An instalment contract is a sale of land contract whereby the property is payed for in instalments across time. The title of the property does not transfer to the purchaser until the final instalment is paid. This type of contract differs from a typical sale of land contract which generally consists of a refundable deposit of up to 10% of the purchase price and the remainder of the purchase price being paid at settlement.
The purchaser’s risks in an instalment contract
In a typical sale of land, the parties – particularly the buyer – will not wish for their contract to be an instalment contract. The major risks for purchasers in an instalment contract stem from the fact that they do not have title to the land until they have completed the instalments. If the vendor becomes bankrupt before the instalments are completed, then the purchaser’s claim to the land will be subject to any pre-existing charges and mortgages over the land. In addition, instalments are non-refundable and therefore a subsequent breach of payment obligations could prevent the purchaser from obtaining not only the property but also the money they have already paid towards the property.
How a regular contract could become an instalment contract
A sale of land contract may inadvertently become an instalment contract where the payments made by the purchaser prior to settlement are no longer considered to be a ‘deposit’ under the Property Law Act. A payment prior to settlement will not be considered a deposit if it is greater than 10% of the purchase price or if it is either expressly or impliedly non-refundable.
To prevent a contract from unintentionally becoming an instalment contract, it is important to ensure that no more than 10% of the purchase price is paid prior to settlement. It is equally important to ensure that the deposit is refundable. The REIQ standard form contract states that the deposit is refundable and stipulates who is entitled to the deposit if the contract terminates for any reason. Parties should avoid inserting special conditions that contradict these standard terms or they risk the contract becoming an instalment contract.
Protections under the Property Law Act
Given the potential risks discussed above, there are a number of legislative protections afforded to purchasers in instalment contracts. Firstly, the seller is unable to mortgage the property without the purchaser’s permission. This prevents the seller from entering into a mortgage, thereby preventing awkwardness or loss to the purchaser if the vendor breaches a mortgage and the bank seizes the property, leaving the purchaser without a remedy.
The purchaser is also entitled (and often encouraged) to lodge a caveat over the property once they have entered into the contract. Having a caveat prevents others from registering an interest on the property and therefore adds a layer of protection from the property being sold while the contract is on foot.
Purchasers in instalment contracts also have the option of demanding conveyance (transfer of title) upon paying a third of the purchase price, in return for the seller obtaining a mortgage over the remaining two thirds of the property. This option can also be exercised by the seller.
Finally, purchasers are afforded a 30 day notice of termination from the seller in the event that the purchaser defaults on an instalment, with the exception of the initial instalment. If the purchaser rectifies their breach within 30 days, then the contract remains on foot as if no breach occurred.
*DANGER* Common issues With Instalment Contracts
What’s an instalment contract?
An instalment contract is where the purchaser pays via increments and does not usually obtain title until the final payment is made. The Property Law Act 1974 (Qld) makes special provision for instalments contracts and in many respects treats them differently to standard residential conveyances.
Identifying an instalment contract
If the purchaser is obligated to pay greater than 10% (or 20% for a proposed lot off the plan)[1] of the purchase price without receiving transfer of title then the contract is an instalment contract.
Important features include;
- The vendor cannot mortgage or sell the land
- The purchaser can lodge a caveat to protect their interest in the land
- The vendor cannot rescind the contract for the purchaser’s default in a payment unless a 30-day notice has been issued to the purchaser
- After one-third of the purchase price has been paid, either party can demand a conveyance of title from the other (subject to the purchaser granting a mortgage in favour of the vendor).
- The party seeking the conveyance can’t be in default.
Default
As stated above, where the purchaser fails to meet a payment the vendor can issue a notice giving the purchaser 30 days to rectify the breach. Two common mistakes arise following this. First, vendors often give the purchaser notice requiring payment within 7 or 14 days rather than the statutory requirement of 30 days. Second, vendors often misunderstand their rights and will purport to terminate immediately after the purchaser fails to make the payment. This actually results in a breach by the vendor.
Vendor’s reluctance to hand over title
Vendors are often reluctant to hand over title to the purchaser. Indeed they may not be able to do so if there is a mortgage that hasn’t or can’t be paid out. A purchaser faced with a particularly difficult vendor can make an application to the Court to force the vendor to transfer title to the purchaser. This is very costly and the vendor can be fined upwards of $900.00. We always recommend purchasers lodge a caveat to stop the vendor dealing with the property at all until the Court application has settled.
Lodge a caveat
Although a vendor cannot grant a mortgage to a third party, they can grant other kinds of charges (we stress the importance of proper contract drafting here). Purchasers would lodge a caveat communicate to the outside world that they have a legal interest in the property. This defeats most claims from third parties that the vendor granted them some other form of interest.
Stamp duty
Although final payment of the purchase moneys may be years away, stamp duty is due 30 days from the contract date. Significant penalty interest will accrue from this date until payment.
Existing mortgage over the lot
The purchaser should specify in the contract that instalment payments be made to the mortgagee (bank). The consequence of not doing so is that upon final payment being made the vendor’s mortgage may not be paid out and the funds dissipated preventing settlement.
Interest charges
A term in a contract providing that interest is payable where the purchaser fails to meet an instalment payment can be held invalid if not properly drafted. If the right to charge interest arises because the purchaser has granted a mortgage to the vendor, consumer credit legislation can step in to negate that right. Proper contractual drafting is absolutely paramount to ensure these rights are maintained.
Bankruptcy
If the vendor becomes bankrupt or enters external administration (for companies) the purchaser can enforce the contract against the vendor’s trustee, administrator or liquidator. However, the trustee can void the transaction where the purchase price was well below market value.
Taking possession and due diligence
Purchasers typically lose their right to conduct searches and seek compensation or terminate upon taking possession. The contract should take this into account by delaying possession for a few weeks so the purchaser can do their due diligence.
