10 Things to Know about a Real Estate Transaction
Although real estate is a year-round business, typically most homes are bought and sold during the spring and summer months. As the warmer weather approaches, we thought we would provide you with a list of things you should know if you are contemplating buying or selling in the near future.
1. A Real Estate Purchase Agreement is a legally binding document. It is important to have it drawn up by a Lawyer or Real Estate Agent.
Although parties may wish to draft the purchase contract themselves in order to keep costs down, there is no comparison for the vast expertise and knowledge that a Real Estate Agent or Lawyer can provide. They can advise if the terms of the agreement expose the purchaser or seller to any potential liabilities, if the purchaser’s lender will likely require additional documentation prior to funding the mortgage (which the seller may be obligated to provide), or if any clauses require further clarification in order to avoid any confusion between parties in the future. It is usually much more cost-effective to have a Lawyer or Real Estate Agent involved at the beginning of the process than for them to try to find a solution for any problems that may arise in the future as a result of the agreement between the parties.
2. A seller must disclose all hidden defects/problems with the property to their Real Estate Agent/Lawyer to help prevent a potential lawsuit in the future.
It is imperative that a seller discloses all known hidden defects with the property to prospective purchasers in order to avoid potential litigation. Although sellers are not obligated to report defects that are readily discoverable by purchasers, such as deficiencies visible upon an inspection of the property, we highly recommend that all potential problems are disclosed and if of a serious nature, are specifically acknowledged and accepted by the purchasers in the purchase contract. This will provide evidence that the purchasers were aware of the deficiency, but were nevertheless interested in purchasing the property. This will in turn provide the sellers with a measure of protection should the purchasers choose to commence a lawsuit in regard to the defect.
3. A seller will need to obtain a current Real Property Report (survey) and Certificate/Letter of Municipal Compliance in most sale transactions. “Current” is defined as less than 10 years old and represents the current state of the property.
A Real Property Report is a survey of the property which shows the location of all buildings and structures relative to property boundaries. A Compliance Certificate or Letter of Compliance is a document issued by the municipality confirming that all visible improvements on the property have met the regulations under the zoning bylaws and have the appropriate development permits. Prospective purchasers (and their lenders) will want this confirmation to ensure that they will not be required by the municipality to expend monies in the future in order to bring the property into compliance. Because it can take quite some time to have the survey completed and Compliance issued by the municipality, it is strongly recommended that sellers look into obtaining these documents, or consult a Real Estate Agent or Lawyer with respect to the same, shortly after deciding to list the property for sale.
If the sellers obtained a Real Property Report and Compliance Certificate when they purchased the property and nothing has been changed on the property since the date of purchase (i.e. addition of a deck, hot tub, garage, etc.) then they may be able to use these older documents when selling the home in the future. However, the purchasers’ lender will typically only accept surveys that were completed within the last 10 years.
4. Title insurance can protect purchasers and their lender from any unknown Municipal Compliance issues in the absence of a Real Property Report and Compliance Certificate. However, Title Insurance may not be accepted in certain transactions.
Title insurance indemnifies for loss from title defects or encumbrances such as liens and survey/Real Property Report defects that were unknown and undiscovered at the time of closing.
If a current Real Property Report and Compliance Certificate are not available, purchasers may agree to accept homeowners’ and lender’s policies of title insurance instead. Although the purchasers’ Lawyer will be responsible for ordering the policies, the sellers will typically reimburse the purchasers for the cost of those premiums, which depending on the particular title insurer, are usually around $300.00-350.00 for an average-priced home.
It is important to note that title insurance will only cover survey or title defects that were unknown at the time of closing. For example, if the purchasers were aware at the time of closing that the garage encroached onto municipal lands, this defect would not be covered under the title insurance policy. However, if the purchasers were not aware at the time of closing that the garage encroached onto neighbouring municipal lands and the municipality later advises that the garage must be relocated, the cost of doing so would likely be covered under the title insurance policy.
It is important to note that title insurance policies may change the defined coverage from time to time. As a result, it is always advisable to check the policy coverage at the time the policy is arranged.
5. Rush transactions can cost you more money. Ideally, allow for 3 weeks from the condition removal date to the possession date to avoid unnecessary costs.
It is only when all of the condition precedents set out in the purchase contract have been waived by the parties that the lawyers can begin working on the file. Condition precedents are more commonly referred to as the “subject to” clauses, such as “subject to approval of new financing” or “subject to a property inspection”. In order to ensure that there is sufficient time to prepare the necessary documentation, it is important that the condition removal date(s) and possession date are not scheduled too closely together.
In addition, because documents are typically signed within the 2 weeks preceding the closing date, it is important that if you plan to be away immediately prior to the possession date that you let your Lawyer know as soon as possible. Depending on the number of real estate transactions our firm may be acting on, we typically do not start working on files until 3-4 weeks prior to closing. However, if we have notice from our clients that they will not be available to sign documents in the 2 weeks preceding closing, we will ensure that all of the documentation is prepared and executed well in advance of the closing date to ensure there are no delays.
6. All lenders are not created equal.
As a purchaser, if you do not select a major bank for your new mortgage (e.g., CIBC, TD Canada Trust, Bank of Montreal, RBC Royal Bank, ATB Financial, Scotiabank, Servus Credit Union) you may incur additional legal costs as the requirements of certain lenders increase the obligations of your Lawyer. This is mainly because the paperwork and documentation required for most “B” lenders is significantly more than what is typically required for the major banks. In addition, when we act for a “B” lender, there are usually many more searches and other investigations that need to be conducted as part of the conditions of funding. As a result, the legal fees associated with preparing “B” lender mortgages are typically higher.
7. The seller must ensure that all expenses associated with the property are kept current to the date of closing, such as the property taxes, mortgage payments, utilities and fire insurance.
Most real estate purchase contracts will specify that items such as property taxes, local improvement levies, utilities, rents, security deposits, homeowner association fees, condominium fees, etc. will be the seller’s responsibility for the entire closing day and thereafter assumed by the purchaser. If these expenses were paid on an annual basis, such as the property taxes or homeowner’s association fees, these will be adjusted for the parties as part of the transaction. For example, if the seller has not paid the property taxes for the year, the purchaser will receive a credit for the amount the seller should have paid for the days he or she was in possession of property. All property taxes are paid on a calendar year basis regardless of when they become due and payable.
If the seller fails to keep the expenses associated with the property current, typically the Lawyer acting for the seller will have to pay those arrears out of the sale proceeds and often there will be extra legal fees associated with the additional payouts.
8. A mortgage payment may be taken out after the closing date if the lender has not processed the mortgage payout in time to cancel the subsequent payment.
When acting for a seller, the Lawyer will be responsible for ordering a mortgage payout statement from the seller’s lender. Typically, if the closing date is scheduled for a day that a mortgage payment is to be automatically withdrawn from the seller’s account, that payment will still be withdrawn and the lender will take that payment into consideration in the payout statement. If an additional payment is taken out after the closing date, and there is an overage on the account, the lender will typically reimburse the seller in time once the payout has been processed.
It is important to note that most mortgage payout statements assume that all previous mortgage payments have been made and that the mortgage is in good standing. As a result, it is very important to advise your Lawyer if any mortgage payments have been missed or if there are any other arrears as those will need to be added to the payout figure sent to the lender. Only when the mortgage has been paid in full will the lender issue a discharge of mortgage.
9. When selling, it is important that the property is left in a similar or better condition as to when the purchasers viewed it in order to avoid complications on closing.
We have recently dealt with a number of transactions in which the property was left in a very unclean state or where certain affixed items had been removed contrary to the purchase contract. This can potentially result in a holdback of a portion of the seller’s net sale proceeds pending rectification of the deficiencies or issues or, if that is not possible, releasing some of the holdback funds to the purchasers as compensation. Most real estate purchase contracts will contain a clause confirming that the property will be in a similar condition as to when it was inspected by the purchasers.
The rule of thumb is if the item is even slightly affixed to the property, such as a curtain rod or ceiling fan, the common law presumes that the fixture will remain with the property. Chattels, or items which are not affixed to the property and are moveable, such as a fridge or stove, are not presumed to stay with the property upon a sale. As a result, it is important that if the seller wishes to take a fixture when moving out of the property, that that is specified in the real estate purchase contract. Similarly, if a seller is willing to leave certain chattels behind, that should also be set out in the purchase contract in order to avoid any confusion and complications later on. If there is any doubt or hesitation as to whether a particular item is a chattel or fixture, include it in the purchase contract so that both the purchasers and sellers are on the same page.
10. Choose your Lawyer based on reputation and trust.
Your home is a huge investment. Although legal fees are typically the main focus for clients when choosing a real estate lawyer, it is important to also take into consideration each lawyer’s particular real estate law experience and knowledge. Real Estate is somewhat of a specialty and it is important that the lawyer you choose is well versed in that area of law. Lower legal fees may mean that less time and attention to detail is spent on your file. It is important to query with prospective lawyers how the file will be conducted in addition to the legal costs involved in the transaction. Ultimately, you want to choose a Lawyer you trust to handle the transaction with competency and efficiency.
NOTICE TO READER: The summaries of legal rights and remedies described above are general references to the Alberta laws existing at the date of the publication and may not apply to the reader’s individual circumstances. Also, the laws may change. These legal summaries are not to be relied upon as applicable to your individual circumstances and are subject to a complete review of the facts and applicable laws in every case.