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Legal Chat - By Andrew Padanyi B.A., LL.B.

Despite recent changes to the Sale of Land Act in Victoria (the Act), it’s still possible to unwittingly create a terms contract (as distinct from the usual cash contract) where the vendor gives possession of the property before settlement. This occurs where the contract provides that the purchaser is entitled to possession before final payment.

In a recent court case, the vendor intended to sell vacant land but the purchaser wanted an extended settlement and the right to access the property before settlement to obtain building and planning permits and to start building. A special condition was written into the contract granting the purchaser “immediate possession”. Subsequently, the purchaser sought to avoid the contract on the basis that the contract was in fact a terms contract and that the vendor had failed to comply with the Act.

The vendor argued that the special condition was only intended to give the purchaser access to the land for specific purposes pending settlement, not to have possession of it. However, the court decided the condition meant what it said and the purchaser was entitled to avoid.

The breach relied on by the purchaser in this case was the failure of the vendor to transfer the property to the purchaser when requested to do so and to take a mortgage back. All terms contracts have this right. Failure by a terms vendor to comply with the purchaser’s request entitles the purchaser to avoid the contract.

There are also additional disclosure requirements that apply to terms contracts. Breach of those requirements may also entitle the purchaser to avoid.

The vendor might be saved avoidance if the vendor has acted honestly and reasonably and the purchaser is in no worse a position. The case illustrates how easily an ordinary cash contract can be “accidentally” converted into a terms contract, and the consequences. For the purchaser, non-compliance by the vendor with what turns out to be a terms contract can be an unexpected method of avoiding the contract if the purchaser’s circumstances change during the contract period. However, the vendor can still resist avoidance by showing that he/she has acted honestly and reasonably and that the purchaser has not suffered disadvantage as a result of the vendor’s non-compliance.

 

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