Buying Your Home – A Guide for Homeowners

So you have decided to buy a new home. The question is, what happens after you sign the Contract? If you don’t know the answer to that question, don’t worry, you’re not alone. Most new buyers are not aware of the extent of the work actually done by their lawyer to ensure that they obtain title to their new home on the terms that they had agreed to in the Contract.

This Guide has been prepared for you as the buyer and will attempt to simplify the “conveyance” process and take the mystery out of all those documents that your lawyer will present to you for your signature.

1. GATHERING INFORMATION

After receiving instructions from your Realtor, the first step taken by your lawyer will be to gather information concerning the property that you are about to purchase.

First, a title search of the property, as well as the relevant sub-division or strata plan, is ordered from the Land Title Office (the “LTO”). A review of the search will indicate who legally owns the property now and what charges are currently registered against it. The charges may be financial, (e.g., a mortgage to be removed by the seller) or they may be non-financial (e.g., an easement or right of way) in which case the charge must be reviewed with you to ensure that it will not interfere with your intended use of the property.

The sub-division or strata plan, which shows the location of the property relative to adjacent properties, will be reviewed with you to ensure that the property that you have agreed to buy is actually the same property that you intended to buy.

Second, your lawyer will request tax information from the particular municipal authority. This search will reveal the amount of the annual property taxes and whether or not those taxes are up to date or are in arrears. This specific information is necessary so that an adjustment can be made between the seller and you to ensure that each party pays its fair share of the current year’s taxes.

Third, if you are going to rely on mortgage funding to complete your purchase then you should request your mortgage lender to instruct your lawyer to prepare and register the mortgage. Thereafter, the mortgage lender will forward the mortgage instructions to your lawyer for preparation and registration.

Fourth, assuming that you are relying on a mortgage loan to complete your purchase, the mortgage lender will require your lawyer to ensure that fire insurance coverage on the home has been arranged before it will release the mortgage funds.

Finally, it may be necessary to order a site survey as prepared by a licensed surveyor. Essentially, a site survey is a line drawing that outlines the boundaries of the property and the house as it is situated within those property boundaries. A site survey is only necessary if it is requested by the mortgage lender to confirm that the buildings on the property meet Municipal set-back requirements and to ensure that the buildings do not encroach on neighbouring properties. Of course, you may have your own reasons to confirm this information and can request that a site survey be prepared. If you prefer not to purchase a site survey, most mortgage lenders will accept a title insurance policy instead of a site survey.

It should be noted that if you are buying a strata lot (i.e., a townhouse or a condominium) the LTO will require that your lawyer obtain and file certain additional documents. The intent of this additional requirement is to protect you, the buyer.

2. PREPARATION OF THE DOCUMENTS

After your lawyer has gathered all the necessary information, the next step is to prepare the documentation required to complete the conveyance of the property and the registration of the mortgage. In British Columbia, the standard form Contract of Purchase and Sale stipulates that it is the buyer’s responsibility to prepare all the documentation necessary to complete the transaction. This means that your lawyer will prepare all the documentation required, at your expense.

For the seller’s signature your lawyer will prepare a Form A Transfer (the “Transfer”), a Seller’s Statement of Adjustments and documents concerning the applicability of GST/HST to the particular sale and a statutory declaration concerning the seller’s residency (altogether, the “seller’s documents”). The Transfer, when signed and registered in the LTO, is the document that will actually transfer title in the property from the seller’s name to your name. The Seller’s Statement of Adjustments is a formal statement that will set out all of the financial adjustments to the sale price to be made between you and the seller and will also serve to “calculate” the exact amount the seller will be entitled to receive from you as net sales proceeds.

Next, your lawyer will prepare the Buyer’s Statement of Adjustments, a Property Transfer Tax Return and a Form B Mortgage (the “Mortgage”) for your signature. Similar to the Seller’s Statement of Adjustments, the Buyer’s Statement of Adjustments will adjust the purchase price and it will also calculate the amount of money required from you to complete the purchase.

Preparing the Mortgage, on behalf of the lender, and advising you on its content and consequences will place your lawyer in a conflict of interest. This arrangement is the normal situation for a standard conveyance and mortgage transaction. However, this conflict situation is allowable only if you have been made aware of the existence of the conflict faced by your lawyer and you have consented to it in writing. The alternative to consenting to this arrangement is for you to pay for a second lawyer to act for the mortgage lender alone.

3. SIGNING THE DOCUMENTS

After completion of the documentation, the seller’s documents are sent to the seller’s lawyer for signature by the seller. It is at this time that undertakings (i.e., promises or guarantees) are arranged between your lawyer and the seller’s lawyer. These undertakings are relied upon by real estate lawyers to close the transaction and to ensure that upon the seller’s lawyer receiving the net sale proceeds from your lawyer, the seller’s lawyer undertakes (or promises) to pay out immediately any financial charges that were registered against the property. Without the reliance on undertakings, the closing process would be very complicated and cumbersome.

Finally, your lawyer’s office will contact you to arrange a meeting so that you and your lawyer can review the documents that you will have to sign: the Buyer’s Statement of Adjustments; the Mortgage; the Property Transfer Tax Return; and any other necessary documentation. After signing the documents, but before the date for completion of the purchase, you will be asked by your lawyer to bring in any funds required to add to the mortgage proceeds and your initial deposit in order to complete the transaction. These funds must be in the form of a certified cheque or a bank draft made payable to your lawyer – in trust.

4. REGISTRATION AND COMPLETION

On the completion date, as set out in the Contract of Purchase and Sale, your lawyer will register the Transfer, the Mortgage, the Property Transfer Tax Return, as well as all other necessary documents, in the LTO. The strict registration procedures followed by your lawyer on that day are designed to ensure that, at the end of the day, you will be the registered owner of the property, subject only to your lender’s mortgage and the seller’s financial charges which will be cleared from title by the seller’s lawyer, pursuant to the undertaking mentioned above.
After receiving confirmation from the LTO that the Transfer and Mortgage have been successfully registered, your lawyer will advise the mortgage lender that it has a valid first charge on the property and, at that time, the lender will advance the mortgage funds to your lawyer. Upon receipt of the mortgage proceeds, your lawyer will combine those funds with the amount brought in by you and send the total amount, less any monies payable to realtors or other designated parties, to the seller’s lawyer on their undertaking to clear the existing financial charges.
The actual closing or completion of the transaction is complete when you take possession of the property. Possession of the property will be granted to you on the possession date, as specified in the Contract of Purchase and Sale, or after the seller’s lawyer has received the net sale proceeds, whichever is later. The keys for your new property will usually come to you via your Realtor once the seller’s lawyer has received the net sale proceeds.

5. FINAL REPORTING

Aside from reporting to you in writing immediately after the completion date, the only task remaining for your lawyer is to obtain the State of Title Certificate, or “STC”, for the property. The STC will be available approximately two to four weeks after the completion date. The STC is issued by the LTO and it will show you as the registered owner of the property, subject to your mortgage registered as a first charge on title. Ordinarily, the seller’s mortgage will no longer appear on title.

Upon receipt of the STC your lawyer will forward a copy to the mortgage lender and a copy to you, thereby confirming to each party that the transaction has been successfully completed and that your file will be closed.

Collapsing a Real Estate Deal – The Seller’s Perspective

So you’ve entered into a Contract of Purchase and Sale to sell your property and now the purchaser doesn’t want to complete the transaction. What will you do? Your strategy may depend on the answer to a number of questions, including:

  1. Do you want to complete the transaction?
  2. Will you suffer losses as a result of not completing the sale?
  3. Why is the buyer resisting completion, i.e., is the buyer unable to obtain financing after all; is the purchase price above market value (as the result of a falling market); or has the Buyer learned something about the property that caused him to change his mind.

I. Saving the Deal

If you, or your solicitor, suspect that the deal is collapsing because of challenges the buyer is facing in completing the transaction, you should review with your solicitor, and perhaps your realtor, whether or not there is a course of action that could facilitate completion of the transaction. i.e., should you grant an extension to complete, should you consider closing the sale in escrow, or do you have information that may assist the other party in completing the transaction.

1. Extension

When an extension of the complete date is agreed to, care should be taken to maintain time as being of the essence. If time is not made of the essence again, the situation may arise that the “new” completion date is not enforceable and either party may set the completion date as long as reasonable notice is given. In other words, if time is not made of the essence by the addendum granting the extension, then it isn’t and neither party can sue to enforce the new date.

As consideration for granting the extension, it is not unreasonable to ask for compensation from the buyer for actual costs incurred by you as a result of agreeing to the extension; additional mortgage loan interest is an obvious example. You should not use the extension as an opportunity to “increase” the purchase price as this attitude may lead to further problems with the buyer.

2. Escrow

Essentially, “closing in escrow” is a phrase that has come in to common usage to describe the situation where, because of one reason or another, the transaction cannot be completed on the completion date but the seller is willing to give up possession of the property to the buyer if certain safeguards are put in place to ensure that the transaction is completed once the particular “obstacle” is removed. While closing a transaction in escrow may be more common in other jurisdictions it is not as common in British Columbia and is fraught with risk. Before agreeing to complete a transaction in escrow, the risks should be carefully considered with your solicitor. As a seller the risks much higher than those faced by the buyer but, particular attention should be paid to ensure that the buyer cannot back out of the transaction after possession has been given to the purchaser, proper insurance coverage is in place during the escrow period and caution should be exercised in allowing the buyer to do any additions or renovations prior to completion as any consequential damages will be the seller’s responsibility, since risk does not pass to the buyer until title passes.

3. Preserving your contractual rights

When faced with the prospect of a collapsing deal, the contract must be reviewed carefully to ensure that you maintain strict compliance with its terms during the period leading up to the completion date, if you wish to maintain your right to enforce the terms of the contract. Most standard form real estate contracts stipulate that time is of the essence. It is important to ensure that time lines are monitored and closely adhered to. Further, unless the seller expressly repudiates the contract prior to the completion date, thereby making it clear that they are not going to complete the contract, you should take the necessary steps to complete the transaction, including demonstrating that you are ready, willing and able to complete. Your solicitor will most likely send a “ready, willing and able letter” to the buyer’s lawyer.

II. Walking Away from the Deal

1. Change in Sellers Circumstances

Alternatively, perhaps your situation has changed drastically since making the offer or since the last subject clause, or condition precedent was removed and you want to find a way out. If you find yourself in this position and you want to avoid completing the transaction, you should review the contract to determine whether or not there are any problems or weaknesses in the contract that you can exploit in order to collapse the deal. The majority of the terms in most standard form real estate contracts are time-tested “boiler plate” clauses that have been revised over the years often as a response to litigation. However, where there is an opportunity to add custom terms to the body of a contract or the Addendum, this is often where problems do arise. These terms should be carefully reviewed to determine if there are any weaknesses.

III. The Transaction Did Not Complete, Now What?

Essentially, there are two options available to the non-defaulting seller:

  1. Allow the contract to collapse and, thereafter, elect to take the deposit; or
  2. Accept the repudiation/breach of the contract and sue for damages.

Options 1 and 2 are not necessarily exclusive.

1. When is a Deposit a Deposit?

Traditionally, earnest money paid prior to the completion of the contract (customarily 10 % of the contract price) has usually been considered to be a “true deposit” which, according to the usual Real Estate Board standard form of Contract of Purchase and Sale, should be automatically forfeited to the seller after the buyer’s breach of the contract, without the seller having to prove actual damages.

However, not all money paid prior to completion is considered a deposit, for example a recent BC Court of Appeal case has thrown a wrench into the usual understanding of the traditional rules regarding damages by considering the deposit language in the standard form Contract of Purchase and Sale and deciding that the deposit is not automatically paid to the seller. Rather, the seller is entitled to claim the money paid as a deposit on account of its damages which he would have to prove. This decision serves as a reminder that parties interpreting Contracts of Purchase and Sale must review the wording of the relevant terms very carefully and with the assistance of their lawyer.

Depending on the wording of the contract a party may be able the claim the deposit and claim damages that exceed the deposit. However, where the wording of the contract provides that the deposit is liquidated damages, a seller will be prohibited from seeking additional damages. As a result, it is common for contracts to provide that the deposit will be absolutely forfeited to the seller and the seller may claim any additional damages.

Such a careful review is especially important if the wording of the deposit clause is not standard form. In such a case the Court could characterize the deposit clause as a: true deposit clause; which is enforceable; a penalty clause, which is not valid; a clause describing an excess deposit, which may not survive the Court’s review; or anything in between. In other words, just because it is called a “deposit” in the Contract that does not mean that it is a “true deposit” which can be automatically claimed by the seller if the buyer defaults. You will need legal advice from a lawyer experienced in collapsing real estate transactions to help you determine if it is a “true deposit”.

2. Sue for Damages

When calculating damages, the Court will try to put the party in the position it would have been had the breach not occurred. Often the main component of the damages will be the difference in the value of the property from the contract price. In calculating the loss, the normal date for assessing the value of the property is the date when the breach of contract occurred. Notwithstanding the foregoing, where the date of the breach would be unjust, the courts have applied different dates to assess the loss of property value. (In one circumstance the court declared that three months after breach of contract was reasonable as that was a reasonable period of time to resell the property. Other components that may be included by the Court when calculating damages will be the other losses and expenses that the plaintiff has suffered and may include: closing costs incurred for the collapsed transaction, moving and storage costs, additional property or rental costs, interest and professional fees due or lost as a result of the breach. i.e., a realtor’s commission may be due and payable, despite failure to complete the transaction, and in such a case it can be included in damages.

No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting seller cannot rest on his right to sue in the hope of eventually making himself whole – he has a duty to mitigate or minimize his losses and may need to aggressively sell the property. If the Court finds that the plaintiff hasn’t properly mitigated its losses, the plaintiff may not be awarded full indemnification.

IV. Obtain Proper Legal Advice

Notwithstanding the various remedies available to the non-defaulting party to a transaction that does not complete, uncertainty about what to do as a result of the collapsing transaction and navigating the Court process is a stressful and wearing ordeal. After all, a man’s home is his castle and uncertainty about one’s home is extremely stressful. In our view, the best way to ensure that the stress and frustration is minimized is to engage a lawyer, at an early stage, who has experience dealing with collapsing real estate transactions in order to ensure that the process is handled in as efficient and strategic a manner as possible.

Collapsing a Real Estate Deal – The Buyer’s Perspective

So you’ve entered into a Contract of Purchase and Sale to buy your dream home and now the seller doesn’t want to complete the transaction. What will you do? Your strategy may depend on the answers to a number of questions, including:

  1. How badly do you want the property?
  2. Will you suffer losses as a result of not completing the purchase?
  3. Is the property special or unique to you?
  4. Why is the seller resisting completion, i.e. is the sale price below market value (either as a result of the Seller’s under-valuation or a rising market); will the seller be unable to clear title; or is the seller unable to find a replacement house to buy?

I. Saving the Deal

If you, or your solicitor, suspect that the deal is collapsing because of challenges the seller is facing in completing the transaction, you should review with your solicitor, and perhaps your realtor, whether or not there is a course of action that could facilitate completion of the transaction. i.e., should you grant an extension to complete, should you consider closing the sale in escrow, or should a holdback or reduction in price be considered.

1. Extension

When an extension of the complete date is agreed to, care should be taken to maintain time as being of the essence. If time is not made of the essence again, the situation may arise that you may not be able to stand firmly on your rights as to the timing of the contract and either party may set the completion date as long as reasonable notice is given. In other words, you may lose control over when the transaction may complete. Depending on how much of an extension is being sought it may be worth considering a reduction in the sales price.

2. Escrow

Essentially, “closing in escrow” is a phrase that has come in to common usage to describe the situation where, because of one reason or another, the seller is not able to complete on the completion date but is willing to give up possession of the property to the buyer if certain safeguards are put in place to ensure that the transaction is completed once the particular “obstacle” is removed. While closing a transaction in escrow may be more common in other jurisdictions it is not as common in British Columbia and is fraught with risk. Before agreeing to complete a transaction in escrow, the risks should be carefully considered with your solicitor. As a buyer, the risks are less than those faced by the seller but particular attention should be paid to ensure that proper insurance coverage is in place during the escrow period and caution should be exercised in doing any additions or renovations prior to completion and, therefore, the transfer of title to you.

3. Price Change or Holdback

Another consideration is whether or not a holdback or a change in price will facilitate completion of the deal. That is, if the seller has failed, or is unable, to do something required under the contract, prior to the completion of the transaction you may wish to either negotiate a holdback, to ensure that they will fulfill their obligations, or negotiate a reduction of the price to compensate for the seller’s inability or unwillingness to fulfill his obligation under the contract. In our view, all things being equal, it is generally preferable to negotiate a change in price instead of negotiating a holdback because the former will avoid the inevitable debate concerning the terms of the release of the holdback.

4. Preserving your contractual rights

When faced with the prospect of a collapsing deal, the contract must be reviewed carefully to ensure that you maintain strict compliance with its terms during the period leading up to the completion date, if you wish to maintain your right to enforce the terms of the contract. Most standard form real estate contracts stipulate that time is of the essence. It is important to ensure that time lines are monitored and closely adhered to. Further, unless the seller expressly repudiates the contract prior to the completion date, thereby making it clear that they are not going to complete the contract, you should take the necessary steps to complete the transaction, right up to and including the tendering of funds, to show that you are ready, willing and able to complete. Your solicitor will most likely send a “ready, willing and able letter” to the seller’s lawyer.

II. Walking Away from the Deal – Initiating the Collapse

1. Change in Buyer’s Circumstances

Alternatively, perhaps your situation has changed drastically since making the offer or removing the last subject clause, or condition precedent and you want to find a way out. If you find yourself in this position and you want to avoid completing the transaction, you should review the contract to determine whether or not there are any problems or weaknesses in the contract that you can exploit in order to collapse the deal. The majority of the terms in most standard form real estate contracts are time-tested “boiler plate” clauses that have been revised over the years often as a response to litigation. However, where there is an opportunity to add custom terms to the body of a contract or the Addendum, this is often where problems do arise. These terms should be carefully reviewed to determine if there are any weaknesses.

Problems that most often arise in contracts can arise because of uncertainty relating to a fundamental term of the contract – a term that goes to the root or heart of a contract (i.e. who are the parties to the contract, what is the price, the property or timing of the contract). Are all these terms in your contract “certain”?

Simply ignoring or refusing to waive conditions precedent or subject clauses may not help you out of the contract. There is case law that imposes upon the buyer a positive obligation to take reasonable steps to fulfill conditions precedent. Therefore, careful consideration should be given as to what steps need to be taken before deciding not to waive a condition precedent.

2. Pre-Sale Contracts

The Real Estate Development Marketing Act, S.B.C. 2004, c.41 provides significant consumer protection for buyers of presale properties. Given the protection provided under the Act, special attention should be paid, and research should be conducted, to determine whether or not there have been breaches of Real Estate Development Marketing Act by the developer. Such breaches may include: any misrepresentations made by the developer; the developer failing to provide to the buyer a disclosure statement that accords with the Act; and the developer failing to provide to the buyer every amendment to the disclosure statement as required by the Act. Generally, a breach of the Act will result in the buyer being entitled to rescind or revoke the contract.

III. The Transaction Did Not Complete, Now What?

Essentially, there are three options available to the non-defaulting buyer:

  1. Allow the contract to collapse and, thereafter, demand the return of the deposit;
  2. Sue for specific performance of the contract; or
  3. Accept the repudiation/breach of the contract and sue for damages.

Options 1 and 2 are not necessarily exclusive.

1. Accept the Collapse

If you choose Option 1 then you will want the deposit returned as soon as possible because you may need the funds to use as a deposit on a new property. If the seller has indicated a clear intention that he will not complete the sale of the property and you have decided that you do not wish to sue for specific performance, your solicitor should ensure that the deposit is released to you promptly without conditions. This should be straight forward and almost automatic but, on occasion, an aggressive seller may request that the buyer sign a release of claims before the seller will agree to release the deposit. You should carefully consider with your counsel whether or not this request is appropriate as it will prevent you from suing for the damages you may suffer.

2. Sue for Specific Performance

When setting the remedy for a breach of contract, the Court tries to put the innocent party in the same position it would have been had the breach of contract not occurred. Specific performance is based on the concept that in some circumstances, damages will not be an adequate remedy for the particular breach of contract. In the context of a real estate transaction where the property is unique, it affords a party the opportunity to stand on its rights under the contract and to force a completion of the transaction. For a period of time, it was presumed that specific performance was a given with real estate. However, given the increasing propensity for housing to be standardized and “cookie cutter”, obtaining an order for specific performance has become rare. In order to get specific performance, the plaintiff must prove that the property in question had unique characteristics that are not readily replaced; clearly a significant hurdle for parties wishing to enforce a contract of purchase and sale for an apartment, condominium or town home. Damages may still be available even where the claim for specific performance fails; although it should be noted that where there isn’t a reasonable basis to claim for specific performance a plaintiff is required to mediate or minimize its damages.

3. Sue for Damages

When calculating damages, the Court will try to put the party in the position it would have been had the breach not occurred. Often the main component of the damages will be the difference in the value of the property from the contract price. In calculating the loss, the normal date for assessing the value of the property is the date when the breach of contract occurred. Notwithstanding the foregoing, where the aforementioned date would be unjust, the courts have applied different dates to assess the loss of property value. Other components that may be included by the Court when calculating damages will be the other losses and expenses that the plaintiff has suffered and may include: closing costs incurred for the collapsed transaction, moving and storage costs, additional property or rental costs, interest and professional fees due or lost as a result of the breach.

No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting buyer cannot rest on his right to sue in the hope of eventually making himself whole – he has a duty to mitigate or minimize his losses. If the Court finds that the plaintiff hasn’t properly mitigated its losses, the plaintiff may not be awarded full indemnification.

IV. Obtain Proper Legal Advice

Notwithstanding the various remedies available to the non-defaulting party to a transaction that does not complete, uncertainty about what to do as a result of the collapsing transaction and navigating the Court process is a stressful and wearing ordeal. After all, a man’s home is his castle and uncertainty about one’s home is extremely stressful. In our view, the best way to ensure that the stress and frustration is minimized is to engage a lawyer, at an early stage, who has experience dealing with collapsing real estate transactions in order to ensure that the process is handled in as efficient and strategic a manner as possible.