When parties negotiate settlement terms of a contract of sale of real estate, particularly when it is a long term settlement, they can inadvertently structure the terms of the transaction in a way where the contract is deemed to be a ‘terms contract’ under the Sale of Land Act 1962 (the Act).
This can have adverse consequences, including giving a purchaser a right to avoid the contract prior to settlement or giving the purchaser a right to require the vendor to transfer the title to the purchaser at any time prior to settlement in exchange for a mortgage back to the vendor for the remaining outstanding funds.
What is a ‘terms contract’
A ‘terms contract’ arises where a purchaser is either:
- obligated to make two or more payments to the vendor (other than the deposit and balance of the purchase price) after the contract has been executed but before settlement. It is important to note that any payment made within 60 days of the day of sale is categorised as part of the deposit; or
- entitled to possession or occupation of the property before settlement. This may include circumstances where the purchaser is entitled to access of the property on a regular basis during the settlement period for the purpose of maintaining the property or undertaking repairs, renovations or starting works.
Implications if a contract is deemed to be a ‘terms contract’
There are serious implications for both vendors and purchasers under a ‘terms contract’. Such implications include the following:
- if the purchaser is not in default of the contract, they can demand that the vendor transfer the title to the purchaser at any time prior to settlement 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 avoid the contract at any time prior to settlement and the vendor is guilty of an offence under the Act.
- a vendor may not sell on terms unless that person is the registered proprietor of the land, presently entitled to become registered or entitled pursuant to statute to sell. This is particularly relevant when a party is looking to on-sell a property prior to them becoming the registered proprietor.
- land that is subject to a mortgage cannot be sold under a terms contract unless specific additional requirements are met under section 32 of the Act or the mortgage is discharged within 90 days of the sale.
How to prevent unintentionally entering into a ‘terms contract’
To avoid inadvertently entering into a ‘terms contract’, it is crucial that parties are familiar with the limitations imposed on them by the Act in terms of how many payment instalments are permitted before the contract is deemed a ‘terms contract’, and any deal is structured accordingly.
We also find that special conditions which provide a purchaser with access rights to the property prior to settlement, if not worded properly, can constitute the purchaser taking possession or having occupation of the property in a way which renders the contract a ‘terms contract’. Access rights for a purchaser during a long settlement is common and often an essential aspect of the deal.
If a terms contract cannot be avoided, then care should be taken with the drafting of the contract to ensure it complies with the Act so that the contract does not become voidable.
Finally, legal advice from a firm with experience in dealing with terms contracts should be sought prior to the signing of any contract.