Mortgages, consumer leases and other finance products

Vendor terms contracts and rent-to-buy arrangements are often marketed to people in financial difficulty as a way to buy a home without needing a bank loan. However, these arrangements can be very risky – buyers may pay a lot of money to the seller, but can be evicted if they cannot afford to keep up with the repayments or they cannot get a loan from a bank.

A vendor terms contract is a way to buy property, where the buyer pays the purchase price to the seller in instalments, rather than using a home loan to pay the seller the full purchase price at settlement. The contract of sale to buy the property should state that the contract is a vendor terms contract.

Under a vendor terms contract, the title to the property remains in the seller’s name until the full purchase price is paid. Usually, the buyer lives in the property while they are paying off the purchase price. 

Also, under a vendor terms contract, usually it is the buyer who pays the council rates and property insurance.

A rent-to-buy arrangement is where one or more contracts provide for:

• the right to purchase the property; and
• the buyer to rent the property for at least six months before the right to purchase can be exercised or the purchase completed.

On 1 March 2020, the Sale of Land Amendment Act 2019 (Vic) and the Sale of Land (Exemption) Regulations 2020 (Vic) (‘SL Regulations’) came into effect. These made changes to the law about vendor terms contracts and rent-to-buy arrangements for homes.

Vendor terms contracts and rent-to-buy arrangements entered into after 1 March 2020

From 1 March 2020, the following are banned:

• rent-to-buy arrangements (unless the seller is a government or community housing agency (ss 29WA, 29WC Sale of Land Act 1962 (Vic) (‘SL Act’));
• vendor terms contracts if the purchase price is less than $750 000 (ss 29AB, 29EA SL Act; reg 6 SL Regulations).

If a buyer has entered into one of these banned arrangements after 1 March 2020, they can cancel the contract before it is completed by giving written notice to the seller. After cancelling the contract, the buyer is entitled to a refund of the money they have paid to the seller under the contract. However, the buyer will need to pay fair market rent for the time that they lived in the property, or were entitled to rent from the property (ss 29F, 29WG SL Act).

It is now an offence to advertise or induce a person to enter a banned vendor terms contract or rent-to-buy arrangement (ss 29AB, 29EB, 29EC, 29WD, 29WE SL Act; reg 6 SL Regulations).

Vendor terms contracts and rent-to-buy arrangements entered into before 1 March 2020

If a buyer entered into a vendor terms or rent-to-buy contact before 1 March 2020, they can apply to VCAT or a court to end the contract. This applies as long as:

• the rent-to-buy arrangement was not with a government or community housing agency;
• the vendor terms contract was for a purchase price of less than $750 000 (ss 55, 56 SL Act).

The court or VCAT can make an order to end the contract if:

1. at the time the buyer entered the contract, there was a reasonable prospect that they would not be able to make the payments required under the contract (e.g. because they could not afford to); or
2. at the time the buyer entered the contract, there was a reasonable prospect that they would not be able to get a loan to complete the purchase on reasonable terms;
3. the buyer no longer lives on the land purchased under the contract because they could not afford the payments required under the contract.

The court or VCAT can also make orders:

1. that the buyer does not have to do what is required under the contract; or
2. that the seller must repay the buyer the money they paid under the contract; however, the buyer will need to pay fair market rent for any time they lived in the property, or were entitled to rent from a tenant living on the property.

However, the court or VCAT must not make these orders of it would result in undue financial hardship for the seller or it is otherwise not fair to do so (s 55, SL Act).