Writing a good contract of purchase and sale:
The contract of purchase and sale governs the transaction between the buyer and the seller. As you are representing the buyer or seller, you must ensure that the agreement properly reflects the intentions of your clients and fully protects their interests.
Most real estate contracts for residential transactions use the CREA/CBA standard “Contract of Purchase and Sale.”
Note that paragraph 18 of the standard form Contract of Purchase and Sale (the “Purchase Contract”) in use in BC presently states:
18. REPRESENTATIONS AND WARRANTIES: There are no representations, warranties, guarantees, promises or agreements other than those set out in this Contract and the representations contained in the Property Disclosure Statement if incorporated into and forming part of this Contract, all of which will survive the completion of the sale.
This means that if you fail to include the necessary clauses to protect your client’s interests, often they cannot be enforced pursuant to this clause.
NOTE that most of the following issues are NOT addressed in the Purchase Contract, so it’s up to you to make sure that they are added in to the contract (when applicable).
“AVOIDING THE MOST COMMON MISTAKES” LIST
1. SIZE DOES MATTER
The Purchase Contract is silent on this matter. The listing agreement usually indicates the square footage of a house and lot size and also the square footage of a condominium or townhouse (it also carries disclaimers about the information being believed to be accurate but not so warranted).
Have the home professionally measured and surveyed or review the current strata plan to verify the home size by way of a subject condition unless your buyer instructs you explicitly not to have this done.
Rarely will the seller make a representation concerning the size of his property.
When size discrepancies are discovered, they invariably show a smaller size home, lot or unit than the buyer expected. That means you have an unhappy buyer on your hands.
GOLDEN RULE: Never rely on the facts contained in the Listing Agreement.
The Purchase Contract makes no mention of Goods and Services Tax (“GST”). The vast majority of realtors do not add any clauses dealing with this tax. They leave it to the conveyancing lawyers to try to paper over an “after the fact” representation by the seller that the property is GST exempt because it is “used, residential, not substantially renovated property.”
However, the seller is not contractually or legally bound to provide such a representation after the contract is signed and subject conditions are removed (and most non-conveyancing firms will advise their sellers not to make such a representation, as it can’t help them and may indeed hurt their position if GST is later found to be payable).
The applicability of GST to the transaction depends on what the Seller was doing with the property NOT what the Purchaser plans to do with it.
For example, if the property was used for commercial purposes or has a commercial element (i.e. live/work studio) or has been rented out for short term rentals (i.e. “Air B & B”), GST may be payable, despite the property not being new. This will be an unpleasant surprise to the purchaser.
If your guess about the applicability of GST is wrong, you (or your errors and omissions insurance carrier) will be paying the tax after closing on the buyer’s behalf. 5% on a two million dollar property is a lot of money.
Golden Rule: If acting for a buyer, put a clause into the offer stating that the purchase price is inclusive of Goods & Services Tax if applicable. If the Seller balks at it, you know there is something to investigate further. If the Seller leaves it in, then GST becomes his problem.
3. PROPERTY TRANSFER TAX
Some jurisdictions (i.e. Alberta) don’t have this tax. Purchasers (who only buy or sell every five to ten years), don’t necessarily know about this tax even if they live here. Make sure that they do BEFORE they make the offer and how much that tax will be (its 1% on the first $200,000 and 2% up to $2,000,000 and 3% over that. Add 15% on to that if the buyer is not a Canadian citizen or permanent resident of Canada.*
First time buyer exemptions are subject to MANY conditions.
Keep in mind that TAX rules and conditions are constantly changing.
Golden Rule: Don’t guess whether there is tax or not unless you are absolutely sure. If you are wrong, you (or your insurance carrier) will be paying the tax for the purchaser. Refer the person to your conveyancing lawyer or the PTT branch to assess whether he will qualify for the FTB exemption.
4. SALES BY NON-RESIDENTS
Many non-residents own Canadian properties. The high price of real estate in the Lower Mainland has prompted many to sell. When a non-resident sells, the buyer is entitled to require a holdback of a portion of the sale price of the property under s.116 of the Income Tax Act (generally 25% of the gross sale price, but if the property is held as inventory or is depreciable property, the holdback is 50% on the building value). This holdback is available to the purchaser whether it is a term of the Purchase Contract or not.
The Purchase Contract attempts to deal with this with a check-off box on the top left hand side of page one or on the bottom of the last page (depending on which version you are using). Many realtors don’t know why it matters so they leave it blank.
If you are acting for a seller find out at the outset whether he is a non-resident and advise the buyer’s realtor.
If the seller has a large mortgage on the property, the required holdback can scuttle the sale (unless the seller has money to come up with out of his own pocket to allow his lawyer to pay off the mortgage and holdback the required amount). Alternatively, the seller can apply for a clearance certificate before closing if he knows the sale price and has sufficient time prior to closing. CRA has been known to expedite clearance letters in these circumstances (their normal turnaround time is three to four months).
If the sale is court-ordered (i.e. foreclosure or Court Order Enforcement Act) more searches and investigations MUST be performed before making the offer. A recent BC Supreme Court decision (Mao v. Liu (2017) BCSC 226) resulted in the buyer being assessed with $600,000 of unpaid capital gains taxes owed by the registered owner.
Golden Rule: Make sure that your non-resident seller knows about the holdback, that it won’t scuttle the sale and how long it will take to get the funds back from CRA (after payment of capital gains or income taxes). If it’s a court-ordered sale extra due diligence is warranted before the offer is written up.
5. UNDERGROUND OIL OR FUEL TANKS
Prior to the late 1950’s, most homes in the Lower Mainland were heated by way of underground fuel tanks containing 500 to 1000 liters of heating fuel. These were typically buried a few feet below the surface of the lot in the back or side yard. Pipes connected the tank to the home and allowed for periodic re-filling.
By the late 1950’s many home owners had switched to natural gas heating and abandoned the fuel tanks. Often tanks were simply closed up by sealing or removing the filling pipe without using up or draining the existing fuel.
As there was little or no environmental legislation back then, no one was concerned that after 40 years or so, the tanks would corrode and the fuel would leak out.
Municipal by-laws in Vancouver require the removal of any underground oil tank not in use. Thus, if there is an underground tank, it is the seller’s legal responsibility to remove it.
Removal of a tank by a qualified company usually costs about $2,000-2,500. If fuel oil has leaked out however, we have seen costs up to $100,000 and above, as the fuel oil can leak under foundations and roadways and all contaminated soil must be removed and replaced.
The PDS is of little help for this issue as it simply requires the owner to state that he is “unaware of any existing oil tank”.
GOLDEN RULE: Include a warranty by the seller that there are no underground oil or fuel tanks on the property. To be on the safe side, also include by way of subject condition, a clause permitting your buyer to carry out an inspection in this regard before closing and indicating that should a tank be found that the seller would be responsible for its removal, (including any necessary soil remediation if oil has leaked out) before completion.
Clause 20A of the standard real estate contract in use in BC now prohibits the buyer from assigning the contract of purchase to a third party without the seller’s written consent. Furthermore it allows the seller to obtain the profit from any such assignment.
This is a MAJOR change to the long standing practice of permitting assignments of residential contracts (unless otherwise prohibited).
If prices rise dramatically between the offer date and the closing date and your purchaser has the opportunity to “flip” the contract to a third party, he will be most disappointed to learn that he is prohibited from so doing.
Make sure that you explain this to your buyer BEFORE you write the contract. Like all clauses it can be DELETED before the offer is made.
GOLDEN RULE: Make sure that your buyer understands the concept of assigning his interest in the contract to someone else before you write the offer.
… The moral of the story:
Buyers and sellers hate surprises (as they are almost invariably unpleasant). The best way to eliminate surprises is to draft a proper contract of purchase and sale and to have a good real estate lawyer as part of your team.
© April 11, 2017 Pazder Law Corporation
**Materials are current as of this date and are for information purposes only. They are not intended to constitute or replace legal advice when dealing with the subject matter. Check with the author or conduct your own due diligence to update if referring to these materials in the future.
About Pazder Law Corporation
- We have completed more than 30,000 sales and purchases
- We are approved solicitors for all major financial institutions
- We set up the legal program for the Home Owners Protection Office to assist the owners of leaky condos
- We set up the first title insurance office in BC
- We set up the first province-wide mortgage program for a major chartered bank;
- Members of the Law Society, Canadian Bar Association, CHOA, RELAN and PETA.
We welcome referrals:
- We are accessible 7 days a week to answer your questions (yes, even weekends)
- We spend time with your clients (usually about an hour) making sure that they understand what they are signing (most lawyers and notaries spend about fifteen minutes and the client can’t remember their name the next day)
- On average, eight out of ten of our existing clients are past clients of the firm
- We care whether the clients come back as much as you do
- Clients may come back to us with questions or concerns for as long as they own the property at no additional charge
Disclaimer: The foregoing is for information purposes only and not intended as legal advice to the reader. Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future.
(C) 2017 Pazder Law Corporation