Deposit or Installment Contract

Let’s say you’ve made the decision to sell your commercial property you own in North Lakes. You’re looking for an easy sale to capitalize on your investment. An eager buyer makes an offer on the property. To demonstrate their eagerness, they offer a 20% deposit on the purchase price with $2,000 to remain non-refundable. You accept this offer believing that they are obviously a very eager purchaser and your happy with their offer. you may have just entered into an instalment contract. So, what’s the issue?

What is an instalment contract?

Section 71 of the Property Law Act 1974 (QLD) defines an Instalment Contract as a contract for the sale of land in terms of which the buyer is bound to make a payment or payments without becoming entitled to receive a conveyance in exchange for the payment or payments.

Put more simply, the buyer will not become entitled to a transfer of title until the last payment is made. Whilst this might seem a reasonable proposition, once entering into an instalment contract, the rights of the seller & the buyer are significantly altered.

What are the impacts for parties?

Cannot mortgage the land

Section 73 of the Act, indicates that a seller is not entitled to mortgage the land without consent [i]. If the seller does mortgage the land without the buyer’s consent, the seller will be in breach of the contract. It will allow the buyer to void the contract and also may make the seller guilty of an offence. The seller can be fined under the act a total of $1240.65 if they have committed such an offence.

Losing the ability to mortgage the property whilst waiting for settlement has significant impacts for sellers of property.

Demand of Conveyance

Section 75 of the Act gives the buyer the right to demand a conveyance of the land from the Seller to the buyer once the buyer has paid one-third of the purchase price and has not defaulted under other conditions of the contract [ii].  In addition, it gives the opportunity for the seller to demand acceptance of a conveyance if one-third of the purchase price as been paid.

The seller can also demand that the buyer grant a mortgage back over the property for the remaining two-thirds of the property. If the instalments are to not to be paid over a number of years, those instalments would have to continue to be paid and the Buyer will not be the owner of the property not the seller. This creates a number of tax and fee issues for the Buyer that may not have been accounted for.

Caveats

An instalment contract gives the Buyer the right to lodge a Caveat against the land, thus forbidding the registration of an instrument until completion of the instalment contract.

Default

Most contracts for the sale of land require ‘time to be of the essence’. That means when certain parties miss deadlines, the other party has the opportunity to terminate the contract for breach. In instalment contracts, if a buyer misses a payment by a deadline, the seller must give 30 days’ notice of an intention to terminate the contract. If the party rectifies the breach, the contract continues as if no breach has occurred.

Conclusion

Instalment contracts are complex legal contracts that can unknowingly be entered into by parties. They have significant impacts on the legal rights of Party’s to a contract. It is important that before entering into a contract, you speak to a GKS Lawyer who can make sure your rights are protected. Our Commercial & Property Team can provide advice about the use of instalment contracts, whether they are right for your transaction and to help you avoid inadvertently entering into them.

• [i]   Property Law Act 1974 (QLD).
• [ii]   Property Law Act 1974 (QLD)