Many property purchases in Queensland are relatively straightforward. The standard process is; a deposit is paid by the buyer, outstanding conditions are progressively satisfied, and settlement occurs by way of the buyer paying the balance purchase price to the seller, to which in exchange, the seller then provides legal title to the property.
However, both buyers and sellers need to be aware of the hidden menace within property sales – instalment contracts. These contracts for the sale of land in Queensland can have traps for unwary sellers and buyers alike.
What is an instalment contract?
The Property Law Act 1974 (Qld) (PLA) defines an instalment contract as an executory contract for the sale of land in terms of which the buyer is bound to make a payment or payments (other than a deposit not exceeding 10% of the purchase price) without becoming entitled to receive a conveyance in exchange for the payment or payments.
It is an agreement for the purchase of any Queensland property where the buyer makes incremental payments of the purchase price without obtaining legal title to the property until the final payment is made. While an instalment contract might seem a reasonable proposition, once the agreement is entered into, the rights of the seller and the buyer are significantly altered.
What makes an instalment contract?
Unfortunately, the consequences of instalment contracts can sometimes arise in regular property sales unbeknownst to either party. For example, a contract that obligates the buyer to pay more than 10% of the purchase price, without an immediate conveyance of title, can be deemed to become an instalment contract.
• the terms of a contract require the buyer to pay particular amounts of the purchase price (in addition to the standard deposit) prior to settlement, particularly in circumstances where the amount paid under the contract exceeds market value; or
• a rebate of the purchase price is given to the buyer prior to settlement; this may be interpreted as a reduction of the purchase price, potentially causing the deposit paid to exceed 10% of the purchase price.
Any payment made before settlement may result in the contract being an instalment contract. It should be noted that the Supreme Court of Queensland has partially confirmed that a released deposit will not necessarily by itself constitute an instalment contract (in Watpac Developments Pty Ltd v Latrobe King Commercial Pty Ltd & Anor  QSC 392). However, particular attention must be paid to the wording of special conditions to a contract. Any amounts paid by a buyer that are non-refundable, or described as anything other than a “deposit” may result in the creation of an instalment contract.
Protections for a buyer
After it is determined that a contract is an instalment contract, it can be quite onerous towards the seller. This is primarily due to the special laws governing instalment contracts that can drastically change the relationship between the buyer and seller from those under a normal land sales contract.
Under the Property Law Act, if a contract is an instalment contract the following will apply:
• should the buyer default on a payment, the seller cannot simply terminate and forfeit the deposit amounts paid by the buyer, but is required to give the buyer a 30 day notice to allow the buyer time to rectify their default before terminating the contract.
• The seller is prohibited from selling or mortgaging the property. If the seller mortgages the property without the buyer’s consent, the contract is voidable by the buyer at any time before settlement and the seller is guilty of an office for which fines can be imposed (section 73 PLA)
• The buyer has the right to lodge a caveat over the property, preventing the registration of any instrument affecting the property until completion of the instalment contract. This caveat is deemed to be lodged with the consent of the registered owner and is non-lapsing (section 74 PLA). This may present complications for developers in relation to off the plan contracts where the land is needed as security to fund the development.
• A buyer has the right to demand the seller to convey the property to the buyer once the buyer has paid one-third of the purchase price and they are not otherwise in default under the contract. The seller is entitled to require that the buyer also sign a mortgage in favour to the seller over the property for the remaining two-thirds of the purchase price. The repayments of the remaining two-thirds will continue to be governed by the contract (section 75 PLA). This can be problematic for sellers where there is an existing mortgage over the land, as the seller’s bank will require the existing mortgage to be paid out before the transfer takes place.
• The seller also has the right to demand that the buyer take a conveyance of the property and a mortgage back. However, the seller will be obligated to transfer to the buyer the stamp duty payable under the Duties Act and the buyer’s legal costs for the preparation, execution and registration of the conveyance of the property to the buyer. This advance is added to the contract sum and forms part of the secured mortgage debt to be repaid by the buyer (section 75(2) PLA). This often creates various tax and fee issues for the buyer that may not have been accounted for.
Given the unnecessary problems that instalment contracts create for sellers, agents should take care when specifying the deposit in contracts and advise sellers of the implications if a deposit exceeds 10% of the purchase price. In order to prevent the unintended consequences of an instalment contract, legal advice should be sought when drafting special conditions to a contract or when negotiating amendments.
Consequences of default
As previously mentioned, where a buyer fails to make any of the instalment payments or any other payments required under the contract, then the seller must give the buyer 30 days’ notice of an intention to terminate the contract in the approved form. The contract will remain on foot as if no breach ever occurred if the buyer rectifies the breach within the cure period. The seller has an unrestricted right of termination only where the breach relates to the payment of the required deposit.
Where the seller is in breach of the contract and fails to transfer title of the property to the buyer, the buyer can make a Court application to force the transfer and the seller will be liable for a fine.
Instalment contracts are complex agreements for the sale of land in Queensland and can often be entered into by parties unknowingly. These contracts significantly alter the rights of the seller and buyer from those in a standard land sales contract. Because of this, parties to a land sale contract need to be aware of the various circumstances that can result in an instalment contract being entered into. It is important that buyers and sellers speak to a lawyer who can ensure that their rights are protected and to help parties avoid inadvertently entering into these contracts. Our Property and Business Team have the experience and knowledge to provide you with valuable advice on the risks associated with instalment contracts, when they should be used and whether they are suitable for your particular transaction.