Condition of Property at Possession

One of the most common and frustrating issues for both real estate industry members and lawyers in closing residential real estate transactions is a dispute over the condition of the property on Completion Day. Rarely are buyers entirely happy with the condition and cleanliness of the property when they take possession. While occasionally their concerns are valid, in most cases they are not. In any event, there is not much that lawyers can do to assist buyers in this regard. This column will explain why the Purchase Contract is worded the way it is and what buyers’ representatives can do to protect their clients where specific concerns are identified when writing up the offer.

The condition of the property is addressed in clause 4.2 of the Residential Real Estate Purchase Contract (the “Contract”) as follows;

“When the Buyer obtains possession, the Property will be in substantially the same condition as it was in when this Contract was accepted.”

In addition, clauses 6.1(b) and 6.2 of the Contract require that when possession is granted, all included Attached Goods (fixtures) and Unattached Goods (chattels) be “in normal working order”.

So what does this really mean?

In general, and unless additional terms are inserted in clause 7.6 of the Contract, it means that with the exception of appliances (which have to work), the seller doesn’t have to clean up or repair the property in any way for the buyer. In fact, the words “substantially same condition” imply that some deterioration resulting from normal wear and tear, and the scrapes and blemishes resulting from the moving out process, are acceptable. The seller is certainly not required to paint walls, clean carpets or fix small holes in walls where pictures have been removed.

Even if, contrary to the terms of the Contract, an appliance doesn’t work or more significant damage (such as a broken window) constituting a breach of the “substantially the same condition” obligation is discovered on possession day, the buyer’s lawyer may not be able to refuse to close or otherwise secure compensation for the buyer. In general, the buyer is only entitled to refuse to close if the damage to the property is so major that it would constitute a “material” breach of the agreement. In this case, it is important that the buyer or the buyer’s representative bring these issues to the attention of the buyer’s lawyer quickly. The buyer’s lawyer will communicate the matter to the seller’s lawyer, which will result in one of two possible outcomes:

1. The seller’s lawyer may be able to convince the seller to offer some compensation to the buyer, repair the problem or agree to a monetary holdback until the problem is resolved; or
2. The seller will refuse to take responsibility for the problem, but at least it will be documented that the problem existed at the time of possession which will help the buyers if they choose to prosecute a small claims action for recovery of damages.

Because the problem of not being able to force the issue when the condition of the property is not “substantially the same”, industry members sometimes suggest that a default holdback provision be incorporated in the standard Contract to routinely allow buyers to withhold a predetermined sum (such as $1,000 for example) until the condition of the property is found to be satisfactory. This is not, unfortunately, possible on a practical level. The inevitable result of this provision would be that, rightly or wrongly, buyers would take advantage of the holdback entitlement in almost all cases. Sellers would then have to accept the loss or be forced to sue buyers to receive their full sale proceeds.

Building an early walkthrough or condition inspection provision into the contract is also not a practical solution to the problem. Since damage to the property is only likely to occur when the seller is moving out or only apparent after the furniture is removed from the premises, a walkthrough conducted prior to the seller’s move is virtually useless. It should be mentioned that unless it is specifically written into the Contract, the buyer is not entitled to insist on access to the property in the period between the removal of conditions and possession day.

Although the current Contract could, as a result, appear to be biased in favour of sellers receiving their money from the sale, I always point out to unhappy buyers that the same Contract will protect them for their sale proceeds when it comes time to sell their home in the future.

In cases where a buyer wants the seller to carry out a specific task prior to possession, such as the shampooing of carpets, the removal of car parts from the backyard, or a specific repair to the property, the buyer’s representative has to insert specific additional terms into the Contract in clause 7.6. To be effective, such terms should contain: a firm deadline; a monetary holdback provision if the work is to be completed post closing or an inspection provision if the work is to be done prior to closing; and a term setting out the consequences if the work is not carried out as required.

Courtesy of AREA

Condominium Special Assessments

Condominium special assessments have recently become so commonplace they tend to be a factor in the majority of residential condominium resale transactions. I suspect this is the case for a number of reasons including:

• Aging condominiums built in the 1970s and 1980s may now require
major maintenance that was either not anticipated or not fully
funded.
• Apartment buildings converted to condominiums during the hot
market of 2005 and 2006 may never have been fully refurbished
and problems are now surfacing (i.e. elevators, roofs, mechanical
equipment).
• The rush to complete some condominium buildings during the hot market led to shoddy workmanship and expensive repairs are now required to fix the problems.
• Due to their prevalence, special assessments no longer have the stigma once associated with them and it is easier for condominium boards to pass and implement them.

Whatever the reason, the passing of a special assessment by a condominium board while a contract is “executory” can become a very unpleasant surprise for whoever is burdened with it – the buyer or the seller (Note: Executory refers to the time period after conditions are removed but prior to the closing date). The existing Residential Real Estate Purchase Contract does not specifically address special assessments except that the seller’s lawyer is required to obtain and provide the buyer with an Estoppel Certificate, which confirms that all condominium contributions that are the seller’s responsibility to the closing date are paid. Based in part on the foregoing, the practice that has evolved among conveyancing lawyers is to require the seller to pay any special assessments "due and payable" by the closing date. The buyer assumes responsibility for any special assessments payable post closing, no matter when assessed.
This practice has been expressly incorporated in clause 4.7 of the new Residential Purchase Contract for Resale Condominium Property, which should be available for use by industry members in the very near future. However potential problems may still arise.

While this practice is balanced, it can still result in circumstances of hardship for either party.
Here is a recent example of a seller with low equity caught up in the following situation. Two days before the closing date, the condominium board passed a resolution implementing a substantial special assessment payable in two instalments over the next several months. However, the resolution contained an “acceleration” clause, making the entire amount due and payable immediately in the event of the sale of any unit. The management company refused to issue a clear Estoppel Certificate without the payment of the special assessment, which substantially depleted the remainder of the seller’s equity.

On the other hand, a buyer who has done all due diligence and reviewed all available documentation could be hit with a significant special assessment shortly after closing if, for example, the elevator unexpectedly breaks down and has to be replaced. If the buyer doesn’t have the financial resources to pay the special assessment it can result in substantial penalties, late interest, and ultimately foreclosure of the unit.

As a result, where the relative bargaining position of the parties permits, the new clause contemplates the possibility that the parties could “otherwise agree in writing” to further shift the burden of any known or unexpected special assessments to one or the other of them.
The following are suggested clauses that can be used to help improve the position of either the buyer or the seller of a condominium. The appropriate clause would be inserted in 7.6 of the Purchase Contract (Additional terms of sale).

Clause for the benefit of the Buyer

7.6 "The Seller is responsible to pay all special assessments levied by the condominium board up to and including the Completion Day, no matter when actually due and payable."
This wording would obligate the seller to pay all special assessments approved by the condominium board even if not due and payable by closing. Any special assessments levied after closing would, of course, still remain the obligation of the buyer.

Clause for the benefit of the Seller

7.6 “The Buyer is responsible to pay all special assessments levied by the condominium board after final acceptance, no matter when actually due and payable.”

This wording would protect the seller from having to pay for any special assessments levied after the purchase price is negotiated and a contract entered into. The seller would remain responsible to pay for any pre-existing special assessments due and payable by the closing date.

Notwithstanding the fine print of the contract, it is always possible for the parties to negotiate and re-designate responsibility for any known special assessments as follows:

7.6 “The (Buyer or Seller) is solely responsible to pay the special assessment in the sum of $.......................due on ……………………

If not disclosed by the seller, information concerning an existing (or imminent) special assessment will typically surface during the condominium document review conducted on behalf of a buyer. Invariably the buyer will then try to negotiate either a price abatement or an amendment to the contract obligating the seller to pay for the special assessment. As a result, if the seller and the listing agent know about an existing or pending special assessment, the best policy is likely to disclose it to a potential buyer from the start and attempt to incorporate it into the initial contract negotiation.

Conclusion
Regardless of whether you are buying or selling a resale condominium, awarness of the potential of special assessments being passed and the proper handling of known special assessments in the contract will avoid hurt feelings and complications on closing. Needless to say, from a buyer’s perspective a thorough and professional condominium document review is the best line of defense against unpleasant and unexpected special assessment surprises post closing.

courtesy of Lubos K. Pesta, Q.C.

Top 7 Reasons to Use a Buyer's Agent in a Real Estate Transaction

Purchasing a home is a big step, and a big decision. The average person spends around 1/3 of their income on their home. The home that you choose has a big impact on your life, and can have a big impact on your finances, as well. It always surprises me when Buyers attempt to “go at it alone” because of the possibility of mistakes. A good Buyer’s Agent is invaluable to a Buyer, and can be the difference between a wonderful transaction, and a nightmare.

1. Full access to the MLS

The Multiple Listing Service (MLS) is a powerful tool that only Realtors have access to. When listing agents market a home for sale, they typically allow any Realtor to present the home to potential buyers, and to present contracts for purchase. The MLS is a database of all homes listed by Realtors, and represents roughly 99% of the homes for sale in any given market. As technology advances, so does the MLS. It has evolved into an extremely powerful search engine that allows your buyer’s agent to enter in search criteria, and returns only homes that match those specific parameters. Buyers can find a lot of this information online through IDX feeds available on many websites, but this information is a “watered down” version of the MLS because the IDX search engines aren’t quite as powerful, and don’t return as detailed profiles as the MLS.

2. Maximize your time

While driving neighborhoods is an excellent idea to help you decide which locations you prefer, it’s not a very efficient way to find your new. home. Gas is expensive, and your time is valuable. Your Buyer’s Agent will listen to your needs, make fantastic suggestions based on your likes & dislikes, and provide you with a list of homes that ALL match your wants & needs. Your Buyer’s Agent has helped MANY new homebuyers through MANY purchases, and will help you better organize your search & decision making process – saving you valuable time.

3. Representation

Listing Agents enter into legally binding agreements that require them to ALWAYS act in the best interest of the seller. They are the seller’s “coach” and will make sure that their clients’ best interests are looked after. Luckily, your Buyer’s Agent is there to make sure YOUR best interests are accounted for. With your expert Buyer’s Agent in your corner, you can rest assured that you’re on, at least, even ground with the home seller. A football team would be at a pretty significant disadvantage without a coach – just as you would be without a Buyer’s Agent.

4. Negotiating Power

The MLS maintains a record of, not only all homes listed by Realtors in a given market, but also the sales price of those homes. Your Buyer’s Agent will run a Comparative Market Analysis (CMA) to determine a prospective home’s Fair Market Value (FMV). In simpler terms, your Realtor will look at similar homes in the same neighborhood that have sold recently. This way, you will know whether or not the seller has their home priced fairly. If the home is priced over Fair Market Value, your Buyer’s Agent can present your “under asking price” offer with plenty of firepower – and a greater chance that the offer will be accepted.
Experience

The average person buys 3-5 homes in their lifetime. A good Buyer’s Agent will assist in 3-5 home purchases every month. What might seem complicated and intimidating to you is fairly common and familiar to your Realtor. Your Buyer’s Agent will know what to expect, and will know when to alert you if anything out of the ordinary occurs.

6. Industry contacts

It takes a lot of people to close a real estate transaction – Buyer’s Agent, Listing Agent, Loan Officer, Inspector, Appraiser, Insurance Agent, General Contractors, and sometimes more! A good agent will come with a strong closing team that has performed in the past, and will continue to perform. A transaction is only as strong as its weakest link – with your strong Buyer’s Agent & their closing team, you can rest assured that you will have plenty of support.

7. Peace of mind

If you are like most people, your home is the largest purchase you will ever make. The average person spends around 1/3 of their total monthly income on their home. This is a big decision and you don’t want to go at it alone. When you use a trusted Buyer’s Agent, you know that your best interests are accounted for, and that you can feel confident in your purchase.




Courtesy of Eric Bramlett



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