Terms contracts are not uncommon in large property transactions and offers various commercial advantages to a purchaser such as locking in a sale price at an early stage while settlement is months if not years away and/or the ability to pay for the purchase by instalments.

Generally, a terms contract is in existence, according to section 5 of the Sale of Land Act 1970 (WA), when:

  1. a purchaser is entitled, under the contract, to possession of the property before settlement; or
  2. a purchaser is obliged to make 2 or more payments to the vendor (‘over and above any deposit that the purchaser is already required to pay’) before settlement.

For the purposes of the definition, the deposit ‘includes any part of the purchase price which the contract specifies as being a deposit and provides is to be paid, whether by one or more payments, within 28 days of the execution of the contract’.

Recent Court of Appeal decision

In a recent decision by the Court of Appeal of Western Australia (McLure P, Newnes and Murphy JJA), Du Buisson Perrine v Chan [2016] WASCA 18, one of the issues which arose on appeal was whether the contract for sale of a property was a ‘terms contract’ for the purposes of section 5 of the Act.

Under section 6 of the Act, there were certain requirements which needed to be satisfied in a notice of default issued by the non-defaulting party if the contract was indeed a ‘terms contract’ under the Act.

This issue arose as a result of the contract in question specifying payment of the ‘deposit’ in several instalments over a period of time, and the timeframe for payment of all of the deposit instalments exceeded 28 days after execution of the contract.

The issue in question: what forms a ‘deposit’?

The Court was then required to construe whether the payment of the ‘deposit’ instalments that were payable later than 28 days after execution of the contract:

  1. were truly payment of the deposit; or
  2.  they formed in reality part of the ‘2 or more payments’ of the purchase price (over and above the ‘deposit’).

If the Court decided in favour of interpretation 1, then the contract could not qualify as a terms contract. Conversely, if the Court decided in favour of interpretation 2, then section 5 of the Act was satisfied and there was a ‘terms contract’ in place.

The Court explored the relevant case authorities and legislative intent behind the Act in relation to what were the characteristics of a deposit.

Newnes and Murphy JJA decided that the contract was a terms contract because there were two or more payments made outside of the 28-day timeframe, despite what the contract provided.

McLure P appeared to have adopted a softer approach and decided the payments that were made outside of the 28 day timeframe were so “remote in time from the date of entry into the Contract…. as to be inconsistent with an inference that the primary purpose of the payments was an earnest given by the purchaser to bind the bargain to provide security for its performance”.

Conclusion

The conclusion to take home from this Court of Appeal decision is that any party drafting a contract for sale of property purporting to be a ‘terms contract’ must ensure that the contract clearly specifies that:

  1. any deposit payment(s) by the purchaser must be made within 28 days of execution of the contract; and
  2. there must be at least 2 further payments by the purchaser (not including the deposit) prior to settlement.

However, note that in the event of default, a default notice under a terms contract must comply with the requirements under section 6 of the Sale of Property Act 1970 (WA) which are more onerous than the requirements under the Joint Form of General Conditions for the Sale of Land.

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