By Russell Cocks, Solicitor
First published in the Law Institute Journal
The law relating to terms contracts has been governed, principally, by the Sale of Land Act 1962 for half a century. Essentially, the Act seeks to protect consumers from unfair contracts and is an early example of consumer protection.
Traditionally, a terms contract was created if the purchaser was obliged to pay multiple payments before becoming entitled to possession of the property or became entitled to possession of the property before paying all payments due under the contract. This was in contradistinction to a cash contract, where the purchaser pays two payments – deposit and settlement – and becomes entitled to possession upon payment of the second payment. The evils that the Act sought to avoid were the possibility that the purchaser might pay a large part of the purchase price without ever becoming entitled to ownership, or that the vendor might encumber the property further notwithstanding that the purchaser was in possession. The protection offered to the purchaser was the ability to terminate the contract for breach of the Act.
The Act was ‘updated’ in 2008, and I have previously (Law Institute Journal, May and June 2009) written about what appeared to be an error in the legislation relating to the creation of terms contracts by multiple payments. The original words of the Act referred to payments ‘on or before execution of the contract’ and when the purchaser ‘becomes entitled to a transfer’. A terms contract by payments was any contract that had more than one payment between these bookends – that is, more than three payments. The 2008 amendments defined these bookends as ‘deposit’ and ‘final payment’ respectively, fairly innocuous changes in themselves, but an existing definition of deposit from another part of the Act was adopted and ‘deposit’ was defined as ‘a payment made to the vendor … before the purchaser becomes entitled to possession’. The effect of this misdescription of ‘deposit’ was to squeeze the gap between deposit and final payment to nil.
All payments before final payment are, by this definition, deposit and so it is impossible, under this definition, to have a terms contract by multiple payments.
Judicial consideration of these amendments was part of the judgment in the recent case of Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd & Anor [2011] VSC 222. The case related to a $6.5 million land purchase. The purchaser defaulted and the vendor sought to forfeit the deposit. The purchaser purported to terminate the contract and claim a refund of the deposit on the basis of a breach of the terms contract requirements. There were, arguably, four payments due under the contract, which had undoubtedly begun as a cash contract with just two payments but which was varied to require a deposit in two parts, potentially in fact two payments, an ‘interim payment’ and, finally, the ‘balance’.
The potentially offensive payment, the interim payment, was in fact contingent upon a rezoning prior to settlement, which did not happen and so that payment became due upon settlement. The contingent obligation may well have been sufficient to constitute a breach under the ‘old’ terms contract condition; however the purchaser faced the difficulty of the ‘new’ definition of ‘deposit’ in the Act. If deposit includes all payments made ‘before the purchaser becomes entitled to possession’, then there were no payments other than the (expanded) deposit and the ‘balance’ and therefore no breach of the Act. The vendor relied upon this interpretation of the amendments to support the argument that the interim payment was either deposit or, as it happened, due at settlement and therefore not in breach of the Act.
The purchaser argued that this could not have been the intention of parliament. To so interpret the section was to accept that parliament had abandoned half a century of consumer protection on a whim, without debate. The purchaser argued that words requiring payment of the ‘deposit’ to be contemporaneous with signing of the contract (as had existed prior to the amendment) ought be implied into the contract, with the result that the interim payment did indeed offend the Act and the purchaser was entitled to terminate the contract.
Dixon J. rejected this argument and concluded that the plain words of the section were not ambiguous and the purchaser was not entitled to avoid, describing the purchaser’s arguments as ‘the desperate ex post facto search for a ground to avoid a major commercial obligation’. Be that as it may, a purchaser is nevertheless entitled to rely on any failure by the vendor to comply with its statutory obligations and the fact that the purchaser’s argument is based on a technical breach should not in any way lessen the validity of that argument.
In any event, the discussion was somewhat academic. The purchaser had purported to terminate after 4 pm on the settlement day, by which time the purchaser was in default and had thereby lost the right to terminate.
It would appear that we will have to wait for parliament to recognise and correct this obvious error.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.