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Know your Devil

By Natalie Smyth

Like so much with the law, the devil is usually in the detail, and what might seem a good idea at the time may have consequences from left field.  It is no different with conveyancing contracts for the sale of residential property in Brisbane.

Take the example of Tara.  Tara made her living as a medium sized property developer in Brisbane.  She purchased land and developed one or two apartment blocks per year with an average of 10 to 15 units each. When the market was good, Tara had no trouble selling her apartments. She was very proud of her finishes and the quality of her fittings. “They sell themselves really”, she told me.

But recently things have been different. There has been a glut of good product on the market and prices were falling.

Tara was sick and tired of Buyers putting down a small deposit and walking away when they found an apartment which was cheaper. It was unfair she thought, after all the planning and work she put in for Buyers, to be able to walk away like that with very little consequence.  She decided to do something about it.

Tara told her agent that she would now require Buyers to put down a deposit of thirty percent and the contract of sale must now specify that the deposit was non-refundable.  Her agent told her she may lose some prospects but Tara said she didn’t care, “If they are not prepared to do that, they are not serious anyway”,  she replied.

For a while everything worked well. She was attracting Buyers who were fair dinkum. But then one Buyer, having paid the 30 percent deposit refused to pay the balance. Tara was very patient and gave the Buyer every opportunity to come up with the balance of the purchase price but the Buyer just refused to pay.

“Oh well, so be it, the deposit is non-refundable, I will just take that and find another Buyer….the deposit will compensate me for the extra interest I have had to pay, while the Buyer has been dithering around”, she thought.

However, when Tara came to sign the transfer documents for the new Buyer she found that the previous Buyer had placed a caveat on the property preventing the sale.  If that was not bad enough, the previous Buyer had now engaged a solicitor who had written to her bank demanding that the mortgage be removed from the property and the Bank was listening, they wanted Tara to pay back the mortgage. Tara needed to mortgage her apartment blocks to finance the construction, she simply didn’t have the funds to pay for everything upfront.

The previous Buyers solicitor claimed that the contract of sale, even though it was in the standard REIQ form, was an Instalment Contract and the deposit wasn’t really a deposit at all but part payment of the purchase price which gave the previous buyer an interest in the apartment. A ‘non-refundable’ deposit can make a contract an Instalment Contract with unintended consequences.

What is an Instalment Contract?

In most land contracts in Queensland, the Buyer will pay a deposit that is held by the ‘stakeholder’ (usually the agent or Seller’s lawyer) until settlement. On settlement, the Buyer will then pay the balance of the purchase price, in exchange for the Seller providing them with clear legal title to the property.

An Instalment Contract, as the name suggests, has the Buyer make payment of the purchase price by a number of instalments. It is sometimes called a vendor finance arrangement. Usually, these instalments will be non-refundable.

Most importantly, Instalment Contracts change the legal relationship between the Buyer and Seller, and provide more protection to Buyers than under a standard REIQ contract.

Can a non-refundable deposit make a contract an Instalment Contract?

Section 71 of the Property Law Act 1974 (Qld) defines an Instalment Contract as one in which the Buyer must make a payment, other than a deposit, without becoming entitled to a transfer of the land.

A deposit is defined in the Property Law Act to be an amount that:

  • does not exceed 10% of the purchase price (for existing lots), or 20% of the purchase price (or proposed/off the plan lots); and
  • is paid or payable in one or more instalments; and
  • is liable to be forfeited to the Seller in the event of default by a Buyer.

Where a deposit is truly non-refundable, it is not ‘liable to be forfeited’. The Buyer is deemed to have already paid to the Seller part of the purchase price. Even though, the contract itself specified that the amount was a deposit, it does not overrule what is provided in the Property Law Act.

What are the consequences of an Instalment Contract?

Instalment Contracts provide more protection to Buyers than a standard REIQ contract. In summary, where a contract is deemed to be an Instalment Contract because of a non-refundable deposit these protections are:

  • Restriction on Termination by Seller on default of the Buyer

Under a standard contract, a Seller can terminate the contract and forfeit the deposit if the Buyer breaches it in a material way. However, section 72 of the Property Law Act requires a Seller under an Instalment Contract to provide a Buyer with 30 days’ notice to remedy this failure to pay, before the Seller is able to terminate the contract or take any other action. This means that time is not of the essence in relation to the payment of monies. The settlement date may be extended by up to 30 days by the Buyer without a Seller’s consent.

  • Property cannot be Mortgaged under an Instalment Contract

Under a standard REIQ contract, there is no prohibition against mortgaging the property after the contract is formed, provided that the mortgage is removed from title at or before settlement. However, Section 73 of the Property Law Act provides that under an Instalment Contract, a Seller must not mortgage the property without the consent of the Buyer.  However, you can insert a Special Condition into the contract that provides the Buyer’s consent to the registration of a mortgage.

  • Registration of Caveat by Buyer under an Instalment Contract

Section 74 of the Property Law Act provides that a Buyer under an Instalment Contract has an express right to lodge a caveat over the Land.

When we told Tara that she would have to pay the previous Buyer out she was very upset. But when we told her that, as the price for removing the caveat, she would also have accede to the demand of the previous Buyer’s Solicitor to pay a share of the profit from the sale as well as his legal costs, she was furious.

“The Previous Buyer is an absolute devil. I have been taught a very expensive lesson. I should have made sure of the details before getting the agent to change the contract and then I wouldn’t be in this mess,” Tara complained.

The creation of an Instalment Contract can severely impact a Seller’s right to terminate a contract, if a Buyer defaults. It is important to get legal advice before you enter into any contract, including Instalment Contracts.

What can I do to avoid an Instalment Contract?

As a general rule, special conditions should not express or imply that the deposit is ‘non-refundable’, and the Seller should be under an obligation to refund the ‘deposit’ if the contract is terminated because of the Seller’s default. However, don’t try this at home. You should always obtain legal advice before including conditions that allow for release of the deposit.

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