By Russell Cocks, Solicitor

 First published in the Law Institute Journal

The Bill, soon to be an Act, that amended SUNSET CLAUSES also introduces other amendments to

Terms Contracts

Terms contracts were an important method of funding property acquisition in the mid-twentieth century when mortgage funding was not as available as it is in the current de-regulated finance market. Many working people were unable to obtain traditional finance and many a family home can be traced to a terms contract paid off over a number of years. The Sale of Land Act was in fact introduced in 1962 to regulate this method of sale, as it always had the potential to facilitate sharp practices.

Essentially, a terms contract allows a purchaser to take possession of the property and pay the purchase price over an extended period of time, such that the property provides both a home and an investment. However, in recent years various sharp operators have been using terms contracts to lure unsuspecting, and generally under-funded, purchasers in outer metropolitan and regional areas into entering into terms contracts that were doomed to fail and cause those purchasers extensive losses. A report by the Consumer Law Action Centre highlighted these dangers and has resulted in s.29EA and subsequent sections prohibiting terms contracts of residential land at a sale price of less than a prescribed amount (expected to be $400,000). Section 55 gives VCAT jurisdiction to review existing terms contracts on fairness grounds.

Rent-to-Buy

A variation on the unfair terms contract is a rent-to-buy arrangement whereby the purchaser takes possession of the property on a rental basis with an option to purchase the property at a future time. Again, these schemes invariably fail as a result of the inability of the purchaser to manage the financial obligations imposed by these arrangements, with the result being substantial loss for the purchaser. Section 29WA prohibits rent-to-buy arrangements, with limited exceptions, and s.56 gives VCAT jurisdiction to review existing arrangements on fairness grounds.

Land Banking

A third scheme that has involved substantial losses for unsuspecting consumers have been land banking schemes, which involve consumers buying a small interest in a large parcel of land purchased by developers with the hope that the land will become suitable for development at some time in the, often distant, future. When sold to the purchaser via an option arrangement the purchaser’s deposit is not protected and there have been many examples of the arrangements collapsing and purchasers losing their investment.

Section 29WH prohibits the sale of options in land banking schemes unless the scheme is a registered scheme or the deposit is held in a trust account and provides that the deposit must be returned to the purchaser if the event triggering the option does not occur within 5 years.

There is no provision for review of current schemes.

Past Use

From time to time a purchaser will complain that the property that has been purchased has “prior history”, such as a sensational death or inappropriate use, such as a drug lab. Such history is in the nature of a quality defect and subject to the principle of caveat emptor, meaning that in the absence of fraud or common law misrepresentation, the purchaser is obliged to proceed with the contract.

Section 12 Sale of Land Act presently creates an offence (but not a purchaser’s right) in relation to false, misleading or deceptive representations and prohibits fraudulent concealment of “material facts”. Section 14 of the amending Act substitutes “knowingly” for “fraudulently” in s.12(d), thereby reducing the onus of proof and making it an offence to knowingly conceal material facts. New section 12A allows the Director of Consumer Affairs Victoria to publish guidelines designed to assist vendors and agents to understand what is meant by “material facts” and presumably such matters as sensational deaths and drug lab use will be included in such guidelines.

However, making non-disclosure by an owner or agent of such matters an offence will not, of itself, give a purchaser a right to rescission or damages. The basic principle of caveat emptor will still apply.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states the Sale of Land Act, notably in relation to terms contracts.