If the contract obligates the buyer to make any of the required instalment payments or other payments of insurances or rates on the property and the buyer fails to do so, then the seller must first give 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 as if no breach had ever occurred. If the breach however relates to the payment of the required deposit the seller has an unrestricted right of termination.
- Seller Default: If the seller contravenes the contract and fails to transfer title of the property to the buyer, the buyer can force the transfer by Court application and the seller is also liable fora fine.
Considerations for Parties to an Instalment Contract
- Stamp Duty: as a buyer it is important to note that stamp duty payable on the full purchase price is payable within 30 days of the contract being signed (even though the full purchase price may not be paid for several years).
- Search Results: under a typical contract, the buyer has rights to conduct searches, which in some circumstances give rights to either terminate the contract or demand financial compensation from the seller if those searches reveal issues with the property. In a normal contract, these rights remain live up to the date of settlement of the purchase where the property is transferred in exchange for the purchase price. After settlement, these rights are usually extinguished via a process called “merging with the contract”. In an Instalment contract however, these rights “merge with the contract” and are therefore extinguished upon the buyer taking possession of the property not at settlement.
- Equitable Charges: although the seller is prohibited from mortgaging the property, the seller might otherwise effectively charge the property with some other form of equitable charge. A caveat over the property is therefore critical to protect the buyer and notify the public at large that the instalment contract is in place.
- Consent to Mortgages: in many instalment contracts, the seller will already have a mortgage on the property at the time the contract is to be signed and the buyer and seller usually contract for the mortgage to remain in place for the duration of the instalment contract. In these circumstances, it’s integral the seller make formal disclosure to the buyer as to the total borrowings on the mortgage at the time the contract is signed and authorises the buyer to direct the full instalment payment to the seller’s mortgagee bank. This ensures the buyer’s payments are being directed towards paying down the mortgage debt on the property. Without this protection, the buyer could potentially have to pay for the property all over again at the time of final settlement if the seller had been using the buyer’s money for some other purpose.
- Bankruptcy: if the seller goes into bankruptcy then the buyer is usually able to still enforce the contract against the trustee who is now appointed to administer the bankrupt’s affairs. If however, the buyer had obtained the rights to purchase the property on very favourable terms (for example, well under market value) then the trustee in bankruptcy may have the right to void the contract and refund any instalment money already paid.
- Interest Charges: if the instalment contract states that interest is to be charged to the buyer whenever the purchase price remains outstanding from time to time, then this obligation will in all likelihood be captured by the consumer credit legislation. If the contract is not drafted in accordance with the requirements imposed by the legislation, the repercussions for the seller can include fines and loss of rights to claim the interest under the contract.
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@example.com 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.