This response is along the lines of what happens in Queensland. I expect Victoria will be similar, but each state has its own property laws.
You often see this type of clause in developer contracts, also known as ‘off the plan‘ contracts. They can be necessary to allow the developer to be able to complete the property for sale. Most developers are heavily/solely reliant on a financier to fund the project completion - and the contracts can have a long term on them depending on where in the build they are signed. Developers can often find themselves in situations where the debt needs to be refinanced, or additional finding sought to overcome additional costs due to delay, budget revisions, fixes, unexpected issues, general council twaddle, and the like.
Without a clause allowing them to mortgage the property they wouldn’t be able to complete, and the contract would need to be terminated - and without the clause that can give the buyer a right to terminate for the seller creating an encumbrance over the property during the contract period.
The general rule is that a seller must give your clear title at settlement, except for any encumbrances specifically disclosed as staying on the title in the contract, or ones which are essentially automatic Crown reservations. This is done practically by providing relevant release instruments at settlement. If the seller doesn’t do this, you’re entitled to refuse to settle.
