When drafting a contract of sale of land, be careful not to inadvertently create a voidable terms contract.
Your vendor client calls having verbally agreed to sell their property, and they’ve agreed on the price, date of settlement and for several deposit payments to be paid along the way. The client wants you to draw up the contract quickly, so the deal doesn’t fall through.
Be careful! A contract of sale of land with a longer settlement and staged instalment payments can fall within the definition of a terms contract under Part I Division 4 (ss 29A to 29W) of the Sale of Land Act 1962 (Vic) (SLA), even where the parties intended a standard contract.
Before you draft, count the qualifying payments. If the purchaser is obliged to make two or more payments after 60 days from execution and before the final payment at settlement, it is a terms contract, and a standard contract of sale will not comply.
A common scenario is when the vendor and purchaser negotiate a longer settlement for the sale of land, for example two or three years, with the purchase price to be paid in a series of instalments. The vendor’s legal practitioner is instructed to prepare the section 32 statement and contract of sale of land, which they draft without recognising that the multiple payments have rendered the contract a terms contract under the SLA.
As a result, the contract of sale of land and section 32 statement do not comply with the special rules governing terms contracts under the SLA, and the vendor is not aware of their rights and obligations. This can have serious consequences for the parties, including a contract that can be voidable.
What is a terms contract?
A terms contract (also colloquially referred to as a vendor finance contract or instalment contract) is defined under section 29A of the SLA as a contract for the sale of land where the purchaser is:
obliged to make two or more payments to the vendor other than a deposit or final payment on completion, or
entitled to possession of the land, or to the receipt of rents and profits before the purchaser becomes entitled to a conveyance or transfer of the land.
When preparing a contract of sale of land, practitioners should always pay careful attention to the type and number of payments the purchaser will be required to make under the contract. Multiple payments can render a contract of sale of land a terms contract under the SLA, even though the parties only intend a standard contract.
The following payments do not count when working out whether a contract of sale of land is a terms contract:
deposit instalments that are specified to be payable within 60 days of the date of execution of the contract
a final payment made by the purchaser at settlement where they become entitled to a transfer of the land
payments made prior to signing the contract
voluntary payments which the purchaser is not obliged to make under the contract.
So if the contract requires the purchaser to make two or more payments after 60 days from execution and before the final payment at settlement, even if they form part of the deposit, it is a terms contract under the Act.
Worked example: two payment schedules compared
Consider the following example where a purchaser agrees with the vendor to buy a parcel of land for $5 million, with the contract of sale of land requiring the purchase price to be paid in four instalments over a three-year period. In scenario 1, the two payments made more than 60 days after the day of sale and before the final balance is paid at settlement will render the contract of sale a terms contract. In scenario 2, there is only one payment made after the 60 days and before settlement and so the contract will not fall within the definition of a terms contract.
| Scenario 1 — a terms contract | Scenario 2 — not a terms contract |
|---|---|
|
Scenario 1 — a terms contract
1. $500,000 deposit payable upon execution of contract |
Scenario 2 — not a terms contract
1. $250,000 part deposit payable upon execution of contract |
|
Scenario 1 — a terms contract
2. $500,000 instalment payable 12 months after execution |
Scenario 2 — not a terms contract
2. $250,000 part deposit payable 30 days after execution |
|
Scenario 1 — a terms contract
3. $500,000 instalment payable 24 months after execution |
Scenario 2 — not a terms contract
3. $1 million instalment payable 18 months after execution |
|
Scenario 1 — a terms contract
4. $3.5 million payable at settlement |
Scenario 2 — not a terms contract
4. $3.5 million payable at settlement |
What to do before you draft
When a contract of sale has staged payments, check the payment schedule before you draft.
Count the payments the purchaser is obliged to make after 60 days from execution and before the final payment at settlement. Two or more makes it a terms contract.
If it is a terms contract, prepare a bespoke contract that complies with the terms contract provisions (ss 29A to 29W and s 32A(d) of the SLA); a standard contract of sale will not meet the parties’ needs.
Include the instalment information required by Schedule 2 of the SLA in the section 32 statement. Non-compliance can make the contract voidable.
Tell the vendor, and any purchaser client, in writing about the risks and consequences of a terms contract and what compliance requires.
Where terms contracts are outside your experience, consider referring the client for specialist advice.
