What's in the purchase and sale agreement?
Posted by Steve Harmer on Saturday, January 9th, 2016 at 9:34am.
Most purchase and sale agreements come in standard formats, with standard clauses, and are drafted by the builder or real estate board. There are generally spaces throughout the agreement for additional, customized clauses to be added.
It is recommended to have a lawyer review your offer to purchase before you sign it. Regrettably, relatively few people do this, because they either don’t realize they should, perceive it to be an unnecessary or costly legal expense, or could cause delay that could cause a purchase to be lost to someone else, or otherwise kill the deal.
Alternatively, rather than seeing a lawyer before submitting an offer to purchase, some people may wish to insert a condition that states the offer is subject to approval as to form and contents by the purchaser’s solicitor within X days of acceptance.
There are many common clauses and features contained in the purchase and sale agreement, many of which vary from contract to contract according to various circumstances-whether one is purchasing a new or a resale condominium or house, etc. A brief overview follows of some of the common features of the agreement for purchase and sale. This article is Part I of a two part series.
Amount of Deposit
A deposit serves various purposes. It is a partial payment on the purchase price, a good-faith indication of seriousness, and an assurance of performance if all the conditions in the offer to purchase have been fulfilled. The deposit is generally 5% to 10% of the purchase price. If there were conditions in the offer, and these conditions were not met, then the purchaser would be entitled to receive the full amount of the deposit back. This is one reason why it is important to have conditions or “subject to” clauses in the offer to protect one’s interests fully. When making a deposit, it is very important to be careful whom the funds are paid to. If you are purchasing through a private sale and no realtor is involved, never pay the funds directly to the vendor; pay them to your own lawyer in trust.
If a realtor is involved, the funds can be paid to the realtor’s trust account or your own lawyer’s trust account as the situation dictates. If you are purchasing a new condominium from the builder, do not pay a deposit directly to the builder unless it is held in trust by the builder’s lawyer or real estate agent. The money should go to your lawyer’s trust account, or some other system should be set up for your protection ensuring that your funds cannot be used except under certain conditions as clearly set out in the agreement,
Another matter you have to consider is payment of interest. If you are paying a deposit, you want to ensure that interest at the appropriate rate or based on the appropriate formula is paid to your credit. In many cases, deposit monies can be tied up for many months, or in a condo presale situation for many years. These delays could represent considerable amounts of interest.
Conditions and Warranties
It is important to understand the distinction between conditions and warranties, as it is very critical to the wording that you would be using in the agreement. A condition is a requirement that is fundamental to the very existence of the offer. A breach of condition allows the buyer to get out of the contract and obtain the full amount of the deposit back. An inability to meet the condition set by a vendor permits the vendor to get out of the contract.
A warranty is a minor promise that does not go to the heart of the contract. If there is a breach of warranty, the purchaser cannot cancel but most complete the contract and sue for damages. Therefore if a particular requirement on your part is pivotal to your decision to purchase the condominium or not, it is important to frame your requirement as a condition rather than as a warranty. Both vendors and purchasers frequently insert conditions into the agreement, sometimes referred to as subject clauses. You can see why the services of an experienced real estate lawyer are important to protect your financial interests.
Risk and Insurance
It is important that the parties agree to exactly when risk is going to pass from the vendor to the purchaser. In some cases the agreement will state that the risk will pass at the time that there is a firm, binding, unconditional purchase and sale agreement. In other cases, the contract states that the risk will pass on the completion date or the possession date. In any event, make sure that you have adequate insurance coverage taking effect as of and including the date that you assume the risk. The vendor should wait until after the risk date before terminating insurance.
Fixtures and Chattels
This is an area of potential dispute between the purchaser and vendor, unless it is sufficiently clarified. A fixture is technically something permanently affixed to the property; therefore, when the property is conveyed the fixtures are conveyed with it. A chattel is an object which is moveable; in other words, it is not permanently affixed. Common examples of chattels are clothes washer and dryer, refrigerator, stove, microwave, and drapes.
A problem can arise when there is a question of whether an item is a fixture or a chattel. For example, an expensive chandelier hanging from the dining-room ceiling, gold-plated bathroom fixtures or drapery racks, or television satellite dish on the roof might be questionable as to whether they are a fixture or a chattel. One of the key tests is whether an item was intended to be attached on a permanent basis to the property and therefore should be transferred with the property, or whether it was the intention of the vendor to remove these items and/or replace them with cheaper versions before closing the real estate transaction.
In general legal terms, if it is a fixture and it is not mentioned in the agreement, it is deemed to be included in the purchase price. On the other hand, if it is not a fixture and no reference is made to it in the agreement, then it would not be included in the purchase price. To eliminate misunderstanding, most agreements for purchase and sale have standard clauses built into them which state that all existing fixtures are included in the purchase price except those listed specifically in the agreement. In addition, a clause should list the chattels specifically included in the purchase price, and they should be clearly described.
Adjustment Date
This is the date that is used for calculating and adjusting such factors as taxes, maintenance fees, rentals, and other such matters. As of the adjustment date all expenses and benefits go to the purchaser. For example, if the maintenance fee has been paid for the month of March by the vendor and the purchaser takes over with an adjustment date as of the 15 of March, there will be an adjustment on the closing documents showing that the purchaser owes half the amount of the prepaid maintenance fee to the vendor for the month of March.
Completion Date
This is the date when all documentation is completed and filed in the appropriate registry office, and all monies are paid out. The normal custom is for all the closing funds to be paid to the purchaser’s solicitor a few days prior to closing. As soon as all the documents have been filed in the land registry office and confirmation has been obtained that everything is in order, the purchaser’s solicitor releases the funds to the vendor’s solicitor/
Possession Date
This is the date on which you are legally entitled to move into the premises. It is commonly the same date as the adjustment and completion date. Sometimes the possession date is a day later in order for the vendor to be able to move out; in practical terms, though, many purchasers prefer the adjustment, completion, and possession dates to be the same, if it can be arranged. One of the reasons is that the risks of the purchaser take effect as of the completion date, and there is always a risk that the vendor could cause damage or create other problems in the premises if he or she remains there beyond the completion date. As soon as your solicitor has advised you that all the documents have been filed and money has changed hands, your realtor or lawyer arranges for you to receive the keys to the premises.
Merger
This is a legal principle to the effect that if the agreement for purchase and sale is to be “merged” into a deed or other document, the real contract between the parties is in the document filed with the land registry. To protect you, it should be stated in the agreement for purchase and sale that the “warranties, representations, promises, guarantees, and agreements shall survive the completion date.” There are exceptions to the document of merger in cases of mistake or fraud–technical areas that require your lawyer’s opinion– but it is important to understand the concept.
Commissions
At the end of most purchase and sale agreements there is a section setting out the amount of the commission charged, which the vendor confirms when accepting an offer.
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