An “Instalment Contract” is an Agreement for the purchase of any property where the Buyer pays over the purchase price by gradual increments without obtaining a transfer of title from the seller’s name into the buyer’s name until the last payment is made.

These types of agreements are covered by special laws which can dramatically change the relationship between Buyer and Seller from that situation under a normal land sales contract.  Here are some of the main features:

• The contract is 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.

• Section 73 of the Property Law Act prohibits the Seller from selling or mortgaging the land.  If the Seller does mortgage the land to any other person or company without the buyer’s consent, then 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 against the land which will forbid the registration of any instrument affecting the land until completion of the Instalment Contract.

• Section 75 of the Property Law Act gives to the Buyer the right to demand a conveyance of the land from the Seller to the Buyer once the Buyer has paid one-third of the purchase price and is 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 go out 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.

• 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, the Seller is 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.

Now we will cover what happens if the buyer or seller defaults under the contract and some traps and pitfalls to watch out for.

• 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 this time, the seller is obligated to continue with the contract as if no breach had ever occurred.  If the breach however relates to the payment of the required deposit then this is fatal for the buyer and the seller has an unrestricted right of termination.
• If the seller contravenes the contract and fails to transfer title of the property to the buyer, then the buyer can force the transfer by Court application and the seller is also liable to a fine of up to $900.00. Since Court applications are time consuming and costly and the potential fine for the seller is not particularly large, it is therefore strongly recommended that caveats are lodged over the affected property so as to stop the seller from doing anything with the property until the Court application can be determined.

• Traps and pitfalls to watch out for:

–        Stamp Duty:  Even though full payment of the purchase price and the transfer of the property might not occur for several years, full stamp duty payable on the full purchase price is payable within 30 days of the contract being signed.  Typically, the contract will state that the buyer is to pay the stamp duty over to the seller as part of the instalments to give the seller the right of termination if the buyer defaults.

–        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 be left in a position to 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.

–        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 on the contract.

–        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.

–    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 settlement.  The contract therefore should ideally delay the possession date for at least three – four weeks and contain a special “due diligence” clause so as to allow the buyer time to conduct all of the normal searches before taking occupancy of the property, giving to the buyer rights of termination if those searches turn up unsatisfactory results.

–    Equitable Charges: Although the seller is prohibited from putting a mortgage over 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 communicate to the outside world that the Instalment Contract exists.

Jenny Zande is a Solicitor of Zande Law Solicitors, with 20 years experience in practice.  Jenny has extensive experience in conveyancing matters. We also acknowledge Matt Hannam from our office as co-author. Please feel free to review our firm and staff profiles at www.zandelaw.com.au

The information in this article is merely a guide and is not a full explanation of the law.  This firm cannot take responsibility for any action readers take based on this information.  When making decisions that could affect your legal rights, please contact us for professional advice.