Buying and Selling a Home Considerations - Contract Considerations

Contracts and Agreements for Buying and Selling Homes

So you have made the decision to buy a home or sell a home, or maybe you are considering doing so.  Whether it is an acreage, apartment style condo, townhouse, a house or anything in between, there are a large number of legal considerations, and it is important to have a general understanding of the process of negotiating, forming and closing the contract for the buying and selling a home.
From a contract law perspective, a typical home purchase and sale can be divided into two stages:

1. Contract Stage in which you negotiate and enter into an agreement, attend to your due diligence and if appropriate waive / remove your subject to’s; and
2. Conveyancing Stage in which lawyers typically are involved to [a] prepare the legal documentation and related steps for transferring title to the buyers the seller, including trust conditions and related documents which permit the buyer to register a mortgage before its paid; [b] preparing mortgage documentation and complying with instructions [tax searches, title searches, insurance etc.] provided by the buyer’s lender.

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1.   Contract Stage
This stage involves negotiating the terms of the Agreement of Purchase and Sale of the Property.
Generally, we recommend that a lawyer be consulted at the Contract Stage.
While there are a multitude of matters to be addressed when negotiating, drafting and entering into a contract, we will further divided into the contract stage into the following general timeline:
[a]  Entering into an Agreement -- Offer + Acceptance = Binding Contract;
[b] Due Diligence Period; and
[c]  Removal of Conditions / Holdbacks.
Again, there are many issues which may arise and can be addressed, and in fact volumes of legal case law, books [and numerous courses at law school] that we are only briefly addressing some of the issues which may arise in the residential purchase, mortgage and sale transactions in Alberta.
[a]   Entering into an Agreement -- Offer + Acceptance = Binding Contract
Generally speaking [again there are volumes of legal text on contracts and contract law], in its simplest form a contract is a written document that sets out in writing the “deal” between parties, setting out the parties’ intent [expectations], obligations [what the parties’ required to do] and rights [what the parties’ are entitled to].
As the contract you enter into when buying or selling a house will govern what your rights and obligations are, it is important that [a] you fully understand the contract; [b] that the contract fully and accurately sets out what you understand your “deal” with the other party to be.
We are often asked as to whether there is a “standard’ contract, and while some forms of contracts are commonly used the more relevant question is does the contract, “standard” or otherwise, set out the deal you think you are entering.
It is important that obtain independent legal advice before entering into a contract not only to assist you in understanding the contract, but also to assist you in identifying potential problems, so that any decision you make is informed and prudent.
Typically, in a real estate transaction, the buyer makes an offer to purchase which is either accepted [if accepted then there is a binding legal agreement] or rejected by the seller. Of course it is open to the to counter-offer.
Again, while you should obtain independent legal advice prior to drafting an agreement, you should consider the following:

1. Deadline for acceptance -- while often included as part of a negotiation tactic it is important that there be a deadline for the other party to accept your offer, as unless an offer is withdrawn [revoked] or expires it is available for acceptance, and it is easier to put in a deadline and extend that deadline then face legal issues arising from the other party accepting an outstanding offer you thought had expired;
2. Deposits -- while the specific contract you enter into will govern, but generally speaking, a deposit is at risk of forfeiture [1] if buyers don’t take reasonable effort to waive their condition precedents; or [2] if a buyers waive condition precedents but don’t close. In that light there are competing interest with buyers wanting to minimize the deposit to minimize their loss if they fail to close [ie. lender problems] and the sellers wanting to maximize the deposit as [a] a show of good faith / ability to close from the buyers; and [b] as compensation for losses [damages] if the Buyer fails to close.
3. Land Titles Searches -- again while specific contract will govern, generally speaking, contracts provide that buyer’s interests will be subject to non-financial registrations which will remain on title such as the following [which is not an exhaustive list]:
4. Restrictive Covenants, such as Architect Guidelines, prohibited uses of land [Glenora Caveat prohibits use of property for business or rivervalley Caveat prohibits uses which destabilize slope], neighbourhood fencing or walkway etc.;
5. Development Agreements and Developer’s Registrations which can be significant [charge against the land for Developer’s obligations to the City to develop the neighbourhood or the Developer’s right to re-purchase the lands for a nominal amount or charge the land to ensure the Builder’s compliance with the Developer’s instructions];
6. Other problematic financial registrations such as WCB or CRA registrations which may require a Court order to discharge or raise issues with respect to your deposit.

Another important part of a contract is condition precedents more commonly referred to as “subject to’s” which are discussed in further detail below.
[B]   Due Diligence -- Condition Precedents / Subject To’s
Generally speaking, again every contract is difference, the Seller does not give representations or warranties as to the condition of the house, and generally speaking the doctrine of Caveat Emptor applies making the buyer responsible for those defects n the condition of the property that were there to be seen.
It is of utmost importance that buyers to [a] take the opportunity to do its due diligence [inspect and make proper inquires]; and [b] identify and address those defects which are there to be seen as the buyer assumes them. Buyers may also wish to consider having the sellers provide a property disclosure statement, which is typically attached as a schedule to the property.
The purpose of “subject to’s” is to provide buyers with the right, obligation and opportunity to do their due diligence, and generally operate as a hang man’s axe / guillotine of contracts so that as long as buyer take reasonable efforts to satisfy their subject to’s if they find a defect or issue respecting a due diligence subject to and don’t waive or remove the subject to’s within the deadline provided then the contract immediately comes to an end and the deposits are returned.
Buyers should include in any offer they make condition precedents or subject to’s which permit them the opportunity to do their due diligence and provide them with a safeguard in the event that a defect or issue which the Buyer is reasonably unwilling or unable to accept arises.
This “safeguard” is not absolute and condition precedents only provide protection from problems which are in respect of the condition precedent. For example, buyers can only properly refuse to waive or remove their “subject to approval of mortgage financing” only if they are having problems obtaining financing and not because of any other reason
You may wish to consider precedents in the nature of the following:

• Subject to Buyer’s approval for mortgage financing satisfactory to the Buyer;
• Subject to Buyer’s satisfactory review of title and approval of non-financial and other registrations to remain on title;
• Subject to Buyer’s satisfactory review and approval of Real Property Report and evidence of Municipal Compliance;
• Subject to home inspection and Buyer’s satisfactory approval of the home inspection.
• Subject to Buyer’s Lawyer satisfactory approval of Real Estate Purchase Contract;
• Subject to Buyer’s and/or the Buyer’s Lawyer satisfactory approval of estoppel certificate, condominium financials, condominium documents and Condominium Property Act section 44 information [if applicable];
• Subject to sale of Buyer’s home or removal of conditions on the sale of Buyer’s home [if applicable].

The protection or safeguards afforded by condition precedents [subject to’s] are not absolute and as a contract is a written document intended to reflect the agreement between the parties, the wording of any “standard” contract and condition precedents only properly applicable if your deal fits the standard contemplated and we strongly recommend you obtain independent legal advice lawyer to discuss the particular wording of any condition, as well as what other conditions would be appropriate for your transaction prior to entering into any agreement.
While we have discussed buyer’s condition precedents, it is open and available to a seller to have subject to’s as well.
Generally speaking, from the seller’s perspective it is important to limit length of time [short deadline] as unless and until the condition precedents are waived/removed or expire, the deal is “pending” and generally speaking ties up the seller’s property.
[C]   Removal of Condition Precedents / Holdbacks
As subject to’s generally operate as a hang man’s axe / guillotine of contracts such that if they are not waived or removed the contract comes to an end.
If a party that has a condition precedent, typically a buyer, wishes to proceed it is important they waive a condition precedent before any deadline. If a condition precedent is NOT waived or removed before their deadline generally the contract provides that the agreement automatically comes to an end.
Often, if buyers identify defects or problems which they have a “subject to” in respect of when conducting their due diligence generally speaking their options are as follows:
[1]       Accept the defect or problems and remove condition precedents and proceed to close the Contract;
[2] Not accept the defect and NOT waive or remove condition terminating the Contract;
[3] Attempt to re-negotiate with the sellers either [a] a reduction in price for the defect; or [b] the obligation of the seller to rectify the defect plus a holdback [money held in trust] to secure the sellers rectifying the defect.
Of course generally speaking you cannot force a Seller to re-negotiate the contract to address a defect or problem.
2.   Conveyancing Stage:
This stage involves the preparation of legal documentation and attendance to the matters required for transferring title, and generally requires the involvement of a lawyer for each party.
Description on Title
You will want to consider [a] how you want your name to appear on title and the mortgage; [b] what address you want to be on title and the mortgage; and [c] ownership questions.
Ownership of Property
There are generally two different scenarios involved in answering the ownership questions, and they are either [i] one owner on title; or [ii] at least two owners on title.
[i]    One Owner on Title.
The provisions of the Dower Act apply if there is only one owner to be named on title, and the differing requirements of the Dower Act depend upon the marital status of the sole owner.
[ii]  Two or More Owners on Title
If there are to be at least two owners on title, we will require instruction as to the nature of the joint ownership, being whether the joint ownership will be a Joint Tenancy, a Tenancy in Common or some other form of ownership.
Other Factors to Consider
Real Property Reports
A Real Estate Purchase Contract will also typically contain a request for a Real Property Report and evidence of Municipal Compliance.
A Real Property Report is a document prepared by a land surveyor which provides an accurately and reliably sets out the locations and dimensions of buildings, improvements, rights-of-way, and encroachments relative to boundaries of their property. Generally, a Real Property should disclose the property boundaries, the location of the buildings and other improvements in relation to the property boundaries, any encroachments onto or from adjacent properties, rights-or-way, easements, and is relied upon by the municipality in determining whether there is compliance with municipal bylaws.
Compliance Certificate or other evidence compliance refers to a municipalities confirmation that the property and more importantly the improvements meet the requirements of the local bylaws, such as Right of Ways, Easements, and Bylaw Setbacks to name a few.
As set forth above, buyers should strongly consider requiring the review and acceptance of a Real Property Report and evidence of compliance as a condition precedent [subject to] of the contract.
We recommend you discuss the Real Property Report and evidence of compliance, and alternatives with your lawyer.
Insurance
We recommend you obtain multi-peril / multi-coverage insurance at the time you enter into a contract for the purchase of the property to protect you and your deposit.
If you are obtaining financing, you should ensure that your insurance meets your Lender’s requirements, as well as contains a First Loss Payable Clause. For instance, issues identified in your property inspection [such as electrical wiring] may be an issue for your insurer which in turn may cause issues for your lender.
Title Insurance
You may wish to consider title insurance when buying and selling a home.  Title insurance provides coverage for individual transactions, and coverage is valid for the duration of ownership and the policy coverage amount is generally the amount you paid for your property.
Depending upon the facts and circumstances, and the policy of title insurance obtained, title insurance may cover certain losses incurred as a result of unknown title defects or other covered matters that exist at the time of your purchase, but are unknown to you at that time, which may include:

• someone else claiming an interest in your title;
• fraud, forgery and false impersonation affecting the validity of your title;
• existing liens against the title including realty tax arrears and municipal utility charges;
• violations of municipal zoning by-laws;
• many forms of encroachments onto the property or adjoining land;
• existing work orders;
• lack of legal access to the property;
• unmarketability of land due to adverse matters that an up-to- date survey/Real Property Report (RPR)/Building Location Certificate would have revealed house;

but does not include coverage for

• Title or other defects created, allowed, or agreed to by you;
• Title or other defects known to you but not the title insurer prior to the policy date;
• Environmental matters;
• Native land claims;
• Matters that result in no loss to you;
• Matters disclosed in home inspection or building inspection reports obtained by you; and
• Exclusions and exceptions set forth in the policy of title insurance including transaction and property specific exclusions and exceptions added to your policy arising from searches performed and information provided to the title insurer.

Purchasing a Condominium
If you are considering purchasing a condominium unit please the following is a list of factors you should consider prior to entering into a purchase and sale contract:
The Condominium Corporation, Rules and Regulations

• Is the condominium corporation in good financial condition?
• Is all documentation for the condominium accessible and in good order?
• Are there any legal claims or judgments against the condominium corporation?
• Is the Estoppel Certificate and Condominium Documents to my satisfaction?
• Should I discuss the Estoppel Certificate and Condominium Documents with my lawyer?
• Should my lawyer’s review of the Estoppel Certificate and Condominium Documents be a condition to my contract?
• Is the reserve fund amounts and contributions sufficient for the costs of major repairs and replacement of common property elements over time?
• Should I consult a qualified expert on the condominium financial statements, and in particular the reserve fund?
• Is the condominium corporation self-managed or has the corporation hired a property manager to handle the day to day running of the condominium??
• Does the management fit my lifestyle (property manager vs. self-managed)?
• What percentage of the unit owners are tenants of the condominium complex?
• Who is on the Board of Directors? Are they all unit holders? Are they all tenants of the condominium complex?
• Are the condominium rules and restrictions clearly defined and understandable?
• Are the condominium rules and regulations reasonable (can I live under these rules)?
• Are there rules about the numbers of occupants permitted?
• Can I rent out my unit?
• Does the Board of Directors (or developer) seem helpful in explaining the rules?
• Can I take my pet?
• Can I operate my business from the condominium?

Affordability

• What is the amount of the monthly condominium fees?
• Can I afford the monthly condominium fees along with my mortgage payments, taxes, insurance and other expenses?
• Is cable/satellite and/or Internet access included in the monthly condominium fees, and if not, how much would they cost?
• Are utilities included in the monthly condominium fees, and if not, how much can I expect to spend each month?

The Building -- Common Property

• Is the condominium in good physical condition?
• Does it seem well built (or well maintained)?
• Are the grounds attractive and well maintained?
• Does it have enough storage space?
• What is included in the common property?
• Are there any restricted or exclusive use common property elements -- portions of the common property elements that are reserved for the personal use of one or more of the owners?
• Are there Parking Stall[s] designated for my condo, and are the Parking Stall[s] on a separate title?
• Does the condominium have recreational facilities? [exercise room, pool, party room, convenience store etc.]
• Does it have parking available? Indoor or outdoor? Guest parking?

Buying a Condominium Under Construction – Additional Considerations
 
In the event that the property you are purchasing or considering purchasing is a new condominium that is being constructed then you it is strongly recommended that you have a lawyer assist you in the "contract stage".

Section 14(3) of the Condominium Property Act, R.S.A. 2000, c. C-22, as amended from time to time, provides that a developer or builder must hold in trust all money [other than rents and security deposits] until a certificate of title is issued in the name of a buyer.

It is important to note that the certificate of title can only be issued in the name of a buyer AFTER construction of the ENTIRE  condominium project is complete AND can take quite some time.

While section 14(3) of the Act is ultimately a consumer protection provision, it has had a significant impact upon the rights and obligations of buyers  as in light of this section contracts with developers or builders of condominium projects often  require:

1. A buyer to take possession of the property and partially pay the purchase price [down payment] BEFORE completion of the construction of the condominium complex, registration of the Plan of Condominium and due formation of the Condominium Corporation;
2. After taking possession a buyer to pay "rent" or interest on the unpaid balance of the purchase price often at a very substantial rate of interest often substantially in excess of the buyer's mortgage rate and mortgage amount;
3. A buyer to take possession of the property on limited notice making the buyer liable not only for interest but also condominium fees and utilities for the property on short notice.

From a legal perspective the foregoing can be problematic as without the completion of the construction of the condominium complex, registration of the Plan of Condominium and due formation of the Condominium Corporation it cannot be ascertained:

1. the legal description of the Condominium Unit the buyer is purchasing , and accordingly, the buyer's interests cannot and will not be registered against the Property until after the registration of the Plan of Condominium and until that time the buyer's interests will be subject to and subordinated to the current registrations on title PRIOR to the registration of the Plan of Condominium and transfer of the Property to the buyer;
2. whether buildings, structures and improvements forming the Property you are purchasing or the building, structures, improvements and amenities forming the Common Property the buyer acquires an interest in by virtue of ownership of shares in the Condominium Corporation are or will be fully and/or duly constructed;
3. the financial statements, information and assets and liabilities of the Condominium Corporation cannot be reviewed nor ascertained;
4. the bylaws of the Condominium Corporation which the buyer's ownership, use and enjoyment of the Property will be subject to and must be in compliance with cannot be reviewed nor ascertained;
5. the buyer's shareholdings in the Condominium Corporation;
6. further and other issues which arise from and are related to the incomplete construction of the condominium complex, Registration of the Plan of Condominium and transfer of Property to the buyer, and the due formation of the Condominium Corporation.

Further in the  event that the buyer is obtaining financing to fund the purchase of the property even if the buyer takes possession the buyer's lender may, for whatever reason, decide not to lend you monies or fund this transaction, which is particularly a concern as often builders or developers will require the buyer to take possession on short notice but provide no fixed date upon which construction must be completed and possession granted.  

As it is very common for lenders to put time limits on their mortgage commitments, the failure of the builder or developer to complete construction of the property before the expiry of a commitment can cause significant damage, loss and expense to a buyer with the expiry of the commitment putting the buyer in the position where the buyer can't close or the interest rate has increased and the buyer is paying a greater rate of interest.

Each purchase and sale of a home is as unique as the individual Sellers, Buyers, Property and facts and circumstances  involved in the transaction, and it is difficult to say what is involved in a “typical” transaction and this  post is intended to provide a general outline of some of the considerations involved in purchasing and selling a home for informational purposes.

If you need legal advice or assistance, please contact us.

This is provided for discussion purposes only and is not legal advice or legal opinion, and you should not rely upon it as legal advice or legal opinion.  As the information provided herein may or may not be accurate you should not rely upon it nor consider that we have been retained or that we are providing legal advice or legal opinion.  We provide specific legal advice or opinions if we are formally retained in writing and for specific facts and circumstances.  So, if you wish to obtain legal advice or legal opinion from us then please contact us, as it would be only upon our formal written retainer that we would provide legal advice or legal opinion specific to you for your specific facts and circumstances for you only to rely upon.  Please see the terms of use respecting the use of our website and our blog.

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