Non-Refundable Deposits and Instalment Contracts
For buyers and sellers of property in Queensland, arranging to release “non-refundable” deposits under a contract has traditionally been risky. The possibility of having a contract deemed to be an instalment contract due to a non-refundable deposit has significant implications for both buyers and sellers.
Under the Property Law Act 1974, section 71 defines an “instalment contract” as a “…. Contract for the same of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments”.[1]
Instalment contracts provide more protection to buyers than standard contracts. Generally, protections include:
1. Restriction on seller’s right to terminate
Under a standard REIQ contract, a seller can terminate the contract and forfeit the deposit if the buyer breaches an essential term of the contract, including the payment of a sum of money required under the contract.
However, under an instalment contract the seller is required to provide a buyer with 30 days’ notice to remedy this failure to pay, before the seller can terminate the contract or take any other action. This means that time is not necessarily of the essence in relation to the payment of monies. The settlement date may be extended by up to 30 days by a buyer without the seller’s consent.
2. Land not to be mortgaged by seller
Under a standard REIQ contract, there is no prohibition against mortgaging the property after the contract is formed, provided that the mortgage is removed from title at or before settlement. Under an instalment contract, a seller must not mortgage the property without the consent of the buyer.
3. Right of buyer to lodge caveat
Under an instalment contract, the buyer has an express right to lodge a caveat over the land. The creation of instalment contracts can severely impact a seller’s right to terminate a contract and walk away from a transaction if a buyer defaults.
4. Right to require conveyance
Where a buyer is not in default under an instalment contract and has paid an amount equal to one-third of the purchase price, they may require the seller to transfer the land to them in exchange for a mortgage in the seller’s favour.
The Case of Newlander Development Pty Ltd v Jung Kyun Han
Previously, contracts were argued to be instalment contracts in circumstances where a buyer paid a non-refundable deposit that was released to the seller. However, the recent case of Newlander Development Pty Ltd v Jung Kyun Han [2023] QSC 94[2] has provided further guidance on how the courts consider the question of non-refundable deposits giving rise to instalment contracts. In this case:
i. The buyer and seller has a standard REIQ contract on foot for the sale of a property;
ii. Settlement was due on 28 September 2022, however the buyer failed to tender for settlement;
iii. The seller terminated the contract on 29 September 2022; and
iv. The deposit (less agent’s commission) had been released to the seller, as the special conditions of the contract provided that the deposit was “non-refundable” and accessible to the seller on agreement.
The buyer contended that because the deposit was non-refundable, the buyer had lost their interest in the funds, and the deposit was therefore not a “deposit” as defined under the Property Law Act 1974, but a payment the Buyer was bound to make under the contract without becoming entitled to receive a conveyance in exchange, so that the contract was an “instalment contract” as defined under the Property Law Act 1974.
The Seller argued that despite the word “non-refundable” in the special conditions of the contract of sale, the deposit was still “liable to be forfeited”. They relied on the decision in Phillips & Anor v Scotdale Pty Ltd [2008] QCA 127[3].
Ultimately, the court held that while the deposit money became the property of the seller upon the payment to them, under the contract it still operated as a deposit. This is because:
i. The court considered that the words “non-refundable deposit” meant that the deposit was non-refundable if the buyer changed their mind and did not proceed with the contract, not that the buyer could not recover the deposit if the seller was in default.
ii. If the contract was terminated due to the buyer’s breach, the seller would still be entitled to retain the deposit.
iii. The buyer would be entitled to recover the deposit in the event of the seller’s breach, as under a contract a sum paid by way of deposit and in part payment of the purchase price is part of the consideration paid by the buyer. In the event of a buyer terminating due to the seller’s breach, the buyer would be entitled to obtain restitution of the deposit which they have paid. The court affirmed the analysis of the court in Foran v Wight (1989) 168 CLR 385, confirming that the buyer’s “claim for the return of the deposit is not founded on the rescinded contract… it is a claim found in the equitable notions of fair dealing and good conscience which require restitution of a benefit received as, or as part of, the quid pro quo for a consideration which has failed”.
The contract was found not to be an instalment contract.
Terms of Contracts to Watch Out For
While the decision in Newlander Development Pty Ltd v Jung Kyun Han may lead to some relief for certain sellers of property in Queensland, there remains numerous terms that the courts have found lead to an instalment contract. Some examples include:
i. Payment of interest on the outstanding purchase price, as the price for subsequent extension of time;
ii. Rental arrangements and the payment of rent;
iii. Related contracts and contingent commercial arrangements; and
iv. Other types of consideration provided by a buyer, which doesn’t entitle them to receive a conveyance in return.
Note that the above is not an exhaustive list, and we recommend that you obtain appropriate legal advice for your individual circumstances when buying and/or selling.
Contact the team at Miller Sockhill and engage an experienced team of Property Lawyers and Conveyancing Managers on 07 5444 4750 to protect your property interests today.
Rachel Clutterbuck, 6th November 2023
[1] Property Law Act 1974 – Queensland Legislation – Queensland Government
[2] Newlander Development Pty Ltd v Jung Kyun Han [2023] QSC 94 – Supreme Court of Queensland – Trial Division Caselaw (queenslandjudgments.com.au)
[3] Phillips v Scotdale Pty Ltd [2008] QCA 127 – Supreme Court of Queensland – Court of Appeal Caselaw (queenslandjudgments.com.au)