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Putting the cart before the horse: Statutory confusion over terms contracts

Feature Articles

Cite as: Jan/Feb 2013 87 (1/2) LIJ, p.38

Repeal of the section relating to definition of terms contracts for sale of land could solve the problems created  by amendments to the  Sale of Land Act 1962 (Vic).

By Nimal Wikramanayake SC

In 1962 the Sale of Land Act (the Act) was enacted for two purposes: first, to provide protection to purchasers under terms contracts for the sale of land; and second, to prevent lots on a plan of subdivision being sold before the plan was registered.

In s2 of the Act a terms contract was defined as:

“an executory contract for the sale and purchase of the land under which the purchaser is –

(a) obliged to make two or more payments to the vendor after the execution of the contract and before he is entitled to a conveyance or transfer of the land; or

(b) entitled to possession or occupation of the land before he becomes entitled to a conveyance or transfer of the land”.

This article is concerned with the interpretation of sub-section (a) above and not with sub-section (b), since the latter has not been affected by the provisions of s29A of the Consumer Credit (Victoria) and Other Acts Amendment Act 2008 (the Amending Act).

Previous case law

Sub-section (a) was the subject of a carefully reasoned decision by Hedigan J in Australian Horizons (Vic) Pty Ltd v Ryan Land Co. Pty Ltd & Ors.1 The plaintiff/purchaser and the defendant/vendor entered into a contract of sale of real estate dated 10 October 1989. The purchaser encountered difficulties in raising finance and a second agreement was made on 27 March 1990. The second agreement made a number of variations to the first agreement, including a later settlement date, an increased purchase price and a release of the deposit. The purchaser continued to have difficulties in arranging finance and a third agreement was made on 30 October 1990 which varied the payments under the contract and the settlement date to 15 February 1992. The purchaser was unable to settle the contract and then contended that it was a terms contract.

His Honour held that the three agreements read together constituted one terms contract within the meaning of the Act, but exonerated the vendor pursuant to the provisions of s14(1) of the Act.

In Starco Developments Pty Ltd v Ladd2 the Court of Appeal in Queensland held that a contract for the sale of land could by variation made between the vendor and purchaser be converted into an “instalment contract” (terms contract).

The 2008 amendments

Until 2008 the legislative provisions relating to terms contracts were contained in ss2, 2(4), 3, 4, 5, 6, 7, 14, 32(2)(f) and 33 of the Act. In 2008 the amending Act introduced into the Act a new Division 4 – terms contracts, containing ss29A to 29W. The provisions relating to terms contracts were for the most part left unamended, save that a definition of terms contracts in s2 was altered; s2(4) was repealed and s32(2)(f) was left unamended.

The new definition of a “terms contract” is to be found in s29A(1) and (2):

(1) In this subsection the words “(other than a deposit or first payment)” were added after the words “two or more payments” in the original definition.

“(2) In sub-section (1) –

deposit means the 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 the payment on the making of which the purchaser becomes entitled to a conveyance or transfer of the land”.

The repealed s2(4) of the former Act provided:

“It is hereby declared that for the purpose of determining whether an executory contract is a terms contract within the meaning of this Act any payment made in relation to the contract by the purchaser –

(a) on or before the execution of the contract; or

(b) upon the making of which he becomes entitled to a conveyance or transfer of the land –

is not a payment required to be made to the vendor after the execution of the contract and before he is entitled to a conveyance or transfer of the land.”

The obligations of a vendor under s32(2)(f) – the section 32 statement – were left unchanged:

“(2) The statements required by subsection (1) shall contain the following matters – . . .

(f) 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 . . .”

Schedule 2 was left unamended.

Earlier amendments

The Act was enacted in 1962 to protect terms purchasers. However, there were problems in regard to the deposits paid by purchasers under cash contracts. In order to protect purchasers under cash contracts, the Sale of Land (Deposits) Act 1980 was enacted “to make provision in relation to the holding of deposit moneys in transactions for the sale of land and for other purposes”.

The meaning and purpose of a “deposit” has always been clear, and was restated by Barwick CJ in Brien v Dwyer.3

A statutory deposit was created by s23 of the 1980 amendment to the Act, which read:

“‘Deposit moneys’ in relation to a transaction for the sale of land includes any moneys which are part of the purchase price received by the vendor or on behalf of the vendor before the purchaser becomes entitled to the transfer or conveyance of the land which is the subject of the transaction, or in the case of a terms contract any moneys received by the vendor or on behalf of the vendor before the purchaser becomes entitled to possession or to the receipt of rents and profits pursuant to the contract”.

Thus, in the case of a cash contract, if any payment was made after the date of the contract and before completion it became a statutory deposit. In the case of a terms contract, any money received by the vendor or on behalf of the vendor before the purchaser became entitled to possession or receipt of the rents and profits became a statutory deposit.

The problem

The second part of the above definition, in relation to terms contracts, in this “statutory deposit” was imported into the definition of terms contracts in s29A(2) without any consideration being given as to the effect and consequences of this unusual definition of a “statutory deposit”.

A terms contract usually entitled the purchaser to possession on payment of the deposit but not to a transfer or conveyance of the land until after a period of time had elapsed, during which they paid instalments of purchase money with interest in the expectation of subsequently obtaining a title.

When at some future date they had paid the full amount owing under the contract, they became entitled to delivery of the duplicate certificate of title and a registered transfer of the land or a conveyance and the muniments of title (as the case may be).

Thus, in a terms contract for the sale of land there would first be a determination of the purchase price, the determination of what the deposit was to be, and the number of instalments to be paid under the contract, the amount of the instalments and a final settlement date. Under this contract, when the purchaser paid the deposit they were entitled to immediate possession. The introduction of the definition in s29A(2) of “statutory deposit” made no change in the law; it simply redefined the obligations of the parties. A terms contract was still a contract where the purchaser was “obliged” to make two or more payments, other than the deposit or final payment, to the vendor after the execution of the contract and before the purchaser became entitled to a conveyance or transfer of the land.

In s29A(1) the purchaser is “obliged” to pay, while in s29A(2) the deposit means “a payment made to the vendor”.

Two questions arise for determination:

(1) Did Parliament intend to change the meaning of “terms contract” and “deposit”?

(2) If yes, then what is the meaning of those words?

The Interpretation of Legislation Act 1984, s35(b)(3), permits explanatory memoranda or other documents laid before Parliament to be used as aids in the interpretation of a provision in the Act. It is abundantly clear from the explanatory memorandum that it was not the intention of Parliament to introduce into the Act a new definition of the word “deposit” to change the original meaning of what a terms contract was. This was confirmed in the second reading speeches in both Houses of Parliament by MPs Hulls4 and Robertson.5

It is important to remember that the word “deposit” as defined in s29A(2) of the Amending Act is a “definition clause”. As the editors of Statutory Interpretation in Australia (6th ed.), Pearce and Geddes, point out at paragraph [6.63], definitions are not to be treated as substantive provisions. They refer to the decision of the High Court in Gibb v FCT,6 where Barwick CJ, McTiernan and Taylor JJ, when considering the definition of “dividends” in that case, pointed out:

“The function of a definition clause in a statute is merely to indicate that when particular words or expressions the subject of the definition are to be found in the substantive part of the statute under consideration, they are to be understood in the defined sense – or are to be taken to include certain things which, but for the definition, they would not include. Such clauses are, therefore, no more than an aid to the construction of the statute and do not operate in any other way. As was said by Sutherland in Statutes & Statutory Constructions (2nd ed., vol. 2, p687):

“‘Such definitions can, in the nature of things, have no effect except in the construction of a statute themselves’.

“Consequently the effect of the Act and its operations in relation to dividends as defined by the Act must, we think, be found in the substantive provisions of the Act which deal with ‘dividends’”.

Similarly in Jobbins v Middlesex County Council,7 Scott LJ stated that a definition section ought not to be construed as cutting down the enacting provisions of an Act unless there is absolutely clear language having the opposite effect.

In Boehm v Director of Public Prosecutions8 the Court of Appeal stated:

“Provisions re-written in plain English, like mere amending provisions, should not be treated as altering the character and operation of the previous provisions unless that intention is clearly indicated: cf. Ministry of Railways and Harbours of the Union of South Africa v Simmer & Jack Proprietary Mines Ltd [1918] AC 591 at 596.”

It is submitted that there was no intention of Parliament to make any alteration in the law relating to terms contracts. It was merely a restatement of the existing law.

Subsequent case law

In Ottedin Investments Pty Ltd v Portbury Developments Pty Ltd,9 on 18 December 2008 Ottedin and/or nominee contracted to purchase a property at 20 Lecky Road, Officer for $6.5 million. It was a normal cash contract for the sale of land requiring the payment of a deposit of $325,000 on the day of the sale, and completion was fixed for 18 December 2009. The purchaser was unable to complete the contract and the parties entered into a deed of variation of contract, which kept the purchase price at $6.5 million but increased the deposit from the $325,000 that had already been paid to $1.325 million, of which $1 million was to be paid on 31 January 2010. Further, the purchaser contracted to make an interim payment of $3,675,000, payable on the earlier of 150 days after rezoning (defined as “the day of the gazetting of the Gardenia Employment Structure Rezoning Plan”) or settlement. Since the purchaser was given the alternative of paying the $3,675,000 either after the rezoning or at settlement, whichever was earlier, the purchaser was “obliged to make this payment”. In the correspondence before the negotiations were entered into the purchaser said that the contract could be varied, with the variations not to create a terms contract. However, Dixon J stated (at [24]):

“As matters developed the intention of the plaintiff to vary the existing contract without creating a terms contract or infringing the Duties Act is significant”.

What the parties intended to do and what they actually did are two completely different things. They may have intended not to enter into a terms contract but the effect of what they did was to create a terms contract. The purchaser was perfectly entitled, if the contract became a terms contract, to rely on it so as to avoid its obligations.

Dixon J then stated (at [70]):

“Ottedin’s argument that the contract was a terms contract is dependent upon a favourable characterisation of both the second and third payments. It is plain, in my view, that the Deed of Variation created a deposit for the transaction effected by two payments”.

A terms contract usually entitles the purchaser to possession of the property on payment of a deposit, but not to a transfer or conveyance of the land until after a period during which they have paid instalments of purchase money with interest in the expectation of obtaining a title. When at some future date the purchaser has paid the full amount due under the contract they become entitled to the delivery of a duplicate certificate of title and a registrable transfer of land or conveyance and muniments of title (as the case may be).

The person who drafted s29A(2) has, if I may be permitted to use a colloquialism, put the cart before the horse. Once it is determined that the contract is a terms contract then “the statutory deposit” means any payment made by the purchaser before they become entitled to a conveyance or transfer of the land.

This matter was made clear in Myers v Witham,10 where Cussen J was faced with the problem of applying the English rule of completion in relation to “cash contracts” to the situation of a typical Victorian “terms contract of sale”. His Honour held that in a terms contract the “date of completion” was not the date of the payment of the purchase money in full (or the last instalment thereof) but the date of acceptance of title and payment of the balance of the deposit. This is the meaning of “deposit” in s29A(2), when there are two or more payments between the execution of the contract and when the purchaser becomes entitled to a transfer at settlement. The deposit is the sum payable on the execution of a terms contract.

In Ottedin the contract had already been made. Two additional payments were then required to be made. These two payments had the effect of making the contract a terms contract and – as was said by the Queensland Court of Appeal in Starco,11 a cash contract for the sale of land can by a variation thereto be converted into a terms contract for the sale of land. When the variation was entered into by the plaintiff and the defendant, the cash contract was converted into a terms contract and the purchaser, Ottedin, was entitled to immediate possession of the land.

Dixon J went on to state in Ottedin (at [70]):

“It is truly fanciful to contend that the second payment is not a deposit”.

The second payment was characterised in the variation as a deposit, but the fact that the parties characterise the payment as a deposit does not necessarily mean that it is a deposit.

Dixon J then said (at [71]):

“There is an air of unreality about the third payment, as it was not made but fell into the residue – the final payment”.

Due to space constraints, I do not propose to analyse this paragraph, but simply to say that there was no unreality about the payment: it was an obligation undertaken by the purchaser to pay the sum of $3,675,000 to the vendor after 150 days had elapsed since the rezoning if the rezoning took place before settlement.

Conclusion

It is submitted, with all due deference to Dixon J, that his analysis of the meaning of the word “deposit” is incorrect. If his Honour was concerned about the bona fides of the purchaser and that the vendor was penalised for its intention to keep the contract alive, Dixon J could have relieved the vendor pursuant to the provisions of s29F(2) of the amending Act, as Hedigan J did in Australian Horizons.12

The simple answer to the problem is to repeal s29A(2) of the Act.



NIMAL WIKRAMANAYAKE SC MA (Cantab) is a chartered arbitrator and accredited mediator, and author of Voumard’s The Sale of Land (6th edn), 2009, Thomson Reuters. He is a judge of the Court of Appeal in Fiji.

1. [1994] 2 VR 463.

2. (1999) 2 QBR 532.

3. (1978) 141 CLR 378 at 387.

4. R Hulls, Second Reading Speech to the Consumer Credit (Victoria) and other Acts Amendment Bill, Hansard, 6 December 2007.

5. T Robinson, Second Reading Speech to the Consumer Credit (Victoria) and other Acts Amendment Bill, Hansard, 28 February 2008.

6. (1966) 118 CLR 628 at 635.

7. [1949] 1 KB 142 at 160.

8. [1990] VR 494 at 498.

9. [2011] VSC 228.

10. [1924] VLR 470.

11. Note 2 above.

12. Note 1 above.

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