Is your contract for the sale of land a terms contract? It might be, if proposed changes to the Sale of Land Act 1962 currently before the Victorian Parliament pass.

The amendments in the Consumer Affairs Legislation Further Amendment Bill 2014 (Vic) seek to clarify when a contract for the sale of land in Victoria is a terms contract. A terms contract has a number of consequences for the parties including, in certain circumstances, an obligation on the vendor to discharge any mortgage within 90 days of the date of the contract and, more generally, a right for the purchaser to call for an early transfer, subject to granting a mortgage back to the vendor (or to any other person the vendor requires). As a result, these proposed changes will have practical and important implications for vendors and purchasers of land in Victoria.

The current position

The Sale of Land Act 1962 (Vic) currently provides that a terms contract is a contract that either:

  • obliges the purchaser to make two or more payments to the vendor (other than the deposit or final payment) after the date that the contract is signed but before the purchaser is entitled to take a transfer of land (section 29A(1)(a) of the Act); or
  • entitles the purchaser to possession or occupation of the land before the purchaser is entitled to take a transfer of land (section 29A(1)(b) of the Act).

Problems with the current definition

The current definition of "deposit" in section 29A(2) of the Act was introduced in 2008. It has caused confusion as it:

  • includes any payment made by the purchaser to the vendor before the purchaser becomes entitled to possession or to the receipt of rents and profits under the contract;
  • is not limited to what parties traditionally consider to be a "deposit"; and
  • can include instalments of the purchase price.

The practical implication of this broad definition is that payment of a purchase price by instalments alone (without an entitlement to possession or occupation for the purchaser before the purchaser is entitled to take a transfer) cannot currently create a terms contract, thereby rendering section 29A(1)(a) of the Act effectively redundant.

What are the proposed changes?

The proposed changes to the Act set out in the Consumer Affairs Legislation Further Amendment Bill can be summarised as follows:

  • the definition of "deposit" will be confined to the amount stipulated in the contract as the deposit, provided that amount is paid no more than 60 days after execution of the contract;
  • payments made by a purchaser to a vendor following an anticipated or actual default by the purchaser (such as default interest) will not be considered an instalment of the price; and
  • the reference to "possession or occupation of the land" will be replaced with a reference to "possession of the land or receipt of rents and profits" so that a terms contract will also arise where the purchaser is entitled to receipt of rents and profits (not just possession ) before settlement.

Timing and practical implications of the proposed changes

Debate will resume on the Bill in the Legislative Council on 3 September 2014. If passed, the Bill will then be introduced into the Legislative Assembly.

If the proposed changes are passed by Parliament, on the date the Bill receives Royal Assent:

  • a terms contract may again arise where the purchase price is paid by instalments;
  • default payments will not constitute instalments when determining if a terms contract exists; and
  • terms contracts will arise if a purchaser receives rents and profits before settlement.

Action required

Vendors and purchasers of land need to bear the proposed changes in mind when negotiating contracts for the sale of land in Victoria, including any variations to contracts of sale.

Further, as no transitional provisions have been proposed, a review of all existing contracts of sale should be conducted now to determine:

  • if they will constitute terms contracts; and
  • if so:
    • what implications this may have; and
    • the actions that should be taken,
  • if the proposed changes take effect.