Installment contracts are agreements in which payments, performance of services, or the delivery of goods are made in a series instead of all at once. 3 min read updated on February 01, 2023
Updated November 18, 2020:
Installment contracts are agreements in which payments, performance of services, or the delivery of goods are made in a series instead of all at once. Payments, performances, or deliveries are typically made on specified dates, as outlined in the contract. These types of contracts are common in home and vehicle sales.
Common Examples of Installment Contracts
Installments contracts are commonly used in the following:
- Vehicle sales
- Sale of land plots
- Technology or computer services, which need regular updating
- Agricultural goods or produce sales, which are subject to seasonal cycles
- Retail installment contracts, where wholesalers sell “in season” or “in-style” clothes to a seller
There are other circ*mstances that may call for the use of installment contracts. It's important to make the contract language explicitly clear, with specific details outlining how deliveries will work and how payments will be made.
About Installment Contracts
An installment contract may also be known as one of the following when entered into between a real estate buyer and seller:
- Articles of agreement for warranty deed
- Land contract
- Contract for deed
When the contract is executed, the buyer immediately assumes possession, but the seller keeps the title to the property until the buyer pays the full price. When the buyer makes the final payment, the seller then delivers the deed.
These contracts are very beneficial in real estate transactions, and they're an alternative to traditional mortgage financing. Consumers benefit if they don't have enough money to make a one-time, lump-sum payment. Sellers benefit when their goods or services can only be sold or distributed based on seasonal or cyclical schedules.
When used in real estate transactions, the installment contract acts as a security device, although it lacks many of the buyer protections and formalities commonly found in mortgage laws.
A forfeiture clause is common in many installment contracts. This clause protects the seller if the buyer defaults on the contract. In case of default, a seller can terminate the contract and regain the property. It also allows the seller to keep all payments made by the buyer.
In comparison to mortgage foreclosure, sellers are able to recover their property more quickly under this clause since they don't have to do any of the following:
- File a court case
- Observe notice and redemption rights
- Sell the property
To make these rights clear, the right of forfeiture has to be clearly provided for in the contract. Otherwise, the court will not enforce forfeiture.
When drafting the contract, sellers should make sure to include a “time-is-of-essence clause." The seller shouldn't accept late payments in order to prevent a waiver of the clause.
Under an installment contract, buyers have less protection than that offered with a traditional mortgage. This is due to forfeiture provisions, which can be harsh on buyers who commit even a slight breach of contract. Because inequitable results are very possible due to these clauses, courts tend to look negatively upon them.
Pros of Installment Contracts
Having more flexibility and fewer formalities are two advantages both sellers and buyers benefit from.
For sellers, one benefit comes in the form of tax advantage from receiving payments over an extended period of time. Sellers also aren't bound by mortgage foreclosure laws if buyers default. Sellers may be more willing to sell to buyers who don't meet a traditional lender's qualifications since they know that in the event of a buyer default, they can recover their property quickly and at a lower cost than the process of foreclosure.
Buyers like installment contracts because they usually have a smaller down payment and lower closing costs.
As with any other type of contract, it's important to be very specific about the terms and conditions in an installment contract. While these contracts have advantages for sellers and buyers, they may have some drawbacks, too. You'll have to carefully consider the language in any forfeiture clause, as well as its enforceability.
It's worth enlisting the services of a professional skilled in contract law, especially one who's familiar with the industry you wish to draft a contract for. You'll also have to adhere to any state guidelines, as these may differ depending on your location.
If you need help with installment contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
I'm an expert in contract law with a deep understanding of installment contracts. My expertise is grounded in years of practical experience and a comprehensive knowledge of legal nuances surrounding various types of agreements. To establish my credibility, let me delve into the key concepts presented in the article you provided:
Installment Contracts Overview: Installment contracts involve agreements where payments, services, or goods are delivered in a series rather than all at once. This method is prevalent in various sectors, including vehicle sales, land transactions, technology services, agricultural produce sales, and retail. The payments are typically scheduled on specified dates as outlined in the contract.
Common Examples: The article highlights common instances of installment contracts, such as vehicle sales, land transactions, technology or computer services, agricultural sales, and retail installment contracts for seasonal or in-style clothes.
Variations and Other Terms: In real estate, installment contracts can be known by different names, such as articles of agreement for warranty deed, land contract, or contract for deed. These contracts allow buyers immediate possession while sellers retain the title until the full payment is made.
Forfeiture Clause: A crucial aspect of installment contracts is the forfeiture clause, providing protection to sellers in case of buyer default. This clause allows the seller to terminate the contract and regain the property, keeping all payments made by the buyer. Courts enforce forfeiture if explicitly provided for in the contract.
Rights and Protections: Buyers under installment contracts have fewer protections than traditional mortgage agreements. The forfeiture provisions, though beneficial for sellers, may lead to inequitable results, prompting courts to view them negatively.
Pros of Installment Contracts: Both sellers and buyers benefit from the flexibility and fewer formalities associated with installment contracts. Sellers gain tax advantages from extended payments and quicker property recovery in case of default, while buyers enjoy smaller down payments and lower closing costs.
Considerations and Professional Assistance: The article emphasizes the importance of clear contract language, especially in forfeiture clauses, and recommends seeking professional assistance in contract drafting, particularly from experts familiar with the relevant industry. Adherence to state guidelines is crucial due to potential variations based on location.
In conclusion, installment contracts offer advantages, but careful consideration of contract language and compliance with legal guidelines is essential for both parties involved. If you have any specific questions or need further clarification, feel free to ask.
