Can you avoid getting caught in an instalment contract?
An instalment contract (called a terms contract in Victoria and Western Australia) is an agreement to purchase a property by paying in increments without obtaining title to the property until the last instalment is paid.
There is a significant risk to the buyer by not having legal title in the event that the seller becomes bankrupt or there was a mortgage from a lender and the lender sold the property. South Australia and New South Wales have passed legislation to ban and severely restrict their use.
In Victoria and the Northern Territory there is legislation that prevents the seller from mortgaging or selling the property once it is under an instalment contract of sale. In the NT, a mortgage given in contravention, the mortgage is voidable by the purchaser any time before completion.
In Queensland and Western Australia, the permission of the buyer (or by leave of the court in WA) is required to add a mortgage. Also in Queensland, a variation of the mortgage that was in existence when the instalment contract was signed must not increase in the principal sum; however additional advances made under an existing contract are acceptable.
Queensland and the Northern Territory provide some additional protection for the buyer, as, other than for the initial installment which is treated as a deposit with time being of the essence, the seller must provide 30 days notice for the buyer to rectify the contract by paying any overdue installment.
Queensland legislation allows for the buyer to lodge a non-lapsing caveat on the property to prevent the registration of any other instrument until the contract is completed. Queensland also gives the buyer a right to have the title transferred once they have paid one-third of the purchase price with the balance taken as a registered mortgage to the seller back over the property. The payments continue on the terms of the instalment contract. This can, however present a problem if there is an existing mortgage on the property. There is a reciprocal right for the seller to demand the same transfer of title and mortgage, but the seller might be obliged to advance the buyer an amount equal to the transfer duty and legal costs payable by the buyer to be added to the principal sum and would be included in the mortgage.
In general, the payment of an amount more than 10% of the purchase price, without conveyance of the title, can make a contract deemed to be an instalment contract even if that was unintended. If a buyer has to pay other amounts in addition the standard deposit prior to settlement the agreement would become an installment contract. Alternatively, if the buyer is given a rebate before settlement, that would cause the deposit to exceed 10% of the purchase price.
Other considerations including the buyer’s right to conduct searches, timing of the payment of transfer duty, repercussions of a buyer’s requirement to pay interest charges if the purchase price remains outstanding and any equitable charge the buyer may have over the property should be carefully considered after receiving sound legal advice for the particular circumstances of your transaction.