What is a Terms Contract or Vendor’s Finance?

Definition of a Terms Contract

A contract of sale can be a terms contract on either of two bases:

  • If the purchaser is obliged by the contract to make two or more payments after signing the contract and before final settlement, but not counting any payment made upon signing (the deposit) or at final settlement (final payment); and/or
  • If the purchaser is entitled by the contract to possession or occupation before final settlement. This may include the situation where the purchaser is entitled to enter into the property on any regular basis during the term of the contract prior to settlement, for the purpose of maintaining the property or undertaking repairs or renovations.

These are alternatives and only one has to be satisfied to be a terms contract.

Consequences of Terms Contract

The Sale of Land Act 1962 (Vic) (Sale of Land Act) creates additional obligations on the vendor, which must be fulfilled at the time of contract, particularly where the sale of a property under a terms contract is subject to a mortgage. For example, the vendor must give an additional vendor statement setting out the cost of vendor finance if the contract is a terms contract on the basis that two or more payments are required under the contract. This requirement does not apply if it is a terms contract as a result of possession or occupation. A person may not sell on terms unless that person is the registered proprietor of the land, presently entitled to become registered or entitled pursuant to statute to sell.

A vendor cannot sell land on terms if the land is mortgaged, unless the land sold is the only land subject to the mortgage, the contract contains special conditions in relation to application of the proceeds of sale or the mortgage is discharged within 90 days of the sale. These additional obligations seek to avoid the possibility that the purchaser might pay a large part of the purchase price without ever becoming entitled to ownership of the property or that the vendor might encumber the property further, notwithstanding that the purchaser is in possession. A vendor of land sold on terms cannot subsequently mortgage that land.

Consequences of a Breach of the Sale of Land Act

If the breach relates to the disclosure requirements under section 32 of the Sale of Land Act, the purchaser might be entitled to avoid before accepting title, provided that the breach is not minor and the purchaser has suffered detriment. If the breach is of other requirements, the purchaser is entitled to avoid and the vendor is guilty of an offence under the Sale of Land Act, but the vendor may be saved if the breach is minor and the purchaser has suffered no detriment.

Settlement of a Terms Contract

Settlement is usually the time when the purchaser pays the balance due under the contract and receives possession of the property. A terms contract however, usually separates the time of possession, which often occurs upon payment of the deposit and the time for payment of the final balance due under the contract. Thus, settlement in a terms contract usually consists of a ‘preliminary settlement’, being the time when the purchaser goes into occupation of the property, and a ‘final settlement’, being the time when the final balance is paid to the vendor.

In a standard contract, settlement is the time that responsibility for the outgoings passes to the purchaser. In a terms contract this is at the time of ‘preliminary settlement’, when the purchaser becomes entitled to possession of the property. Thus rates are adjusted at that time and disposition and acquisition notices are sent off to authorities.

Published: 4 April 2014


The information in this article is general in nature and is not to be relied upon as legal advice. As always, we recommend you seek thorough legal advice to consider your own circumstances and determine whether the information contained in this article is applicable to you.  This article is current as at the date of publishing but will not be updated as circumstances change.