Posted by: Nick Casey | Date: 28 April 2016
In some contracts, a deposit paid by a Buyer is expressed to be ‘non-refundable’.
A ‘non-refundable’ deposit can make a contract an instalment contract with unintended consequences.
In most land contracts in Queensland, the Buyer will pay a deposit that is held by the ‘stakeholder’ (usually the agent or Seller’s lawyer) until settlement. On settlement, the Buyer will then pay the balance of the purchase price, in exchange for the Seller providing them with clear legal title to the property.
An instalment contact, as the name suggests, has the Buyer make payment of the purchase price by a number of instalments. Usually, these instalments will be non-refundable. Instalment contracts change the legal relationship between the Buyer and Seller, and provide more protection to Buyers than under a normal contract, including for example that legal title may be transferred before the Buyer has paid the full purchase price.
Section 71 of the Property Law Act 1974 (Qld) defines an instalment contract as one in which the Buyer must make a payment, other than a deposit, without becoming entitled to a transfer of the land.
A deposit is defined in the Property Law Act to be an amount that:
Where a deposit is truly non-refundable, it is not ‘liable to be forfeited’, but rather it has already been paid to the Seller and is therefore unlikely to be considered a deposit.
Releasing a deposit to the Seller will not of itself make a contract an instalment contract, however extreme care must be placed in drafting appropriate contract conditions.
As a general rule, special conditions should not express or imply that the deposit is ‘non-refundable’, and the Seller should be under an obligation to refund the ‘deposit’ if the contract is terminated because of the Seller’s default. You should, however, always obtain legal advice before using conditions that allow for release of the deposit.
Instalment contracts provide more protection to Buyers Buyer than a standard contract. In summary, where a contract is deemed to be an instalment contract because of a non-refundable deposit of less than 10% or 20% (as applicable) these protections are:
Under a standard contract, a Seller can terminate the contract and forfeit the deposit if the Buyer breaches an essential term of the contract, including the payment of a sum of money required by the contract.
However section 72 of the Property Law Act requires a Seller under an instalment contract to Seller provide a Buyer with 30 days’ notice to remedy this failure to pay, before the Seller is able to terminate the contract or take any other action. This means that time is not of the essence in relation to the payment of monies. The settlement date may be extended by up to 30 days by the Buyer without a Seller’s consent.
Under a standard contract, there is no prohibition against mortgaging the property after the contract is formed, provided that the mortgage is removed from title at or before settlement.
Section 73 of the Property Law Act provides that under an instalment contract, a Seller must not mortgage the property without the consent of the Buyer. However, you can insert a Special Condition into the contract that provides the Buyer’s consent to the registration of a mortgage.
Section 74 of the Property Law Act provides that a Buyer under an instalment contract has an express right to lodge a caveat over the Land.
The creation of instalment contracts can severely impact a Seller’s right to terminate a contract and walk away from a transaction if a Buyer defaults. It is important to get legal advice before you enter into any contract, including instalment contracts. Please do not hesitate to contact us should you have any questions regarding instalment contracts.