What are terms contracts and how should you structure your
We have recently received a number of enquiries from our
clients in relation to the application of the "terms
contracts" provisions of the Sale of Land Act 1962
(Vic) (Act). Here we explain what they are and how
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
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.
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