Meaning of “terms contract” examined

  • Author : Robert Hay QC - 09-12-2011

Any practitioner who acts for vendors and purchasers of land should have a good understanding of what is and what is not a “terms contract” for the purpose of the Sale of Land Act 1962. The Act prohibits certain types of “terms contracts” and a purchaser can avoid contracts entered into in contravention of the Act.

In an important decision, Dixon J in Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd [2011] VSC 222 considered the definition of “terms contract” that has applied since 31 October 2008. Section 29A provides:

“(1) For the purposes of this Act a contract is a terms contract if it is an executory contract for the sale and purchase of any land under which the purchaser is -

(a) obliged to make 2 or more payments (other than a deposit or final payment) to the vendor after the execution of the contract and before the purchaser is entitled to a conveyance or transfer of the land; or

(b)entitled to possession or occupation of the land before the purchaser becomes entitled to a conveyance or transfer of the land.

 

(2) In subsection (1)- deposit means a payment made to the vendor or to a person on behalf of the vendor before the purchaser becomes entitled to possession or to the receipt of rents and profits under the contract; final payment means a payment on the making of which the purchaser becomes entitled to a conveyance or transfer of the land.” (italics added)

Before 31 October 2008 a “terms contract” was an executory contract under which the purchaser is (a) obliged to make two or more payments to the vendor after execution of the contract and before the purchaser was entitled to a conveyance or (b) entitled to possession or occupation of the land before becoming entitled to a conveyance or transfer.

The definition of “deposit” and “final payment” in s29A have a much wider meaning. In Ottedin the purchaser, in December 2008 contracted to purchase land for $6.5 million and paid a deposit of $325,000 with settlement due in December 2009 upon which the purchaser became entitled to transfer and vacant possession of the land. The purchaser was unable to settle. By deed the parties deleted the particulars of sale and substituted new particulars under which the price remained the same but the settlement date was changed to December 2010, the deposit became $1,325,000 with $325,00 due on the day of sale and $1,000,000 due in January 2010 (increased deposit).

There was also a provision for a contingent interim payment of $3,675,000 with a final payment of $1,500,000 due at settlement. Ottedin defaulted and sought to avoid the contract under s29O(2) of the Act on the ground that the contract was a “terms contract” that did not comply with the Act’s requirements concerning terms contracts. The contention was that apart from the initial deposit of $325,000 and the final payment, the contract (as varied) was a terms contract because it obliged the purchaser to pay two or payments after the execution of the contract, being the balance of the deposit ($1,000,000) due in January 2010 and the interim payment of $3,675,000. Dixon J rejected the purchaser’s contention.

His Honour held that both the initial $325,000 and the increased deposit were each obligations to pay the “deposit” within the meaning of s29A. His Honour held that the contingent interim payment of $3,675,00 (which was not paid) was either a deposit or became part of the final payment but its characterisation did not matter because even if it was an interim payment before settlement, there was still only one payment.

About the Author

Robert Hay QC

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