What is a Terms Contract?
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.
Defining a Terms Contract
In contrast to a standard contract, where the buyer typically makes a single lump-sum payment at settlement, a terms contract involves the purchaser making two or more payments over time instead of paying the full purchase price upfront. The essence of a terms contract lies in its payment structure.
The Sale of Land Act 1962 (SLA) provides a clear definition of a terms contract. In a terms contract under Section 29A of the SLA, the purchaser is required to make multiple payments to the vendor, excluding the deposit and final payment on completion. This type of contract is defined as a contract of sale. This means that any contract requiring multiple instalments before the final payment, including private sales, can be classified as a terms contract, regardless of the parties’ intentions to enter into a standard contract.
Take into account that payments made prior to signing do not determine its classification as a terms contract, a crucial distinction for both buyers and sellers to prevent the accidental formation of a terms contract. Understanding these nuances can help you navigate the complexities of real estate transactions more effectively.
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.
Legal Obligations Under the Sale of Land Act
The Sale of Land Act 1962 imposes several legal obligations on parties involved in terms contracts to prevent unfair practices and protect both buyers and sellers. One of the primary obligations is the handling of deposits. Vendors must ensure that any deposit taken as part of a terms contract is held in a special purpose account until the purchaser is entitled to call for the transfer of the land. This requirement safeguards the buyer’s interests and ensures the funds are secure.
Prohibited terms are another critical aspect regulated by the Sale of Land Act. Vendors are not allowed to include certain terms in terms contracts, such as retaining ownership of the land while receiving payments over time. If a contract includes any prohibited terms or fails to comply with the Act’s requirements, the purchaser has the right to avoid the contract. This provision protects buyers from unfair contract terms and ensures the contract remains fair and balanced.
Additionally, the Act mandates that vendors provide purchasers with a Section 32 statement in small rural property sales. This statement includes specific information about the land being sold, such as title details, zoning, and any encumbrances or restrictions. Providing this information upfront allows buyers to make informed decisions and ensures transparency in the transaction. For both buyers and sellers, grasping these legal obligations is essential to ensure compliance and circumvent potential legal issues.
Risks of Terms Contracts
There are a number of risks associated with a terms contract, 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.
Despite the flexibility offered by terms contracts, they also carry inherent risks for both buyers and sellers. One of the primary risks for purchasers is the financial burden of financing the land over time. Unlike traditional contracts where the full payment is made upfront, terms contracts require buyers to make multiple payments, which can strain their finances. In this context, vendor finance can be an alternative solution for buyers.
Sellers also face financial risks in terms contracts. If a buyer breaches the contract, they may forfeit their deposit as stipulated in the contract. However, the seller may incur re-listing expenses and potential property devaluation if the buyer defaults. Market fluctuations can further exacerbate these risks, affecting the property’s value and making it challenging to find another buyer.
Extended legal disputes over contract disagreements can even lead to high costs for both parties involved. These disputes often arise from misunderstandings or breaches of the contract terms. To mitigate these risks, it’s essential for both buyers and sellers to fully understand the terms of the contract and seek professional advice before entering into an agreement.
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.
To prevent the inadvertent creation of a terms contract, it’s important that the contract doesn’t necessitate the purchaser to make two or more payments before settlement. This includes avoiding any pre-settlement payments that could trigger the terms contract classification.
Another important tip is to avoid granting access rights to the purchaser before settlement. Poorly worded access terms can be interpreted as giving possession, thus unintentionally creating a terms contract. By carefully drafting the contract and seeking legal advice, you can avoid these common pitfalls and ensure a smooth transaction.
The Role of Legal and Professional Advice
It is vital to seek legal and professional advice before entering into a signed contract to sidestep the pitfalls associated with the unintentional creation of a terms contract. Expert legal advice can help prevent you from being trapped in problematic situations after signing the contract. By consulting a legal expert, you can ensure that the contract terms are in your best interest and comply with all legal requirements.
Obtaining legal advice provides security for your investment and business protection. It can save time and money by addressing potential issues early on and preventing costly legal disputes. A contract specialist can help review and ensure that the contract terms are fair and legally binding.
In addition to legal advice, professional advice from experienced conveyancers and estate agents can further safeguard your interests. They can navigate the complexities of property transactions and ensure compliance with all legal obligations. By seeking professional advice, you can make informed decisions and protect your investment.
Dealing with Terms Contracts
For Vendors
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.
For Purchasers
If you are a purchaser and you are considering entering into such a contract, it is also 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.
How Haitch Convey Can Help
With their expertise as experienced conveyancers, the Haitch Convey team can guide you through your property sale or purchase. They can ensure compliance with terms contracts and legal obligations, making the process smoother and more secure.
Haitch Convey can provide valuable advice and assistance throughout the transaction process. From reviewing contracts to handling settlements, their team can help protect your interests and ensure a successful real estate transaction.
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.
Frequently Asked Questions
An example of a term contract is a Fixed Term Employment Agreement, typically used when employing someone for a specific project or to cover staff on leave.
The key elements of a terms contract include deposit limits, payment schedules, and adherence to relevant legislation such as the Sale of Land Act 1962. These elements are crucial for ensuring a clear and legally binding agreement.
Sellers have legal obligations to handle deposits properly, avoid prohibited terms, and provide a Section 32 statement to buyers under the Sale of Land Act 1962. These obligations are important to ensure compliance with the law and protect the rights of the buyers.
In terms contracts, risks include financial burdens for buyers, potential property devaluation, and costly legal disputes for both parties. It’s important to carefully assess and mitigate these risks before entering into any contract.
To avoid unintentionally creating a terms contract, make sure the contract doesn’t involve multiple payments before settlement and avoid granting access rights to the buyer before settlement.
