As seasoned professionals in the real estate world, we all know that there is no such thing as an easy or simple real estate deal. What can appear to be a simple real estate deal can quickly become complicated and fraught with difficulties and challenges. Tough deals can be frustrating but present valuable opportunities for learning. Many of the problems and challenges that arise are almost always beyond the control of the lawyer or the realtor. Below is a list of factors that can complicate or even jeopardize a real estate deal along with some tips on how they can be avoided or minimized.

1. Poorly drafted or thought-out provisions
   In the vast majority of residential transactions, the lawyer will receive the deal after it has been signed. A poorly worded or missing clause can create problems or tie the lawyer’s hands. Examples of this are incorrect or missing representations and warranties, survey clauses and incorrect tenant assumption clauses. Even worse can be failing to include conditional clauses for status certificate review, financing and inspection. Realtors can reduce the risk by drafting carefully worded clauses and not just rely on outdated precedents. Realtors have an obligation to ensure that the complete Agreement has been read and understood by the clients.

2. Clients who do not follow instructions
   Every real estate deal has a deadline. Examples of these are conditions, title search and closing dates. Some Buyers fail to realize the importance of deadlines in real estate transaction. One challenge is often related to clients who delay arranging their mortgage financing. Without mortgage instructions at least one week prior to closing, the lawyer cannot prepare the file for closing or advise the client of the final balance due on closing. In some cases, the lender will have numerous conditions that must be met prior to closing. The delay in receiving mortgage instructions can lead to delays in closing. Many buyers do not understand the implication of not closing due to delays in financing. The Seller is not obligated to provide the Buyer with an extension and may only agree to do so if extension fees are paid. The same goes with new builds where builders often charge exorbitant extension fees with onerous conditions. The tip for realtors here is to stay in constant communication with your Buyers so that there are no last-minute surprises.

3. Selling and Buying on the same day
   This is not advisable and bridge financing should be obtained. A bridge loan will allow the Buyer to close its purchase first and then close its sale at a later date. This avoids the risks of buying and selling on the same day and the problems that can follow.

4. Difficult Lawyer on the other side
   A real estate deal requires 2 lawyers, one for the Buyer and one for the Seller. The lawyers are obligated and should act in the best interests of their respective client. In some cases, the lawyer on the opposing side can make the deal difficult, if not impossible. The reasons for this may vary, but in my experience, the most difficult lawyers are those who either have too many files and cannot handle the volume or those who are inexperienced and simply do not know what they are doing. In any event, as the lawyers need to correspond, exchange documents, resolve disputes and ultimately close the deal, a lawyer who does not respond or refuses to do what is necessary can make a deal go off the rails very quickly. In cases where the lawyer refuses to cooperate or respond, there is very little that can be done. The message for realtors is to refer your clients to experienced lawyers who you trust and will respond when there is a problem. Lawyers who hide behind their clerks and make themselves invisible should be avoided.

5. Failing to ask questions
   Many potential problems on a real estate deal can be avoided by communicating with your client and asking questions from the outset. For instance, will the Buyer qualify for the mortgage or will they need a co-signor? Do they intend to rent out a part of the property? Do they intend to renovate or build on the property? Has the property recently been renovated and have the necessary permits been obtained and has there been a final inspection done? Does the Seller own or lease some of the items on the property like a hot-water tank, furnace or air conditioner? All of these questions and many more need to be asked at the outset so that the appropriate safeguards can be included in the Agreement of Purchase and Sale.

Real estate law is a specialized area of practice and not meant for dabblers who are not familiar with the vast array of laws and constant change. What would appear to be a simple deal is not always the case and when that happens, it is advisable to have an experienced, competent and attentive lawyer on your side and your client’s. While tough deals can be frustrating, learning from them will allow you to refine your skills and strengthen your client relationships leading to a satisfied client and more referrals.

SOURCE: ISENBERG & SHUMAN  info@shumanlaw.ca

Lorne Shuman / September 19, 2022 

In real estate, timing is everything. During the last 6 months, there have been winners and losers in the real estate market. Those Sellers who were fortunate to sell and close prior to the dramatic change in the market were the winners and those who bought at inflated prices and closed may be the losers, however, they may have benefited from lower interest rates on their mortgages. As real estate lawyers, we see the good, the bad and the ugly. The ugly part of our job is advising either Buyers or Sellers when deals are falling apart. While we always to our best to provide advice in difficult situations, in some cases, there is no solution and the deal does not close. It is then up to the litigation lawyers and the courts to resolve the dispute. In many cases, Buyers could not close because they bought without a condition on financing and either wanted out of a bad deal or could not quality for a mortgage. In other cases, Sellers could not close on their purchase deals because of defaulting Buyers on their sale deals. Regardless of the reasons, every time there is a change in the market, chaos inevitably follows and no one wins except the litigation lawyers.

Recently, I have seen other reasons why deals don’t close or are delayed and these have nothing to do with changing market conditions. Many of these problems can be avoided if realtors took extra care when preparing an Agreement of Purchase and Sale (“Agreement”). This column will give examples of unforeseen problems that may arise and how realtors can avoid them to ensure a hassle free closing for all parties involved.

1. Tenants-It goes without saying that buying or selling a tenanted property creates challenges. If you are representing the Buyer, you must determine if your client is prepared to assume the tenant or if it wants vacant possession on closing. Absent anything to the contrary in the Agreement, vacant possession is expected on closing. If the Buyer wants to assume the tenant, then the appropriate clause for a tenant assumption must be in the Agreement. If the Buyer wants vacant possession, then the realtors must address the issue of terminating the tenancy. When I once asked an inexperienced realtor about a deal where the property was tenanted and the Agreement called for vacant possession, the realtor said that the tenant “told me” that he would be vacating the property. This is not good enough. There are specific rules regarding how a tenancy can be terminated and every realtor needs to be familiar with these. If acting for the Seller, if the Agreement requires vacant possession on closing, the Seller must ensure that the tenancy is properly terminated and that the property is vacant on closing. Failing to do so will jeopardize the deal and even worse expose the Seller to possible litigation. Even with everything properly done in terms of notifying the tenant, there is no guarantee that the tenant will in fact vacate the property. Accordingly, there is always a risk that a tenant can make life difficult for a Seller by refusing the vacate the property. Unfortunately, in my opinion, the tenant holds all the cards and it is very difficult, expensive and time consuming to evict a tenant. The bottom line is that realtors need to be very careful when representing a Buyer or Seller of a tenanted property.

2. Fixtures and Appliances- Listing agents should be careful in allowing the following clause into the Agreement-“The Seller warrants and represents that all fixtures and chattels included in the purchase price shall be in good working order on closing” Even if you substitute ”normal working order”, it makes no real difference in my view. The problem in allowing this clause in the Agreement arises when the Buyer attends at the property before closing and discovers that one of the appliances is not working. Invariably, the Buyer’s lawyer will rely on this clause to request a holdback on closing. This results in many e-mails and phone calls between the lawyers and may delay closing. Further, if a deficiency is discovered after closing, you have an unhappy Buyer when the Seller takes the position that the appliance was working on the closing date. In my view, this can be avoided if listing agents amended the clause in the Agreement to state that the fixtures and chattels are being purchased in “as is” condition. After all, the Buyer must understand that they are buying used appliances. If they are concerned about them working, then they should inspect and test them when submitting their offer.

3. Notice of Security Interest (NOSI)-When acting for a Seller, it is insufficient to ask the Seller if there is any equipment on the property that is rented. The most common rental item is a hot water tank and there is a provision in the Agreement which requires the Buyer to assume the rental contract. However, there are some items in the property that are considered rent to own items. Examples of these are HVAC equipment, water softeners, water heaters, etc. With rent to own items, in some cases the owner of the equipment may register what is called a NOSI on the title to the property. This NOSI is a lien on the property which is like a mortgage and if not dealt with correctly in the Agreement, the Buyer could force the Seller to discharge the NOSI and pay it off in full. From my experience, the companies who register these NOSI’s may require the rental items to be bought out at inflated prices. It is therefore important for the realtor to ask if the Seller has any rent to own items in addition to rental items and if so, these should be included in the section six (6) of the Agreement which requires the Buyer to assume the rental contract. Failing to do this could result in a windfall for the Buyer and a shock for the Seller.

As you can see, there is no such thing as a simple real estate deal. Sometimes, market forces will force a deal to go sideways and not close. When this happens, there unfortunately, is not much that can be done by the realtor or the lawyer. However, as can be seen from the examples above, there are things that a good realtor can do to minimize the risks and protect their clients.

Lorne Shuman / April 28, 2022 

Today’s hot real estate market has created many Buyers for few properties with the result being that multiple offers are often the norm.  To ensure that your offer will be accepted, a Buyer may submit an offer without the usual clause making the offer conditional on a lawyer’s review of the Condominium’s Status certificate and related condominium documents.  While such an offer may improve the chances of your offer being accepted by a Seller, there are risks in submitting an offer without a condition on Status Certificate review.  This column will examine the risks of submitting an unconditional offer and discuss what information is contained in a typical condominium Status Certificate.

When a condominium unit is purchased, the Buyer acquires the unit as well as a proportionate interest in the condominium corporation.  The purchase price may also include a locker and/or a parking unit.  In order to ensure that both the condominium unit and the condominium corporation are in good standing, a prudent Buyer should, when possible, make its offer conditional on a lawyer’s review of the Status Certificate and related condominium documents. With a conditional offer, If the lawyer or the Buyer is not satisfied with the contents of the Status Certificate, the Buyer can cancel the transaction and get back its deposit.  Without such a clause a Buyer may not be able to cancel the transaction and may be forced to buy the property with any defects or deficiencies revealed in the Status Certificate. 

The Status Certificate is a set of documents issued by the condominium corporation discloses important information about the condominium unit and the condominium corporation itself.  It is a snapshot in time of the current state of the unit and condominium building as a whole.  The Status Certificate and related condominium documents typically indicate:

• the amount of the monthly common expenses and whether or not the Seller is in arrears of the common expenses

• the legal description of the unit and any parking or locker units

• whether or not the parking or locker units are owned or are exclusive use

• the amount of the condominium corporation’s reserve fund which is a fund necessary for major repairs or replacements and whether or not the reserve fund is adequate

• whether the condominium corporation has conducted a Reserve Fund study

• whether the condominium corporation is contemplating an increase in the monthly common expenses or a special assessment to pay for unanticipated expenses

• whether the condominium corporation is a party to any lawsuits or litigation

• whether the budget of the condominium corporation is accurate

• when the last set of audited financial statements have been produced

• whether or not the condominium corporation has a record of the unit being subject to a section 98 Agreement relating to additions, alterations or improvements to the unit or common elements

• all of the rules on the condominium including, rental restrictions, pet restrictions and smoking restrictions

When an offer is conditional on a lawyer’s review of the Status Certificate, the lawyer will review the Status Certificate as well as all of the other important documents that should accompany the Status Certificate including the condominium’s Declaration, By-laws, Agreements, Budget, Reserve Fund Study, Rules and the latest Audited Financial Statements.  Based on the information provided, the lawyer and the Buyer can make an informed decision as to whether or not to proceed with the purchase of the condominium in which case the Buyer can waive the Status Certificate condition thus making the deal firm.

By failing to make the offer conditional on a Status Certificate review, a Buyer may be going in blind without knowing the full scope of the problems that may exist with both the unit itself or the condominium building as a whole.  For instance, following closing, a Buyer could be faced with a number of costly problems, including:

• significant increases to monthly common expenses

• special assessments against the unit owners which is a lump sum payment required to pay for repairs to the condominium building

• costs to repair a condominium building which may be in need of costly repairs such as water proofing or underground garage repairs

• costs to restore unauthorized repairs which may have been made by a previous owner without the approval of the Condominium Corporation

• future unmarketability or decrease in the value of the property due to age or deterioration

Unfortunately, due to the current market, many Buyers may be getting caught up in the buying frenzy and are submitting unconditional offers without realizing the risks of doing so.  As a result, a Buyer who submits an unconditional offer may be unable to cancel a transaction and be forced to close only to be faced with unexpected costs following closing.  Realtors representing Buyers who are considering making an offer on a condominium should inquire with the listing agent as to the availability of the Status Certificate so that it may be reviewed by the lawyer prior to submitting the offer.  This will allow the Buyer to make a somewhat informed decision even without a conditional offer being submitted.

Buyers and realtor need to be made aware of the risks of making offers which are not conditional on Status Certificate review.  Failing to plan ahead can result in unwanted surprises and costs.

Lorne Shuman / January 25, 2022 

It is not unusual for a property to suffer damage, substantial or otherwise just prior to closing. In most situations, minor damage to a property just prior to closing would not provide the Buyer with the right to refuse to close the transaction. However, an interesting decision of the Superior Court of Justice highlights how parties should conduct themselves when there is substantial damage to a property prior to closing.

In this case, just one day prior to closing, the Buyers had a final inspection and discovered extensive water damage caused to the property, a condominium townhouse caused when the Seller was replacing the Kitec plumbing. The floors, subfloor, baseboards, ceiling and drywall suffered water damage. Upon learning of the damage, the Buyer’s lawyer contacted the Seller’s lawyer suggesting two options-1) that the Buyer’s contractor repair the damage with a holdback of $100,000 for the repairs or 2) the parties sign a mutual release with the Seller paying $25,000 to cover the Buyer’s expenses of renting another property and buying another property. In response, the Seller’s lawyer countered by proposing a three-day extension of the closing to assess the damages, stating that the repairs would be far less than $100,000. The Buyer’s lawyer suggested a holdback of $75,000 with damages of $5,000. The Seller was able to provide a report estimating that the repairs would cost $10,000. The Buyers produced a forensic engineer report stating that the Seller’s report was incomplete and did not address the possibility of further hidden damage behind the walls.

The transaction did not close and subsequently, the Seller had the damage repaired for $6,893 and resold the unit for almost $40,000 more than the original sale price. The parties went to court for a judicial determination of the dispute. In reviewing the evidence, the court referred to the standard clause in the Agreement of Purchase and Sale which provides that in the event of substantial damage, the Buyer has the option to terminate the contract or use the proceeds of insurance to pay for the repairs. The judge ruled in favour of the Buyer concluding that the damage was in fact, substantial and the Buyer’s had acted reasonably in arguing that the cost of the repairs could exceed $10,000. The judge ruled that the Buyer was entitled to receive the return of the $31,000 deposit and were also awarded damages of $33,000 for alternate accommodations, moving expenses and the cost of the engineer’s report.

The important takeaway from this case is that the judge looked at the conduct of the parties and concluded that the Seller had not acted in good faith by refusing the Buyer to have its own engineer assess the scope of the damage and limiting the damages to $10,000 when the Buyer’s engineer report stated that there could be further unknown costs. Parties to a contact have an overriding duty to act in good faith and the courts will look at the conduct of the parties when making legal determinations.

In my view, this is a correct decision as a Buyer should not be forced to accept a property which has suffered substantial damage just prior to closing. It is important to distinguish substantial damage from minor damage which would not otherwise entitle a Buyer to delay or rescind a transaction or obtain an abatement to the purchase price.

Surprises When You Buy A Pre-Construction Home From a Builder

My real estate practice involves acting for many buyers of pre-construction condominiums and houses.  Buying a pre-construction property offers many benefits. These include buying a property that is new, modern and never been lived in, a property with a warranty and most likely a property that may appreciate in value by the time that it is ready for occupancy.   However, buying a pre-construction property is completely different compared to buying a resale property and there are several risks and surprises that come with buying a pre-construction property from a builder.  This column will address numerous risks that buyers may face when presented with a builder’s Agreement of Purchase and Sale (“APS”) for a pre-construction property.

1. A typical builder’s APS is a contract prepared on the builder’s form.  It is long, complicated and prepared by the builder’s lawyer.  The contract is, in many respects, onerous and contains many provisions which are one-sided in favour of the builder.  When buying a pre-construction condominium, a buyer will have a ten (10) day rescission or cooling off period to cancel the transaction if not satisfied with the terms of the contract.  During this period, the buyer is well advised to retain an experienced real estate lawyer to review the contract and provide legal advice. Failing to do this can be a mistake as you will see below.
   
   

2. The builder’s APS will contain a section on adjustments.  These are the costs that the buyer will have to pay for items like development charges, lot levies, Tarion enrolment fees, utility connection fees, etc.  The costs of these adjustments can increase the purchase price by thousands of dollars.  The exact cost of some, but not all of these items will be set out in the Tarion addendum to the APS.  During the rescission period (which only applies to condominiums and not freehold properties), your lawyer may try to either eliminate or cap some of these costs.  In some cases, the builder will provide caps of the adjustments. If the builder will not agree to any caps, you have the option to cancel the contract.  The benefit of this review is so that you will be aware that you will need to come up with extra funds on closing to pay for these items.  A buyer who is aware of this will be better prepared for closing and can budget accordingly.
   
   

3. Many buyers are dazzled by glossy brochures and plans at the sales office.  Unfortunately, what you see is not always what you get.  This is because a typical builder’s APS gives the builder the right to alter the plans and dimensions and substitute materials without the requirement to provide any compensation to an aggrieved buyer.
   
   

4. Many buyers fail to realize that the builder determines when the property is complete and fit for habitation.  The builder sets the closing date and the buyer has no say in this matter. In some cases, very little notice is provided leaving the buyer to scramble to arrange its financing.  A buyer will be forced to close, pay for and move into a property that may be unfinished.  While the buyer will have an opportunity to do a pre-delivery inspection prior to closing, unfinished items are completed by the builder after closing subject to the builder’s schedule and availability of trades.
   
   

5. The builder has very liberal rights to extend the closing date for a number of reasons.  The occupancy date on the APS is tentative and should not be relied upon as the final date.  The date can and will likely change and while delayed occupancy compensation may be available, there is a limit to the amount.
    

6. Conversely, the buyer has no rights to extend the closing date.  If a buyer is unable to arrange its financing in time for closing, the buyer cannot insist on extending the closing date.  The builder does not have to grant an extension of the closing date.  If they do, they can charge extension fees which can amount to thousands of dollars in some cases, depending on the builder.
   
   

7. In some cases, a buyer may decide that it does not want to move in and may want to assign or sell its APS to a third party.  This is generally not permitted without the consent of the builder which may be arbitrarily withheld.  If the builder allows an assignment, there are often conditions and fees that must be paid.
    

8. Similarly, if a buyer needs to add a third party to the APS because it will not qualify for financing alone, a buyer cannot unilaterally add a third party to the APS.  The consent of the builder must be obtained and again, the builder will charge a fee for this.
   
   

9. Many buyers who buy a property for purely investment purposes do not understand how the HST applies to the purchase of a new property.  If the buyer or its immediate family member will not be occupying the property as its primary place of residence, then the buyer will not qualify for the HST rebate.  This means that the builder will charge the buyer the HST rebate on closing.  This could add an additional $25,000 to the purchase price.   In addition, builders are now getting very stringent on this point and have the ability to charge the HST rebate if they suspect that the buyer is being untruthful about moving into the property.
   
   

10. Many buyers fail to realize that a builder’s APS may allow the builder to cancel the contract altogether for a number of reasons.  For instance, the builder can cancel the contract if it fails to sell a certain number of units, if it fails to obtain bank financing or if it fails to obtain the necessary approvals from the municipality.  Finally, although it is a rare occurrence, the builder may go bankrupt leaving a buyer’s deposit at risk as Tarion only provides a limit on the amount of deposit protection that is available.

As can be seen from the points made in this column buying a brand new property from a builder comes with an element of risk.  Understanding these risks and obtaining legal advice from the outset is necessary to avoid surprises and disappointment.