News & Insights

It is important for vendors, advisors, real estate agents, and even purchasers to be familiar with what a terms contract is. In this insight article we will break down the following:

• What a terms contract is;
• How a terms contract operates and what that means for the sale of land;
• What should be taken into account when entering into a terms contract; and
• Tips and tricks when considering entering into a terms contract.

What is a terms contract

A terms contract (sometimes referred to as vendor finance)  is defined under section 29A, Division 4 of the Sale of Land Act 1962 (Vic) (Act) provides two ways that a terms contract may arise, which is where the purchaser is:

• required to make two or more payments to the vendor other than the deposit or balance at settlement; or
• entitled to possession of the land or to the receipt of rents and profits before settlement.

These are the two main aspects that need to be considered when negotiating contracts or terms for the sale of land.

Two or more payments

When considering whether or not a contract has two or more payments you must first appreciate what can be categorised as being the deposit by the Act. The Act defines a deposit to be any part of the price that is specifically designated in the contract as being a part of or the deposit and is required by the contract to be paid within 60 days of the day of sale.

Possession of or rent/profits before settlement

The second way that a terms contract can arise is where a purchaser is entitled to possession of the land or to the rents/profits of a lease or licence governing the land prior to settlement.

The following are two examples of when a purchaser may want possession of the land prior to settlement:

• where they intend to develop the land and require possession so that they may begin to obtain the necessary approvals and permits for the development to allow them to proceed with development as soon as settlement occurs; and
• a purchaser of agricultural land may want to take over the farming activities immediately with a view to using the profits from the farming enterprise to pay off the obligations under the contract (i.e. vendor finance).

Why does it matter if your contract is a terms contract?

If a contract is considered to be a terms contract, then section 29H of the Act provides the purchaser with a right to call for the conveyance/transfer of the land prior to settlement, where it provides a mortgage back to the vendor to secure the balance of the price remaining to be paid. Also, to note, an additional vendor’s statement must be provided to the purchaser by the vendor before the contract is entered to comply with the Act

Take transfer with mortgage back

A purchaser is entitled to issue a notice on the vendor requiring the vendor to transfer the title of the land to the purchaser without the purchaser yet paying the balance or any outstanding progress payments under the contract. If a notice under section 29H of the Act is issued by a purchaser, this will entitle the vendor to register a mortgage against the title until all amounts under the terms contract have been paid.

This presents the following potential issues:

• Where the purchaser defaults (on the balance payments), the vendor’s recourse will be to force a mortgagee sale (which is a slow and cumbersome process) as opposed to simply issuing a notice on the purchaser terminating the contract;
• If a vendor unwittingly enters into a terms contract (believing they had, for example, 5 years left with possession of the land) and the purchaser issues a section 29H notice within 6 months of the contract being signed, this is likely to be detrimental to either their business or lifestyle;
• Some mortgages contain penalties for early repayment, which may occur if a purchaser issues a section 29H notice and the loan has to be repaid much earlier than expected by the vendor.

Additional vendor’s statement

It is a requirement under section 32A of the Act that for a terms contract an additional vendor’s statement is required to be provided to the purchaser prior to entering into the contract. The additional vendor’s statement is effectively an executive summary of the particulars of the terms of the finance under the contract. If the additional vendor’s statement is not provided, then the purchaser will likely incur a right to rescind the contract prior to settlement.

Tips for terms contracts

There are several things to consider when dealing with terms contracts, but some of the main ones that should be considered are the following:

• Prior to entering into a contract, agree on the terms of the mortgage back in the event that the purchaser seeks to transfer the land prior to settlement;
• While it is common for vendor’s to receive an early release of deposit, a vendor must be prepared for the possibility that the purchaser refuses to release the deposit;
• When negotiating progress payments, it is also important to consider the amount of commission that will be released to the real estate agent; and
• If you need to continue operating a business (i.e in the case of farming etc.), you need to ensure that the terms contract has conditions in place to allow you to continue to your business – such as a lease over the land to protect possession.

How MK can help?

If you’re selling land and any of the above aspects are being (or may be) touched on, then you should contact us for advice and guidance specific to your sale.