Recently, Land and Property Information (LPI) listed the Land Sales Act 1964 (the Act) on its agenda for repeal, claiming that instalment contracts are so rarely used that the Act represents a regulatory burden rather than a useful mechanism.
The Act prohibits the sale by instalment of four or more payments of any lot within a subdivision comprising five or more lots, unless the sale complies with the provisions of the Act.
However, it appears instalment contracts are regaining popularity to assist developers fund the development of land, particularly in the western growth region centres of Sydney.
If an instalment contract does not comply with the relevant provisions of the Act, it leaves buyers at risk of losing their money and exposes developers to fines of $1,100, and possible imprisonment of a maximum of 6 months (or both).
The current provisions of the Act have not been relevantly considered in great detail, suggesting minimal awareness and possibly, no regulation by the State.
Although the Act purports to regulate instalment contracts rather than prohibit instalment contracts, the draconian and at times ambiguous provisions make compliance almost impossible. The Act is certainly in need of review if it will not be repealed. For the time being, let’s look at how it works in practice.
What is an instalment contract?
A contract for the sale of a lot in a subdivision comprising 5 or more lots where such contract provides for purchase money to be paid by 4 or more part payments is an Instalment contract. Deposits and informal ‘holding’ deposits constitute part payments.
Accordingly, many of the off-the plan instalment contracts offered by community groups and developers that offer a payment plan of the price without adequate compliance with the Act are prohibited.
The trust mechanism
Compliance with the Act requires a trustee to be appointed.
A trustee must hold office under a trust deed that relates to the subdivision, comply with detailed trustee provisions in the Act and have written approval from ‘the Minister’.
Some questions remain unanswered:
- Ministerial approval may be revoked at any time by publication of notice in ‘the Gazette’, but what are the factors that might persuade the Minister to revoke approval?
- Can a real estate agent act as a trustee? The Act only stipulates that the vendor (or in some cases, the enigmatic ‘Minister’) has the power to determine their appointment and dismissal.
The trustee is only required to retain the purchaser’s money until satisfied that the purchaser has been issued with the relevant warning notices required by section 12, or until the instalment contract has been signed by both parties.
Given that the majority of the off-the plan sales now take place with the intervention of agents (who would have a regulated and audited trust account for the deposit to be held anyway), suggests that the provisions relating to trustees under the Act is both unnecessary and out of touch with current conveyancing practices.
Informal, holding deposits binding
At times, the Act indirectly contemplates prior, informal arrangements to enter into instalment contracts.
After a “preliminary deposit” (informal holding deposit) is paid, the vendor must, within 7 days, pay the deposit to the trustee, and either tender the contract to the purchaser for execution, or refund the full deposit amount to the purchaser.
If the vendor wishes to proceed, they must tender the contract in the form attached to the trust deed.
The purchaser then has 14 days to execute the contract and the property must not be sold to another party for this 14 day period after the contract is issued to the purchaser, (unless agreed in writing by the parties). This provision is out of touch with the current statutory 5 business day cooling off period and rescission rights.
Purported protections for the purchaser
Deposits cannot be taken until the notices prescribed in the relevant Schedules of the Act are issued to the purchaser.
The various forms of notices concern title, charges, and interests on the land as well as a notice that attempts to warn purchasers of their rights and obligations under the contract.
However, the notice of warnings and advice contains outdated and irrelevant information when considered in light of the current practices of off-the plan sales.
The most unusual provisions of the Act appear in an attempt to provide assurance to purchasers that have paid 15% or more of the price.
Where the purchaser has paid 15% or more of the price, a term is implied in every instalment contract, allowing the purchaser, by notice to require the vendor to transfer the lot to the purchaser before the full price is paid. At the same time, the purchaser must execute a mortgage over the land in favour of the vendor which secures the payment of the balance of the instalments payable to the vendor.
Compliance with this mechanism is commercially and practically impossible where developers often have mortgages over the parent land and the purchaser’s lot is yet to be created in order to register the transfer and mortgage in respect of the purchaser’s particular lot.
What is the effect of the Act on purchasers, vendors, developers and lenders?
The Act is outdated, complex, and establishes a compliance regime that is both ineffective at achieving purchaser consumer protection, and almost impossible for a developer to comply with.
- For purchasers: some protection is afforded by the stipulation that if an instalment contact does not comply with the Act, or if the vendor fails to observe any of its obligations under Part 3 of the Act, the purchaser may rescind the contract and recover monies paid.
- For vendors and developers: if entering into instalment contracts in breach of the Act, they should be aware that they face possible imprisonment of a maximum of 6 months, or fines of $1,100 (or both) in addition to the purchaser’s rescission rights.
- For lenders: given the purchaser’s remedies under the Act (which include rescission), Lenders who rely on due diligence of the off-the plan contracts when lending money to developers should consider this Act when reviewing the terms of instalment contracts.
- Whilst the Act contains provisions clearly intended to protect purchasers’ interests under instalment contracts, it falls short of creating an effective framework to genuinely achieve this goal.
Further reform of off-the plan contracts
There is clearly a strong case for legal reform of this Act to meet today’s conveyancing practice.
The disparity between the gravity of the imprisonment penalty and fine further indicates how out of touch the Act is with modern practice; a fine as low as $1,100 is unlikely to deter vendors from entering into non-compliant instalment contracts.
In light of the recent changes to off-the plan sunset clauses, there is likely to be more legislative reforms to off-the plan contracts to address terms allowing developers to make design changes and reduce the areas of apartments (amongst other concerns).
Perhaps the Land Sales Act 1964 is more the appropriate legislative vehicle through which the Government can achieve these changes.