Danger Ahead: Instalment
Contracts
Common issues with these types of contracts
What’s
an instalment contract?
An instalment contract is where the purchaser pays via
increments and does not usually obtain title until the final payment is made.
The Property Law Act 1974 (Qld) makes
special provision for instalments contracts and in many respects treats them
differently to standard residential conveyances.
Identifying
an instalment contract
If the purchaser is obligated to pay greater than 10% (or
20% for a proposed lot off the plan)[1]
of the purchase price without receiving transfer of title then the contract is
an instalment contract.
Important features include;
ü The vendor
cannot mortgage or sell the land,[2]
ü The
purchaser can lodge a caveat to protect their interest in the land,[3]
ü The
vendor cannot rescind the contract for the purchaser’s default in a payment
unless a 30-day notice has been issued to the purchaser,[4]
ü After
one-third of the purchase price has been paid, either party can demand a
conveyance of title from the other (subject to the purchaser granting a
mortgage in favour of the vendor).[5][6]
The party seeking the conveyance can’t be in default.
Common
issues
Default
As stated above, where the
purchaser fails to meet a payment the vendor can issue a notice giving the
purchaser 30 days to rectify the breach. Two common mistakes arise following
this. First, vendors often give the purchaser notice requiring payment within 7
or 14 days rather than the statutory requirement of 30 days. Second, vendors
often misunderstand their rights and will purport to terminate immediately
after the purchaser fails to make the payment. This actually results in a
breach by the vendor.
Vendor’s reluctance to hand over title
Vendors are often reluctant
to hand over title to the purchaser. Indeed they may not be able to do so if
there is a mortgage that hasn’t or can’t be paid out. A purchaser faced with a particularly
difficult vendor can make an application to the Court to force the vendor to
transfer title to the purchaser. This is very costly and the vendor can be
fined upwards of $900.00. We always recommend purchasers lodge a caveat to stop
the vendor dealing with the property at all until the Court application has
settled.
Lodge a caveat
Although a vendor cannot
grant a mortgage to a third party, they can grant other kinds of charges (we
stress the importance of proper contract drafting here). Purchasers would lodge
a caveat communicate to the outside world that they have a legal interest in
the property. This defeats most claims from third parties that the vendor
granted them some other form of interest.
Stamp duty
Although final payment of
the purchase moneys may be years away, stamp duty is due 30 days from the
contract date. Significant penalty
interest will accrue from this date until payment.
Existing mortgage over the lot
The purchaser should specify
in the contract that instalment payments be made to the mortgagee (bank). The
consequence of not doing so is that upon final payment being made the vendor’s
mortgage may not be paid out and the funds dissipated preventing settlement.
Interest charges
A term in a contract
providing that interest is payable where the purchaser fails to meet an
instalment payment can be held invalid if not properly drafted. If the right to
charge interest arises because the purchaser has granted a mortgage to the
vendor, consumer credit legislation can step in to negate that right. Proper
contractual drafting is absolutely paramount to ensure these rights are
maintained.
Bankruptcy
If the vendor becomes
bankrupt or enters external administration (for companies) the purchaser can
enforce the contract against the vendor’s trustee, administrator or liquidator.
However, the trustee can void the transaction where the purchase price was well
below market value.
Taking possession and due diligence
Purchasers typically lose
their right to conduct searches and seek compensation or terminate upon taking
possession. The contract should take this into account by delaying possession
for a few weeks so the purchaser can do their due diligence.
