The Ontario real estate market is ever changing and is challenging in many aspects. The agreement of purchase and sale has evolved over the years to reflect the complexities of the said market. Different clauses are usually included in the APS to protect the buyer as well as the sellers in the transactions. However, with the demanding market conditions all parties to the agreement are including non-standard clauses to provide guidance as well safeguard themselves against potential losses. In this article we will discuss a few of these clauses and the implications for both parties in the transaction. We will also discuss potential suggestions on how to protect each party to the transaction to minimize their liability. The clauses discussed are actual clauses that were encountered during our years of practice.
Seller wishes to remain at the property after selling the property
“The buyer agrees to lease the property back to the sellers after closing for 24 months at the price of $5000.00 per month. The sellers are responsible for utilities such as water, gas and hydro and will have an option to terminate the tenancy after 12 months by giving the 60 days’ notice to the landlord (buyer)”
In these circumstances the sellers wish to remain at the property as tenants as they could not find a property to purchase at the time of their sale. This scenario is a great way for the seller to continue looking for their dream property without incurring additional costs such as moving. The benefit for the buyer is simple in that they have tenants without needing to list the property for lease thus saving time and money. But if we look closer, there are a few suggestions to protect the buyer as well as the seller.
First and foremost, a new rental agreement should be executed between the buyer and the seller to ensure that the new tenancy is guided and protected by Residential Tenancy Act. The Ontario Residential Tenancy Act (RTA) provides a framework for landlords as well as tenants detailing rights, responsibilities and procedures for both parties. Without an executed lease agreement both the seller and the buyer are left unprotected as the RTA clearly states what to do in case of a default of rent payment, rent increase notices, and eviction proceedings.
Tenancy under RTA will also protect the seller as the buyer would be required to give sufficient notice to terminate tenancy should the buyer decide to move into the property prior to the agreed date.
Without including the in the original APS that “the buyer and the seller agree to execute a new rental agreement under RTA” the buyer is doing themselves a disservice as they clause does not obligate the seller to execute an tenancy agreement. The other option to protect both the seller and the buyer in case of potential tenancy, would be to write out all the terms of the tenancy in the purchase and sale agreement, which could be lengthy and to ensure that the tenancy clause will not merge on and shall survive closing. Meaning that while the purchase agreement has been satisfied and the transaction has closed, the tenancy clause in the agreement shall continue to be valid until such time as the tenancy is terminated.
Escape clause
“This Offer is conditional upon the sale of the Buyer’ s property. Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the deliver of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than 6:00 p.m. on the specific date, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction.
Provided further that the Seller may continue to offer the property for sale and, in the event the Seller receives another Offer satisfactory to the Seller, the Seller may so notify the Buyer in writing by delivery to the Buyer personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto. The Buyer shall have 48 hours from the giving of such notice to waive or remove this condition by notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto, failing which this Offer shall be null and void, and the Buyer’ s deposit shall be returned in full without deduction.
The offer is conditional upon the seller being able to negotiate their purchase agreement in their sole discretion. Unless the seller gives notice in writing deliver to the buyer or to the buyers agent within 2 business days following acceptance of this agreement, that this condition is fulfilled this offer shall be null and void and the deposit shall be returned to the buyer in full without deduction“.
The beauty of the escape clause is that it allows the buyer to secures a property that they want and while the seller may continue to list the property for sale and wait for a better offer during the conditional period. Should another offer come through, the original buyer has an option to firm up the deal or let the property go, if the original buyer is not able to sell their property. An escape clause could be beneficial for both the buyers and the sellers in todays market conditions.
The clause will give a seller comfort that their property will be purchases by the specified date by the buyer, once the buyers property sells. It is important to note that the closing of the buyers property on the sale transaction does not need to take place but rather the property just has to sell. If the buyers property does not sell by the specified date the buyer and the seller may choose to terminate the agreement or extend the escape date period. This decision would have to be taken by both parties to ensure that a mutually beneficial arrangement.
Likewise, the escape clause has some drawbacks for both parties, specifically it creates uncertainty. The seller is left in limbo to wait for the buyer to sell their property. In a down turn market the property may not sell before the agreed upon date between the buyer and the seller. As such, the seller would then have to make a decision whether to extend the escape period or leave the deal. Depending on the market conditions, if the market is down, the sellers may agree to extend the escape clause time to allow the buyer more time to sell their property.
The drawback for the buyers is that they found their dream home and while they are waiting to sell their own home, the seller may receive another offer. In this situation, the buyers have to be prepared to either let the house go by signing a mutual release with the seller or firm the offer up without having sold their own house. This may be a risky financial move and the buyers have to ensure that the bank will provide the necessary financing before making this decision.
We have seen many of these clauses in past few months as a result of a down turn market in Ontario. It could be beneficial for both the buyers and the sellers in the transaction if the clause is properly worded and both parties are willing to work together to get the deal done.
Renovation or Improvements Clause
“The seller will allow access to the buyer and their trades to complete renovations such as painting, built in cabinets in walk in primary closet, and removal of carpet flooring/ installation of hardwood flooring on the upper floor”.
We often get asked about renovations and granting access to the property once the property sold but not yet closed and the short answer is always NO. Granting access to the property for renovations or storage purposes is an insurance nightmare. Even if all the trades are paid up front to ensure that there will no be a construction lien, there is still the issue of liability. But what if the property is vacant and there really isn’t any damage that can happen? Well, the property could still be damaged by way of flooding, electrical issues and general property damage, the cost of repair would be on the sellers side even though the seller did not directly cause it. It could lead to a lengthy litigation process especially if renovations commenced and there is substantial damage to the property and as a result the buyer does not close.
The other issue with doing renovations before closing is a likelihood that the seller refuses to close. For example: the buyer does all the renovations and the house now looks beautiful closing date is coming up and the seller refuses to close. The buyer has spent time and money getting the property ready but is unable to take possession. The buyer would note the seller in default of the agreement of purchase and sale and proceed to litigation. Waiting for court date, additional legal fees and hassle of dealing with a very stressful situation could have been avoided if the buyer waited to complete their renovation after the property title was transferred.
In conclusion, there are many other non- standard clauses in the agreement of purchase and sale that could be used and form part of the transaction. In this article we only discuss the three that we see most often and one that we wish to never see. The rule of thumb should be that your agreement of purchase and sale be reviewed by a knowledgeable real estate lawyer to ensure that the clauses are drafted properly and that all the outcomes that flow from the clause are anticipated and agreed upon in the agreement by both buyers and sellers. Real estate transactions are complicated as they are, if your agreement is drafted well , it would be easier for your real estate lawyer to protect your rights should any issues come up between signing the agreement and closing. Most importantly, a clear clause will make it easier for your litigator as well as a judge to rule in your favour should you decide to litigate.
At MBLAW Professional Corporation, we understand how a single clause can impact your entire real estate transaction. Whether you are a buyer or a seller, it is essential to have every term reviewed and explained by a real estate lawyer who is experienced in navigating both standard and non-standard conditions. If you are preparing to buy or sell property in Ontario or simply have questions about a clause in your agreement, do not hesitate to contact us. Our legal team would be pleased to provide you with professional guidance tailored to your unique situation.
