Did you know that when a deposit exceeds 10% of the total price in a property transaction, it transitions into an installment contract?

According to the Property Occupations Act, if a deposit surpasses 10% in a residential contract or if the buyer is obligated to make additional payments exceeding the initial deposit before settlement, it qualifies as an installment contract.

An installment contract entails the buyer making multiple payments (installments) towards the property without gaining title of ownership until the full purchase price is paid off.

This type of contract offers increased protection for buyers and carries significant implications for the legal rights of the involved parties.

Here are some impacts of installment contracts for both parties:

Restriction on Seller’s Mortgage: The seller is prohibited from mortgaging the property further (including obtaining bridging loans) without the buyer’s consent. Any breach of this provision grants the buyer the right to terminate the contract, with potential penalties exceeding $1200 for the seller.

Right to Demand Conveyance: Assuming the purchaser is not in default and has paid at least one-third of the purchase price, they can request the seller to transfer the property title. Alternatively, the seller may choose to act as the mortgagee for the remaining balance.

Caveat Lodgment: Under an installment contract, the buyer can lodge a caveat against the property, preventing any additional registrations until the contract is fulfilled, and obtain signed transfers prior to settlement.

Buyer Default Handling: Installment contracts eliminate the clause “time to be of the essence,” requiring sellers to provide a 30-day notice before terminating the contract due to buyer breaches or missed deadlines.

Settlement Flexibility: Without requiring the seller’s consent, settlement can be extended by up to 30 days.

As evident, when installment contract terms come into effect, it can lead to complexities and significant delays in property settlement. In cases where a property initially had a 10% deposit but undergoes price negotiations resulting in a reduction, it’s advisable to include a term in the deed of variation stipulating that the balance exceeding 10% of the revised purchase price is refunded to the buyer. This helps avoid the unintentional formation of an installment contract.