By Russell Cocks, Solicitor
First published in the Law Institute Journal
Terms contracts are relatively rare, but still common enough to create difficulties. In short, they may arise in one of two ways:
- by payment, where the contract price is spread over a number of payments, in contradistinction to a cash contract that has just two payments, being a deposit at the start and a final payment at the end; or
- by possession, where the purchaser is entitled to possession of the property before final payment, in contradistinction to a cash contract where possession is given only upon final payment.
Many terms contracts exhibit both of these characteristics, with the typical terms contract providing for the payment of a deposit and then a number of payments over a period of time, with the purchaser taking possession shortly after initial payment and well before final payment. But a contract will be a terms contract if either of the criteria is satisfied and may thus be a terms contract on the basis of payment or possession.
Terms contracts are not intrinsically bad. They just create additional obligations that must be fulfilled at the time of contract and face the risk that, if those obligations are not fulfilled, the contract might be voidable. This may have unexpected consequences for the vendor who, in such circumstances, would be entitled to look to his or her solicitor for compensation for any loss. These additional obligations principally arise in relation to selling a property under a terms contract when the property is, at the time of contract, subject to a mortgage. It is therefore important to be able to identify a terms contract and here resort must be had to the Sale of Land Act.
Until recently the terms contract provisions were contained in ss 2 to 7 of the Act.
Inexplicably (and without any consultation with the profession) the government took upon itself the task of reviewing those provisions and last year introduced legislation (Consumer Credit (Victoria) and other Acts Amendment Act 2008) that repealed those terms contract provisions and inserted new, similar provisions at s 29A of the Act.
Most of the new sections are a simple ‘pick up and put down’ transfer from the start of the Act to the middle of the Act, but someone took the opportunity to ‘clean up’ some of the provisions. Gender neutrality has resulted in ‘he’ becoming ‘the purchaser’ or ‘a person’. The definition of terms contract has been moved from the definition section (s 2) to a substantive section (s 29A), headed ‘What is a terms contract?’
The old (s 2) definition of a terms contract was in two parts: s 2(1) and 2(4). Section 2(1)(b) related to creating a terms contract by early possession and, apart from changing ‘he’ to ‘the purchaser’ in s 29A(1)(b), nothing has changed. But s 2(1)(a), which relates to creating a terms contract by payments, relied on a further definition in s 2(4); and the new section 29A(1)(a) has taken it upon itself to merge these two parts of the definition, with perhaps unforeseen consequences.
The ‘old’ definition of a terms contract was where a contract obliged the purchaser to make two or more payments ‘after the execution of the contract and before becoming entitled to a transfer’, excluding any payment ‘on or before the execution of the contract’ and any payment upon ‘which he becomes entitled to a transfer’.
The ‘new’ definition provides that a terms contract is a contract ‘under which the purchaser is obliged to make 2 or more payments (other than a deposit or final payment) to the vendor after the execution of the contract and before the purchaser is entitled to a transfer’. The concepts of ‘deposit’ and ‘final payment’ have been incorporated directly into the definition. But what do these new terms ‘deposit’ and ‘final payment’ mean? Section 29A(2) defines ‘final payment’ (somewhat circuitously) as being ‘a payment on the making of which the purchaser becomes entitled to a …transfer’, and ‘deposit’ is defined as ‘a payment made to the vendor … before the purchaser becomes entitled to possession’. The problem is that according to this definition all payments made before the final payment are ‘deposit’, and so there can never be ‘2 or more payments (other than a deposit or final payment)’ as all payments are either deposit or final payment.
How this juggling of the terms contract provisions could have gained priority over desperately needed legislative reform, such as s 27 and owner-builders, is a mystery. That it was done without consultation with the profession and without a proper understanding of the consequences is damning.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.