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Excessive protection?

Feature Articles

Cite as: (2009) 83(03) LIJ, p.56

A Supreme Court decision applying the Uniform Consumer Credit Code to some terms contracts for the sale of land signals the further decline of such contracts in Victoria.

By Andrew Bretherton

The decision of Bell J in Geeveekay Pty Ltd, Geoffrey Keogh and Veronica Keogh v Director of Consumer Affairs Victoria,1 (Geeveekay) that terms contracts for the sale of land for residential or household purposes are potentially regulated by the Uniform Consumer Credit Code (UCCC), will inevitably lead to the further reduction of the use of terms contracts in Victoria.

The decision will necessitate the alteration of many provisions customarily found in Victorian contracts of sale of real estate, including default provisions, in cases where the UCCC applies. It also means the terms of these contracts are open to review by the Victorian Civil and Administrative Tribunal (VCAT) under the unjust transaction provisions in s70 and the hardship provisions in s66 of the UCCC.

Background

The Sale of Land Act (Vic)

The Sale of Land Act 1962 (the Act) was introduced following two reports from the Statute Law Revision Committee on the sale of land on terms. It is distinctive legislation which is not duplicated in any other Australian state or territory. It arose because of difficulties encountered by purchasers acquiring land by way of terms contract, particularly in the case of multiple terms contracts of sale of unsubdivided land. The Statute Law Revision Committee noted in its initial report, prior to the introduction of the Act, that a series of terms contracts, while relatively unknown in most parts of Australia, were very prevalent in Victoria. This was possibly due to the fact that the payment of stamp duty on the transfer of title was postponed under these contracts.2

The Act contains various restrictions on the sale of land by way of terms contract in Victoria. In particular, s3 provides a general restriction on the sale of land under a terms contract unless at the date of the making of the contract the prospective vendor is the registered proprietor of the land or presently entitled to become the registered proprietor of the land.

Section 6 of the Act provides restrictions on the sale of land that is subject to a mortgage, including that a vendor shall not sell land subject to a mortgage under a terms contract unless the mortgage relates only to that land, and the contract provides that the consideration for the sale of the land shall be satisfied, to the extent of any mortgage money owing at the date the purchaser becomes entitled to possession, by the purchaser assuming from that date the obligations of the vendor under the mortgage. There are also disclosure obligations requiring the vendor to give prescribed particulars of such mortgage or mortgages.

It is probably true to say that terms contracts of sale have tended to be used in respect of properties with some unattractive features. It is also clear that the considerable increase in the availability of home finance to consumers, following the emergence of non-bank lenders over the past 10 years, has significantly lessened the need for vendors to be concerned with the provision of finance to their purchasers. The market has seen the emergence of lenders who are often prepared to lend a high percentage of the purchase money. Traditional banking requirements demanding that consumers establish a prior deposit with their lending institution, or more conservative loan to valuation ratios, are things of the past.

The UCCC

The UCCC was introduced nationally in 1996 and regulates the provision of all credit to natural persons for personal, domestic or household purposes. The UCCC regulates credit which has four elements, namely:

  • the debtor must be a natural person, or a strata corporation;
  • the credit must be provided or intended to be provided wholly or predominantly for personal, domestic or household purposes;
  • a charge is or may be made for providing the credit; and
  • the credit is provided in the course of or incidentally to a business.

Unlike the previous Credit Acts, the application of the UCCC is not limited by reference to interest rates or the amount of credit being provided. As a consequence, the UCCC applies to the vast majority of domestic mortgages. The UCCC regulates all aspects of regulated credit, imposing significant pre-contract disclosure obligations, regulating the format of the credit contract and related securities, imposing obligations on the credit provider during the life of the loan and also regulating enforcement.

Compliance with the UCCC is complex and expensive. As a consequence, many lenders seek to know enough about the UCCC so as to ensure that they only make unregulated loans.

Before the Geeveekay decision, there was some doubt as to whether the UCCC applied to terms contracts. In particular, there was uncertainty as to whether a terms contract involved the provision of credit within the meaning of the UCCC. The extent of the uncertainty has led to specific legislative proposals, recently passed by the Queensland Parliament but yet to be proclaimed, to bring terms contracts within the UCCC.

The Geeveekay decision

Geeveekay was a test case involving an appeal from VCAT as to whether the UCCC applied to a terms contract of sale of land. The Director of Consumer Affairs Victoria had issued an application in VCAT alleging breaches of key requirements of the UCCC and seeking the imposition of civil penalties for those breaches in respect of 46 contracts of sale. The contracts were entered into by Geoffrey and Veronica Keogh, or their company, Geeveekay Pty Ltd, trading under the name Great Australian Dream Providers. VCAT determined that the contracts came within the UCCC. Mr and Mrs Keogh and Geeveekay appealed to the Supreme Court against that decision. The appeal related to one of the 46 contracts of sale, being a contract entered into by Tania Rand.

On 1 August 2002, Ms Rand had purchased a Morwell property from Mr and Mrs Keogh on terms for $82,280, repayable with monthly interest starting at 14.69 per cent, by instalments of $915.51 per month for 30 years. She agreed to observe the terms of their mortgage with Westpac. Mr and Mrs Keogh had previously purchased the property in 2002 for $54,400, with funds supplied by a loan from the Bank of Melbourne secured by mortgage, repayable with interest starting at 5.72 per cent, by instalments of $317 per month for the same period.

Compliant with the Act, the contract of sale by Mr and Mrs Keogh to Ms Rand obliged Ms Rand to meet payments under the Westpac mortgage.

The issue before the Supreme Court was whether the entry into the terms contract, and the incurring of an obligation to pay 36 instalments, constituted “credit” under the UCCC.

Under s4(1) of the UCCC, “credit is provided if under a contract –

(a) payment of a debt owed by one person (the debtor) to another (credit provider) is deferred; or

(b) one person (the debtor) incurs a deferred debt to another (the credit provider)”. VCAT held, and the Supreme Court confirmed, that in entering into the terms contract with Mr and Mrs Keogh, Ms Rand incurred a deferred debt within the meaning of “credit” in s4(1)(b) of the UCCC.

Bell J agreed (at [86]) with the analysis of VCAT in that, in s4(1)(b), “a deferred debt” means:

“ . . . an existing debt incurred under the contract payable under the contract at a defined future date. The words ‘incurs a deferred debt’ point to an immediately incurred deferred debt. Although payable in the future, it is an existing debt represented by an existing obligation . . . The words ‘incurs a deferred debt’ are apt to describe the act of exposing oneself contractually to an obligation to make a future payment”.

Following an extensive review of cases, including those relating to the nature of the obligations incurred under leases and contracts for the sale of goods by instalments, and after reviewing the purposes of the UCCC, Bell J determined (at [128]):

“It is clear from this review of the authorities that the legal character of Ms Rand’s obligation as the buyer to pay instalments of price under her terms contract for the sale of land with Mr and Mrs Keogh is a debt enforceable by them as the sellers once the time for payment arrives. The fact that the instalments might include a component of interest does not alter the character of the payment in that respect; it is derived from the same contractual obligation of Ms Rand as the buyer to make payment of that ascertainable sum on the specified day”.

Both VCAT and the Supreme Court determined that the assumption by Ms Rand of the vendor’s mortgage obligations provided a second basis for the UCCC to apply.

The Court noted (at [160]:

“As the Tribunal found, the relationship between Mr and Mrs Keogh on the one hand and Westpac and the Bank of Melbourne on the other is one of mortgagor/debtor and mortgagee/creditor. In particular, their obligation to Westpac and the Bank of Melbourne to make the monthly repayments on their loan has the character of a definite present obligation to make an unavoidable payment of an ascertained amount in the future. By entering into the terms contract with Mr and Mrs Keogh, Ms Rand has bound herself to observe the terms of their mortgage with respect to their loan with the Bank of Melbourne. She thereby became subject to such an obligation, as between herself and them. In becoming contractually bound by that obligation, Ms Rand incurred deferred debt under s4(1)(b) of the Code. On this additional basis, the terms contract between her and Mr and Mrs Keogh is a credit contract under s5”.

The issue of potential civil penalties for alleged breaches of the UCCC in Geeveekay has yet to be determined by VCAT.

The implications of the Geeveekay decision

It should be stressed that while the facts of Geeveekay were more exotic than those contained in many terms contracts, it is clear that the Court’s interpretation of “credit” will extend to plainer contracts. However, for the UCCC to apply to a terms contract it will be necessary that all four elements noted above apply, including that credit is provided in the course of or incidentally to a business and that credit is being provided for personal, domestic or household purposes.

The Geeveekay case evidences the difficulties of marrying together the technical requirements of the UCCC with sale of land documentation. While the UCCC is based on the premise that accurate disclosure of prescribed information materially benefits consumers, recent developments have seen a move towards simplified UCCC disclosure. In this context, disclosure of information under both the UCCC and the Act would appear excessive. It also seems clear that the Geeveekay case will inevitably lead to a further reduction in the use of terms contracts of sale in Victoria, as many responsible developers will not wish to face the additional responsibilities and contractual uncertainty imposed by the UCCC as well as the potential obligation to register as a credit provider.


ANDREW BRETHERTON is a banking and finance partner at Deacons, practising extensively in property and consumer finance.

The numbers in square brackets in the text refer to the paragraph numbers in the judgment.

1. [2008] VSC 50.

2. Statute Law Revision Committee, Report Upon the Sale of Land on Terms, 2 May 1962, No 15 – 4091/62.

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