What is a terms contract and how to avoid it?
A terms contract is a type of 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. This means that the purchaser is essentially financing the purchase of the land over time.
Such contracts can be risky for both vendors and purchasers. For vendors, there is a risk that the purchaser will default on their payments, which could result in the vendor having to sell the property at a loss. For purchasers, there is a risk that the vendor will not comply with certain legal requirements, which could give the purchaser the right to cancel the contract.
How to avoid a terms contract?
If you are selling land, you can avoid creating a terms contract by:
- Only requiring the purchaser to make one payment to you after 60 days have passed since the contract is signed.
- Making sure that the purchaser pays the full purchase price at settlement.
- Getting legal advice from a conveyancing lawyer who is experienced in terms contracts.
Here are some additional tips for avoiding terms contracts:
- Use a standard contract of sale of land that does not allow for instalment payments.
- Get the purchaser to sign a separate document that outlines the terms of the instalment payments.
- Make sure that the purchaser has the financial ability to make the instalment payments.
- Get legal advice from a conveyancing lawyer who is experienced in terms contracts.
By following these tips, you can help to ensure that you do not inadvertently create a terms contract when selling land.
In-depth look at terms contracts
Such contracts are defined under section 29A of the Sale of Land Act 1962 (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.
- 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.
It is important to note that the following types of payments do not count in determining whether a contract of sale of land is a terms contract under the SLA:
- 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.
As such, if the contract of sale of land requires the purchaser to make two or more payments after 60 days has passed since executing the contract and before the final payment at settlement, even if they form part of the deposit, the contract will be a terms contract under the Act.
Risks of terms contracts
There are a number of risks associated with terms contracts, including:
- The vendor may not be able to get a mortgage on the property if the purchaser defaults on their payments.
- The vendor may have to sell the property at a loss if the purchaser defaults on their payments.
- The purchaser may be able to cancel the contract if the vendor does not comply with certain legal requirements.
How to deal with terms contracts?
If you are a vendor and you have entered into a terms contract, it is important to be aware of the risks involved. You should make sure that the purchaser has the financial ability to make the instalment payments, and that you are comfortable with the terms of the contract. You should also get legal advice from a conveyancing lawyer who is experienced in terms contracts.
If you are a purchaser and you are considering entering into such a contract, it is important to understand the risks involved. You should make sure that you can afford the instalment payments, and that you are comfortable with the terms of the contract. You should also get legal advice from a conveyancing lawyer who is experienced in terms contracts.
Terms contracts can be risky for both vendors and purchasers. It is important to be aware of the risks involved before entering into a terms contract. If you are unsure about whether a contract is a terms contract, you should get legal advice from a conveyancing lawyer.
Need assistance with your property purchase or sale? Contact our team on (03) 8590 8370 to obtain legal advice from our expert property lawyers and conveyancers. We are an online conveyancing firm that can assist when buying or selling property.
This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.
Last updated: 14 August 2023 Article by: Halil Gokler
