Risks and Benefits of Assignment Transactions in Ontario. A comprehensive Analysis

Real Estate Law
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Risks and Benefits of Assignment Transactions in Ontario. A comprehensive Analysis

An Assignment sale transaction is where the original buyer (the Assignor) sells to another buyer (the Assignee) the rights to take over the Agreement of Purchase and Sale before the ownership of the said property is transferred. While assignment agreements are not uncommon for resale properties, this article will focus on assignment where an Agreement of Purchase and Sale is for a new built property with a builder.

Assignment is quite a complicated endeavour for both assignees and assignors alike. Both must navigate complex contracts and have professionals advise them on their rights as well as tax liabilities they could incur as a result of an assignment transaction.

When the original purchaser buys from a builder, the builder gives the purchaser a ten-day cooling off period. This time allows the buyer to take the contract to their lawyer for review.  The lawyer will look over the agreement and advise of any limitations, for example, assignment sales. It is crucial to review these and other critical clauses when initially signing the agreement of purchase and sale with your lawyer.

To find out if you can assign your new built contract, first and foremost, review the original agreement of purchase and sale for assignment clauses and check whether the builder will allow an assignment sale and under what conditions.  For the assignment to take place, consent must be obtained from the builder. Some agreements have conditions that must be satisfied before consent is granted. For example, builders consent could be conditional upon sale of all the units in the building, use of builder approve realtor to list the property or prohibition on listing the property on MLS. If the conditions for consent are not met, the builder may not allow the original buyer to assign the property.

Steps to take if you want to assign your new built property

  1. Review your original agreement with the builder, find out conditions for assignment sale;
  2. If assignment sale is allowed and conditions can be met, find a buyer for your unit;
  3. Once you found the buyer, draft an assignment agreement conditional on builder consent AND lawyer review;
  4. Reach out to the builder and provide them with the assignment agreement and request consent;
  5. Pays the assignment fees to the builder (usually paid by Assignor)

Advantages of an Assignment Sale for the Assignor & Assignee

In a healthy real estate market, the advantages of an assignment for Assignor are quite clear. Assignor has made an ample profit on the property without incurring any substantial expenses. Meaning, Assignor has given a deposit to a builder, which is held by the builder without accumulation of interest, since signing the original agreement equity of the property increased. By choosing to assign their contact, Assignor makes a profit and avoids payment of additional closing costs to the builder as well as Land Transfer Tax.

It is not to say that Assignor will avoid paying any money. Assignor will be responsible for payment of assignment fees to the builder and under a new legislation payment of HST on the assignment.

In a downturn market, Assignor could sell property without any profit or even at a loss but may be stop incurring further losses. For example: a person purchased a condo with an intention of residing at the property, market turns sour and interest rates go up. The purchaser can no longer qualify for a mortgage or is unable to make the payments based on higher interest rates. As such, the purchaser has an option to assign the property if they are unable to close with the builder to avoid liability that comes from defaulting on the agreement with the builder.

Assignee can also benefit from purchasing a property through an assignment purchase. Usually, the purchase price for the assigned property is a bit lower than current market value of a similar property. Justification for that is that the assigned property is not yet ready to occupy. Another advantage for Assignee is that the builder project that they originally looked at sold out without them being able to secure a property.  Through assignment, they can buy at the location and project that they wanted but were not able to secure. Lastly, in a healthy market, the Assignee can also take advantage of the equity growth before ownership transfers.

If Assignor chooses to sell in a downturn market, Assignee can also benefit from lower purchase price and more beneficial terms.

Risks associated with an Assignment Sale for the Assignor & Assignee

There are several factors Assignee should consider before deciding to proceed with an assignment purchase. If assignment agreement does not have the necessary clauses to protect Assignee, Assignee could face substantial financial losses associated with an assignment purchase.

Occupancy Fees

If Assignee is purchasing a condominium or a POTL property, it is important to note that unlike a free-hold home, properties that have common expense component will almost always have an occupancy period. An occupancy period is the time when the property is physically ready to be lived in, but the condominium declaration, by-laws and other documents have not yet been approved and registered. As a result, Assignee can reside at the property, but they do not own it yet, as the title to the property has not passed. There are two draw backs to occupancy closing – occupancy fees and inability to rent the property during occupancy period.

Occupancy fee consists of three components:

  1. Interest on outstanding balance owing under the contract payable to the builder. This money does not form part of additional deposit and will not reduce balance owing to the builder on final closing.
  2. Maintenance fee – payable to condo management corporation
  3. Property taxes – payable monthly

Occupancy fees are usually collected for the duration of twelve months. Some properties may close sooner but in most cases the Assignee should factor in twelve months’ worth of occupancy fees as part of their budget.

If Assignee is purchasing the property for investment purposes and wishes to rent out the property, most builders do not allow to rent out the unit during occupancy. Unless consent to rent is received from the builder, Assignee will pay occupancy fees but would not be able to recoup it through renting. Therefore, reducing their profit margins.

Incentives under the original agreement may not pass to Assignee

When the original agreement with the builder is signed often the builder gives the purchaser some incentives. Such incentives could be décor credits and/or caps on levies and development charges.  The latest trend with builders is to exclude Assignees from receiving these incentives because of assignment. For example, the original agreement of purchase and sale with the builder calls for Development Charges to be capped to $10,000 + HST. As a result of assignment, Assignee will no longer be eligible for the cap and therefore will pay much higher amount for Development Charges on final closing.

The other hidden benefit to which Assignee could be ineligible is Tarion Warranty Delay Compensation. The builder is subject to a strict timetable to complete building your property. If the builder does not follow the timeline indicated in the Statement of Critical Dated, which is part of the agreement of purchase and sale, the purchaser has a right to compensation delay in the amount of $7,500.00 plus other potential compensation. It is important to note that Delay Compensation is only available if there is in fact a delay.  As with Development Charges and incentives under the original agreement, the builder usually will state that one of their conditions for consenting to assignment is waiver of delay compensation. Therefore, if the original purchaser would have been entitled to delay compensation under the agreement of purchase and sale, assignee would no longer be entitled to it.

It is essential that the assignment agreement address the situation where the incentives are not passed to Assignees. If this is not addressed, it could lead to substantial financial implications.

HST – New Housing Rebate

When purchasing a property priced over $450K from a builder for personal use rather than investment, the builder, in most cases, will not charge additional HST on top of the purchase price in the amount of $24k. The purchaser would have to sign several documents confirming that they or their relation intend to occupy the property as their primary residence and assign the rebate to the builder.

If the original purchaser is buying a new built property from a builder for investment purposes, the purchaser would have to bring the additional $24K on closing and then apply to CRA to have it rebated.

When you are buying a property through assignment, the builder rarely gives assignee the option not to pay New Housing HST on closing. Whether you are buying the property for personal use or an investment, the builder requires that assignee compensate them for the rebate ($24K) and apply to CRA directly after closing. If CRA deems that the assignee meets the eligibility conditions, assignee will be refunded the money.

Therefore, it is important for assignees to budget for New Housing HST as additional funds on closing.

HST payable by Assignor on assignment Sale

Effective May 2022, Assignor will be responsible for payment of HST on their assignment sale.

Here is an example of an assignment financials:

  • Original Purchase price of a property with a builder $600K with deposit of $120K.
  • Assignment Purchase price is $700K
  • Assignee will pay to Assignor the difference in price ($100K) together with reimbursement of Assignors deposit ($120K)
  • The Assignee would get a credit from the builder for the deposit that the Assignor has given to the builder on the Statement of Adjustments.
  • At the time of final closing with the builder, the Assignee will be responsible for payment of remaining contract price ($600k- $120k) together with closing costs to the builder.
  • The Assignor will be responsible for payment of HST on the profit of $100k and potentially deposit of $120K

When assignment sale is entered into after May 7, 2022 the deposit may be excluded from taxable consideration if the assignment agreement clearly indicates that part of consideration payable under the assignment agreement is attributable to reimbursement of original deposit with the builder.  Using our example above, Assignor would have to pay HST on $100K profit and not on $120K reimbursement of deposit.  If the assignment agreement is silent as to the reimbursement; the Assignor would have to pay HST on $220K.

Tips for making an informed decision

Assignment sales are complicated from contractual as well as taxation standpoint. If assignment agreement and its clauses are drafted incorrectly, both Assignee and Assignor could face financial consequences.  It is vital to have a lawyer to review an assignment agreement while it is still conditional so changes could be made to protect Assignors or Assignees interests. Discuss with your lawyer the intended use for the property so that he/she may suggest appropriate clauses. Ensure that you understand all the risks and benefits of assignment sale and budget accordingly. Hesitation and unfamiliarity associated with assignments does not have to be stressful if you have the right team on your side.

AssigneeAssignment TransactionsAssignorOccupancy DateOccupancy FeesReal EstateReal Estate OntarioReal-Estate Lawyer
Disclaimer

The Content is current as of its original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose. Content is provided solely for informational purposes. It is not intended to be legal or other professional advice or an opinion of any kind. You are advised to seek specific legal advice by contacting members of MBLAW (or your own legal counsel) in relation to your specific legal issues.

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