WHAT IS AN INSTALMENT CONTRACT IN QLD AND WHY SHOULD SELLERS AVOID THEM?
What is an instalment contract?
In a standard REIQ contract, the buyer pays a deposit to the deposit holder (this is generally the agent) who will hold this until settlement. On settlement, the buyer pays the balance of the purchase price, in exchange for the seller providing clear legal title to the property.
In an instalment contract, as the name suggests, the buyer makes payments to the Seller in instalments and receives title to the property once the final payment is made.
What triggers an instalment contract?
A contract may inadvertently become an instalment contract where a buyer makes a payment that is not considered a deposit under the Property Law Act.
A deposit is defined under the Property Law Act to be an amount that:
- Does not exceed 10% of the purchase price (or 20% for off the plan lots); and
- Is paid or payable in 1 or more instalments; and
- Is liable to be forfeited to the seller in the event of a default by the buyer.
As such, a contract will become an instalment contract where, either:
- The deposit is greater than 10% of the purchase price (or 20% for off the plan contracts). Care should be taken where, after the contract is signed, the purchase price is negotiated down (for example, for items discovered at the building & pest inspection) as the deposit may need to be amended to keep within the 10% threshold; or
- The buyer is required to make a non-refundable payment to the seller prior to settlement. Where a payment is non-refundable, it is not ‘liable to be forfeited’ but has already been paid to the seller and is therefore unlikely to be considered a deposit. We strongly recommend legal advice is sought where the buyer is to make a payment to the seller prior to settlement to ensure the condition is drafted correctly to avoid an instalment contract. It must be very clear that the buyer can recover the payment if the seller is in breach of the contract.
Why should a seller avoid instalment contracts?
Instalment contracts drastically change the relationship between buyer and seller from a standard contract and are particularly problematic for sellers.
| Standard REIQ contract | Instalment contract |
| If the buyer breaches an essential term, including the payment of money under the contract, the seller can terminate the contract and keep the deposit. |
If the buyer fails to pay an instalment payment, the seller must first provide the buyer with 30 days’ notice to remedy the failure to pay before the seller is entitled to terminate the contract. If the buyer remedies the breach within the 30 days, the contract continues as if no breach had occurred. The seller still has the right to terminate as usual if the buyer fails to pay the deposit on time. |
| The seller is allowed to register a mortgage on title after the contract is signed, provided this is removed before or on settlement. | The seller must not mortgage the property without the consent of the buyer, otherwise the buyer can void the contract at any time prior to settlement and the seller is guilty of an offence for which fines can be imposed. |
| Title is only registered in the buyer’s name upon full payment of the purchase price to the seller. | The buyer can serve notice on the seller requiring the transfer of the property to the buyer once the buyer has paid one third of the purchase price (and is not in default under the contract). Simultaneously, the seller is entitled to require that the buyer grant a mortgage back over the property for the remaining two thirds of the price. |
| A buyer may have a right to lodge a caveat over the property. | A buyer has an express right to lodge a caveat over the property. This can prevent any other person, including the seller, from registering an instrument over the property. |
