Instalment Contracts – the hidden menace to property Sellers

March 10, 2020

Have you ever wondered why it is commonly accepted that a Deposit on a property contract should never exceed 10%* of the Purchase Price?

The answer is: to prevent the contract from becoming an “instalment contract”.

What is an “instalment contract”?

Sections 71-76 of the Property Law Act (Qld) set out the definitions and consequences of “instalment contracts”.

The Act seeks to prevent unfair land sale contracts where (for example), a Buyer might have paid 90% of the purchase price in instalments pre-settlement, only to fail to make the last payment on time and lose both the property and his/her money already paid.

Unfortunately, the consequences of “instalment contracts” can sometimes reach into regular property sales by stealth.

What are the consequences of my sale contract being deemed an “instalment contract”?

In summary:-

(a)        clean/quick termination for Buyer default at settlement is no longer possible;

(b)        the Buyer can terminate if you mortgage the land pre-settlement without Buyer consent;

(c)        the Buyer gains the right to be transferred the property after paying one-third of the Purchase Price (and the Seller becomes their bank/mortgagee for the balance of the Purchase Price owing).

(d)        other specific Buyer rights to lodge a caveat on the land and obtain signed transfers in escrow.

Consequences (a)-(c) are sufficiently terrifying that most well-informed Sellers will deliberately prevent an “instalment contract” breaking out.

Likewise, a non-performing Buyer intent on mischief will take advantage of any available technicality to thwart the Seller.

What are the triggers to watch out for?

  1. Deposit greater than 10%*

This is an easy one – but in negotiations watch out for the “maxed-out” Deposit remaining static while the price comes down. For example a $500,000 Purchase Price negotiated down to $495,000 while the Deposit remains untouched at $50,000.

  1. Any other pre-settlement payments

This is the sneaky element. Section 71 defines “Instalment Contract” as follows (emphasis added):-

instalment contract means an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments.”

In other words, if your Contract requires a 5% Deposit, BUT the Buyer must also pay the Seller an additional $1.00 before settlement for some other reason – that is an instalment contract!

It is usually best to play it safe and have all non-Deposit payments payable at settlement (not before).

For more complex contracts and similar documents (such as Options) this “payments before settlement” issue needs to be handled with particular care.

If you have concerns that your proposed contract may be at risk of becoming an instalment contract, or for assistance with property matters generally, please contact our Property team on (07) 3392 0099.

[*up to 20% for “off the plan” sales]

Written by Julian Creagh, Associate, Wilson Lawyers.

Important Notice: This publication is provided as general information only and should not be considered or relied upon as legal advice. The law is complex and you should always obtain specific legal advice about your circumstances from a qualified legal practitioner. If you require legal advice, please contact our office to see how we can help.