25 October 2012 Ms Claire Davie Senior Legal Policy Adviser Consumer Affairs Victoria GPO Box 123 Melbourne Vic 3001 Dear Ms Davie Discussion Paper on Terms Contract Definition under the Sale of Land Act 1962 (Vic) The Law Institute of Victoria (LIV), in a 17 May 2012 submission (attached) to the Minister for Consumer Affairs and Consumer Affairs Victoria (CAV), raised concerns regarding the potential for consumer detriment resulting from the terms contract provisions as currently worded in the Sale of Land Act 1962 (Vic) (the Act), and suggested that a review of s29a of the Act is warranted. The LIV is therefore pleased to have this opportunity to provide a submission to Consumer Affairs Victoria (CAV) regarding issues in CAV s discussion paper on the definition of terms contract (Discussion Paper). The LIV s comments regarding the four issues / questions in the Discussion Paper are set out below. 1. Are there material examples of multiple payment terms contracts in Victoria that would have been terms contracts under the previous wording of the Act, but are now unprotected by the Act (accompanied by descriptions of any such transactions)? At this stage, the LIV has not been provided with any examples of multiple payment terms contracts in Victoria that would have been terms contracts under the previous wording of the Act, but are now unprotected by the Act. This does not mean, of course, that no examples of multiple payment contracts which are no longer protected by the Act exist. A member of the LIV has provided the following example of a multiple payment terms contract which remained a terms contract under the Act because it gave the purchaser possession before final settlement. The LIV considers that this is a useful example of the usual arrangements where early possession is given. Sale price - $875,000 payable as follows: Deposit payable on exchange of contracts (10%) Payment to be made in order to entitle the purchaser to possession $87,500 $37,500
Payment due 12 months after the possession date Payment due 24 months after the possession date Payment due 36 months after the possession date $250,000 plus interest of 1% above the Australian Financial Markets Association Bill Swap Reference Rate for a period of 180 days $250,000 plus interest based on the above rate $250,000 plus interest based on the above rate Total $875,000 plus interest 2. What is the extent to which the consumer protection provisions of the National Credit Code apply to terms contracts? The National Credit Code legislation may apply to some contracts which are terms contracts for the purposes of the Act. However, the LIV considers that the National Credit Code provisions are no substitute for the specific protections in the Act, including termination rights exercisable by a purchaser without reference to the Court. 3. What amendments would you propose to section 29A of the Act? The LIV proposes three amendments to address the issues identified in the 17 May 2012 submission. First, it suggests that s29a(1)(a) revert to the wording used under (a) in the definition of terms contract in s2 of the Act as at 1 July 2008, before the terms contract provisions were amended. Secondly, it proposes the deletion of the reference to occupation in s29a(1)(b) for the reasons referred to below. Section 29A(1) would therefore read as follows (proposed amendments to the existing section are tracked): 29A(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 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 of the land before the purchaser becomes entitled to a conveyance or transfer of the land. The LIV has suggested deleting the reference to occupation in s29a(1)(b) to overcome the problem of terms contracts being created inadvertently as referred to in its submission of 17 May 2012. This could be further clarified by the use of a drafting note to the effect that possession means exclusive possession and not a right to access the property to carry out works before the purchaser actually takes possession or is entitled to vacant possession under the terms of the contract. Thirdly, the LIV proposes that s29a(2) be repealed, as this is consistent with the terms contract provisions prior to their amendment in 2008 in which there were no definitions of deposit and final payment as part of the definition of terms contract. The LIV notes that the original definition of terms contract worked well prior to the 2008 amendments. Page 2
4. Are there any other matters relevant to the definition of terms contract under the Act? The LIV notes that the change to the definition has removed important consumer protections in s29h of the Act which enabled a purchaser under a multiple payment terms contract to require the vendor to transfer title to the land sold to the purchaser subject to the purchaser giving the vendor a mortgage over that land to secure payment of the balance of the price. As many purchasers do not wish to exercise that right in order to benefit from the postponement of payment of stamp duty until final settlement, the creation of a terms contract gives such purchasers the protection of being able to rescind the contract under s29f if the vendor has a mortgage and this has not been discharged within 90 days of the day of sale in accordance with s29o(2). Without such provisions there is a risk that a registered mortgagee whose interest predates the sale could sell the land as mortgagee in possession free from the purchaser's interest if the vendor defaults under the mortgage after substantial payments towards the price have been made by the purchaser. If you would like to discuss any of the matters raised in this submission, please do not hesitate to contact me or Karen Cheng, LIV Property and Environmental Law Section Lawyer, on ph 9607 9522. Yours faithfully Michael Holcroft President Law Institute of Victoria Page 3
17 May 2012 The Hon. Michael O Brien MLA Minister for Consumer Affairs Level 22, 1 Spring Street Melbourne VIC 3000 Dr Claire Noone Executive Director Consumer Affairs Victoria 121 Exhibition Street Melbourne VIC 3000 Dear Minister and Dr Noone Terms contracts provisions in the Sale of Land Act 1962 (Vic) The Law Institute of Victoria (LIV) wishes to raise with you changes made to the Sale of Land Act 1962 (Vic) (the Act) which have resulted in multiple payment contracts no longer being regulated by the Act. The LIV is concerned that there may be consumer detriment resulting from the provisions as currently worded, and submits that a review of s29a is warranted. Types of terms contracts Terms contracts may arise in one of two ways: 1. by payment, where the contract price is spread over a number of payments, in contrast to a cash contract that has just two payments, being a deposit at the start and a final payment at the end; and 2. by possession, where the purchaser is entitled to possession of the property before final payment, in contrast to a cash contract where possession is only given on final payment 1. The majority of terms contracts have both of these characteristics, and provide for the payment of a deposit and then a number of payments over a period of time, with the purchaser taking possession shortly after initial payment and often long before final payment. However, a contract has been considered as a terms contract if either of the criteria is satisfied 2. Terms contracts and the Act The Act was introduced nearly 50 years ago with one of its principal aims being to protect purchasers under terms contracts. It was an early form of consumer protection legislation. For the purposes of the Act, the definition of terms contract included a contract under which the purchaser was obliged to make two or more payments to the vendor after the execution of the 1 Russell Cocks, Property: Not Good Terms (2009) 83 (05) LIJ, p.83 2 Ibid.
contract and before he is entitled to a conveyance or transfer of the land. This type of contract may be described as a multiple payment contract. The definition in the Act prior to its repeal in 2008 made it clear that any sum paid on or before the signing of the contract and the final payment at settlement was not to be counted. This meant that there could be only one intermediate payment usually, the balance of a partly paid deposit before the contract became regulated by the Act as a terms contract. The Consumer Credit (Victoria) and Other Acts Amendment Act 2008 (Vic) repealed the definition of terms contract in the Act and substituted a new definition contained in section 29A. This section provides: 29A What is a terms contract? (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) (b) 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 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. It is apparent that the definition of deposit in s29a derives from the definition in Division 3 of Part 1 of the Act which deals with the stakeholding of deposits. It is also apparent that, by virtue of the new definition, a multiple payment contract without early possession is no longer subject to the Act. It cannot be a terms contract for the purposes of the Act because every payment made before completion of the contract constitutes part of the deposit according to the definition of deposit in s29a. That consequence appears to render unnecessary the vendor s disclosure obligation regarding terms contracts in s32(2)(f) of the Act, which provides that the vendor s statement must contain the following: in the case of a terms contract where the purchaser is obliged to make two or more payments to the vendor after the execution of the contract and before the purchaser is entitled to a conveyance or transfer of the land, the information set out in Schedule 2; Judicial consideration Section 29A was considered by the Supreme Court recently in Ottedin Investments Pty Ltd v Portbury Developments Pty Ltd [2011] VSC 222, where the learned judge ruled (at [68]): It is not a matter for this court whether the words used in s 29A(2) produce an unsatisfactory consequence in the general use of contracts involving two or more payments to a vendor between execution of the contract and becoming entitled to a transfer. On the one hand, in my view, there is no ambiguity or uncertainty in the definitions of deposit and final payment adopted by the Parliament
The LIV queries whether it was an intended consequence of the 2008 amendment legislation that the Act no longer regulate multiple payment contracts. If that was intended, the LIV seeks details of the policy or rationale behind that decision. The LIV also queries why s32(2)(f) was not amended or repealed if it was in fact the intention that the Act no longer regulate multiple payment contracts. The LIV believes that this is a matter of public importance, and that a review of section 29A of the Act generally is warranted. The LIV respectfully submits that the review should consider: 1 What, if any, consumer protection is required in Victoria for multiple payment contracts that are not already covered by the Consumer Credit Code; 2 The different circumstances in which multiple payment terms contracts could arise and where consumer protection may be appropriate to protect consumers under such contracts; 3 The repeal of section 32(2)(f) of the Act if multiple payment terms contracts cease to exist; and 4 The amendment of section 29A(1)(b) to ensure that it imposes the statutory requirements relating to a terms contract only in circumstances where the purchaser enters into possession following a preliminary settlement and that purchaser requires the consumer protection applying to terms contracts. For instance, The LIV submits that inadvertent creation of the right to possession such as arose in Mahred Nominees Pty Ltd v Tulloch & Anor (1991) V ConvR 54-421 (Mahred) and in Munro & Anor v Humphries [2008] VSC 600 (Munro) should not create a terms contract. In Mahred, Byrne J held that a special condition which stated that "the vendor hereby agrees to grant the purchasers access to the two vacant properties for the purpose of renovating upon payment of the whole of the deposit monies" gave an entitlement to occupation under the previous definition of a terms contract in section 3 of the Act. This, in turn, gave the purchasers the right to avoid the contract under section 14(1) of the Act at any time before completion. LIV members are aware of cases where estate agents have inserted handwritten special conditions allowing purchasers access to the property being sold in order to carry out works (such as in Munro) thus inadvertently placing vendors at risk of the purchaser being able to rescind the contract if the vendor is unable to discharge its mortgage within 90 days of the day of sale or there has been any other contravention of the requirements relating to terms contracts. If you would like to discuss any of the matters raised in this submission, please do not hesitate to contact me or Sue Jones, LIV Property and Environmental Law Section Lawyer, on ph 9607 9522. Yours faithfully Michael Holcroft President Law Institute of Victoria