Instalment contracts for the sale of land in Queensland have traps for unwary vendors.
Instalment contracts can arise automatically in some situations, even where the parties may not intend to create an instalment contract.
An instalment contract is defined in section 71 of the Property Law Act 1974 (Qld) (PLA) as an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit not exceeding 10% of the purchase price) without becoming entitled to receive a conveyance in exchange for the payment or payments.
Importantly, any payment made before settlement of the contract may result in the contract being an instalment contract.
Why all the fuss about an instalment contract?
If a contract is an instalment contract the following will apply:
- The contract cannot be terminated by the vendor because of a default in the payment of any instalment or sum of money (apart from the deposit) until 30 days after notice in the approved form is served on the purchaser (section 72 PLA).
- If the vendor sells or mortgages the land the subject of the contract without the purchaser’s consent, the contract is voidable by the purchaser at any time before completion (section 73 PLA).
- A purchaser may, in some situations, require the vendor to convey the land to the purchaser (section 75 PLA).
Recent case of MSD Securities
In MSD Securities v MFB Properties (NQ) Pty Ltd (No 2)  QSC 168, the broad facts were as follows:
- There was a suite of contracts for the purchase of land and an associated resort business for $4 million.
- The contracts were to settle contemporaneously.
- There was a variation to the contracts whereby the purchaser transferred to the vendor a Gold Coast house and vessel, which was treated as a payment of $2 million in reduction of the purchase price for the resort.
- Before completion of the resort contracts, the vendor granted a mortgage to its bank over one of the lots in the resort land as security for an unrelated transaction.
- The vendor claimed it had obtained the purchaser’s consent to the mortgage.
- The purchaser asserted that it did not consent to the mortgage.
- Before completion the purchaser gave notice terminating the resort contracts.
- The purchaser applied to the Court contending that the resort contracts were voidable at its election because the contracts were instalment contracts and the land had been mortgaged without its consent.
- The purchaser sought recovery of $2 million from the vendor for the Gold Cost house and vessel.
The decision in MSD Securities
The Court did not accept the vendor’s evidence about the purchaser consenting to the mortgage.
Consequently, the Court had to consider these questions:
- Were the contracts instalment contracts?
- If so, were they voidable due to the vendor granting a mortgage over one of the properties without the purchaser’s consent?
- Was the purchaser entitled to the refund of the $2 million part payment?
The Court held that:
- as a result of the $2 million part payment, the contracts became instalment contracts;
- even though the payment was by way of transfer of property, the Court was satisfied that it was still a payment that had the effect of partially discharging the purchaser’s obligation to pay the purchase price; and
- as the contracts were instalment contracts, they were voidable by the purchaser before completion because the purchaser’s consent to the mortgage was not obtained.
The Court then considered whether the part payments already made were to be repaid by the vendor.
The Court referred to the decision by Mason CJ in the High Court case of Baltic Shipping Co v Dillon (1993) 176 CLR 344. The Court considered that the claim to recover payment made under a discharged contract could succeed on one or two bases: the intention of the parties or failure of consideration.
In considering these two matters the Court had to decide, as a matter of construction, whether the $2 million part payment, was absolute or conditional.
The Court concluded that the payment was made conditionally on the performance of the vendors of their promise to convey the resort property at completion.
As that condition had failed, the payment was recoverable.
Accordingly, the Court was satisfied the purchaser was entitled to recover the part-payment of $2 million, being the accepted value of the Gold Coast house and vessel.
Vendors to a land sale contract in Queensland need to be aware of the circumstances that will cause a contract to be an instalment contract.
A ‘deposit’ greater than 10% will be caught but other ‘payments’ could potentially be caught.
Non- refundable deposits are also problematic for a vendor.
Variations made to a contract requiring ‘payments’ to be made before completion may result in the contract being converted into an instalment contract.
An astute purchaser seeking to avoid having to settle may be able to terminate because it is an instalment contract where the vendor has failed to comply with the requirements of the PLA.