What are terms contracts and how should you structure your sale?
Terms contracts
Terms contracts may be used by vendors when settlement of a property is still months or years away, and the price may be paid by instalments; either offering favourable terms or a low interest rate on the balance of the price until settlement.
There are several implications if a contract is deemed to be a terms contract, including:
- if the purchaser is not in default of the contract of sale, they can demand that the vendor transfers the title to the purchaser in exchange for a mortgage back to the vendor for the remaining outstanding funds
- if the vendor mortgages land that is subject to a terms contract, the purchaser may, at its discretion, avoid the contract of sale at any time prior to settlement, and the vendor is guilty of an offence under the Act
- land that is subject to a mortgage cannot be sold under a terms contract unless specific requirements are met or the mortgage is discharged within 90 days of the sale.
The general position is that a terms contract arises where a purchaser is either:
- obliged to make two or more payments to the vendor (other than the deposit and balance of the price) after the contract has been executed but before settlement (for ease of reference, this limb will be called the Multiple Payments Limb); or
- entitled to possession or occupation of the property before settlement (the Early Possession Limb).
The problem – what is a "deposit"
In 2008, the definition of "deposit" for the purposes of section 29A of the Act was amended as part of the Consumer Credit (Victoria) and Other Acts Amendment Act 2008 (Vic) (Amending Act). Unfortunately the Brumby government's attempt to re-enact aspects of the Amending Act relating to terms contracts in plain English was implemented with poor drafting, which now renders the Multiple Payments Limb irrelevant.
The definition of deposit has been amended to mean "a payment made to the vendor or to a person on behalf of the vendor before the purchaser becomes entitled to possession or to the receipt of rents and profits under the contract".
While previously contracts that had multiple payments between contract and settlement were generally understood to be terms contracts, the new definition of "deposit" means that any payment between contract and settlement is deemed to be part of the deposit. It is therefore impossible to have multiple payments for the purposes of section 29A of the Act.
The future of terms contracts
Until the new state government fixes the drafting of the definition of deposit, the only manner in which a terms contract can be created is under the Early Possession Limb.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
