If you agree to sell your property to someone and then let them move into the property before they have paid the whole of the purchase price, you have what is known as a “terms contract”.
Special rules apply to terms contracts under the Sale of Land Act 1970 which make these contracts particularly risky.
These are some of the risks you should be aware of if you are thinking of allowing a purchaser to move into your property before being paid the purchase price in full:
- If the purchaser is paying off the purchase price by instalments and then defaults, they may end up getting to stay in the property for at least 28 days rent-free which is the minimum period of notice you have to give before you can evict them.
- We have come across cases where a would-be developer offers to purchase land in anticipation of a planned subdivision, pay a portion of the contract price and pay the balance once the planned subdivision and development is complete. Meanwhile, unless there is a definite date for final payment specified in the contract, they end up staying in the property indefinitely and rent-free, without paying the balance of the purchase price. If the planned development then fails for whatever reason, you may find yourself stuck with an unwanted guest permanently unless you make an expensive Supreme Court application to remove them.
- If a payment is delayed and you need access to additional finance, you will not be allowed to mortgage any part of the property without the buyer’s prior written approval, even though their failure to pay you is the reason you need finance.
If, despite these risks, you do still decide to enter into a terms contract, these are some of the ways you can protect yourself:
- Investigate the prospective purchaser’s financial means before committing yourself.
- Insist that the contract provide for payment of a substantial deposit.
- Make sure the contract sets a definite due date for final payment and allows you to terminate it if the buyer does not pay you on time.
- Make sure the contract includes a written authority from the buyer allowing you to mortgage the property so that you don’t find yourself at the buyer’s mercy if you need to access additional finance after the contract is signed.
- Consider inserting into the contract, a liquidated damages clause which prescribes the rate per day that the buyer has to pay to you in compensation for overdue payments.