Backup Offers in Real Estate Transactions

When a buyer makes an offer to purchase a house or condo and the seller accepts it, a contract of purchase and sale is formed.

Most contracts contain “subject conditions,” which are due diligence searches and investigations which must be completed by the buyer before the contract becomes fully binding on both parties.

For various reasons, contracts can come apart at the seams. Sometimes it is as a result of one or more subject conditions not being removed (and thus the contract lapses). However, even after subject conditions are waived or fulfilled, on occasion the buyer can’t or won’t complete. For example, we had a file last year where the buyer died a week before the completion date (and his estate was unable to finalize the purchase). We had another case where the buyer found out that he was subject to the 20% Foreign Buyers Tax after he had removed his subject conditions. He could not come up with an extra $300,000 in closing costs, so even after a few extensions to the closing date, he had to ultimately decline to complete the sale.

A buyer who wants to have “first dibs” on one of these collapsed sales can ask his realtor to write a “backup offer” while the first contract is still in force.

Since the seller can’t legally sell the same property twice, the backup offer is drafted to come into effect only when the original offer no longer exists.

Common clauses used by real estate agents for this purpose include:

“This backup offer shall only become effective when the seller is no longer legally obligated to complete the sale of the property under the original offer.”

Or, “This backup offer is subject to the collapse or non-completion of the original contract of purchase and sale.”

While these clauses may seem to be sufficient at the outset, hardly a month goes by without our office getting a call from a realtor or client inquiring about whether the seller is entitled to make a change to the original offer while a backup offer is in place.

Most realtors and their managing brokers in the Lower Mainland seem to be of the view that even based on the aforesaid clauses, no changes can be made to the original offer.

That position does not appear to be borne out by the few reported cases that have dealt with this issue.

In Wright v. Hamster (2009 BCPC 109 (CanLII), <https://canlii.ca/t/2381n) the BC Provincial Court looked at the issue of whether an offer collapsed as a result of the original seller granting the buyer an extension of time to remove his “subject to financing” clause. The court referred to B.D. Management Ltd. v. Tajico Holdings Ltd (1988, BCJ No. 3130), a decision of the BC Court of Appeal, where under the original contract, the seller agreed to increase the deposit by $25,000 and extend the completion date, while the plaintiff’s backup offer was in place. The backup offeror sued claiming that the vendor’s amendment to the contract constituted a collapse or non-completion of the original agreement. The appeal court upheld the seller’s right to amend the original contract.

In Wright, Judge Higinbotham held that the original seller’s amendment “was not of a character which rejects the original (Pollard) deal, but is of a character which affirms it. It is an amendment to a still subsisting agreement. As such, the amendment which operated to extend the time for Mr. Pollard to remove his “subject to financing” clause did not constitute a collapse or non-completion of the Pollard deal. Nor did the actions of the Defendant (original seller) breach any contract that the Defendant had with the Claimant.”

I did not come across a case where the court had held against the original seller, although that does not mean that there may not be one in the future. For example if a seller were to allow the original buyer to close after missing the deadline for the removal of a subject condition, that would likely run afoul of the backup offer.

However, for the sake of clarity for both the original seller and the backup offeror, clearer drafting may prevent the need to go to court in the first place.

For example a backup offer could contain the following schedule.

BACKUP OFFER

The Buyer and the Seller acknowledge that the Seller has entered into a contract of purchase and sale to sell the subject property to a third party (hereafter referred to as “the existing contract.”) This is a backup offer which will only become effective upon the Seller ceasing to be legally obligated to sell the subject property under the existing contract.

NOTICE

The Seller agrees to forthwith notify the Buyer or the Buyer’s realtor in writing as soon he is no longer legally bound to sell the subject property under the existing contract.

CHANGES TO EXISTING CONTRACT

While this backup offer is in effect the Seller agrees that no changes will be made to the existing contract (including, but without limiting the generality of the foregoing, the waiver or extension of any time deadlines stipulated therein).

RIGHT TO WITHDRAW

The Buyer and the Seller agree that until the Buyer or the Buyer’s realtor receives written notice that the Seller is no longer legally bound to sell the subject property under the existing contract, the Buyer may withdraw this backup offer by notice in writing to the Seller or the Seller’s realtor.

MANNER OF NOTICE

Written notice to either party or his realtor may include notice by fax, email or text.

GENERAL

Where the context requires, reference to the parties includes the plural (if more than one), the feminine or any other gender preference.

Such clauses make it clear what the parties are legally entitled to do.

In addition, the right to withdraw clause allows the backup offer to rescind his offer if he finds a better property, provided that his backup offer has not already been accepted.

These suggestions may not be a good fit for every situation, so we always suggest that a seller considering accepting a backup offer or a buyer thinking of making one should consult their real estate lawyer about the appropriate terms for their circumstances. Realtors are NOT trained to draft customized amendments to the standard form BCREA/CBA.

Courts only get involved when clauses are either not clear or non-existent and it becomes necessary to intuit the parties’ intentions when they made the contract.

Clear drafting by your real estate lawyer can save you a lot of time, money and stress.

© 2021 Pazder Law Corporation

DISCLAIMER: This foregoing is for information purposes only. It does not constitute legal advice. Laws and legal precedents are always changing so always consult your own solicitor before making a decision on these matters.