IMPORTANT ITEMS TO CONSIDER WHEN PURCHASING PROPERTY
The Agreement of Purchase and Sale
By Mark Gelfand LL.B., J.D.
Associate at Kronis, Rotsztain, Margles, Cappel, LLP
25 Sheppard Avenue West, Suite 1100, Toronto, Ontario
Purchasers of real estate in Ontario are often provided with a standard Ontario Real Estate Association (“OREA”) Agreement of Purchase and Sale (“Agreement”) when considering the purchase or sale of residential or commercial property. In many cases, Ontario real estate agents will provide their clients with this form of Agreement. Although the Agreement includes various clauses important to protect purchasers (and/or sellers), there are several areas where the Agreement falls short or fails to meet the needs of any particular situation. As each transaction requires its own independent analysis, the purpose of this article is not to provide an exhaustive list of terms or clauses applicable to all situations but rather, to highlight a few important items to consider when preparing your offer to purchase a property. Although the Agreements are standard, they can be amended in many ways in order to add (or delete) a wide variety of terms. It is always recommended to contact a lawyer to review the terms of your Agreement. Below are several examples of ways to improve the terms of the Agreement and important items to consider when purchasing real property.
Legal Description of Property: Prior to entering into the Agreement it would be prudent to contact your legal representative to obtain an initial title search of the property. This will provide the proper legal description of the property and will confirm that the seller is the registered owner of the property and it will also provide the purchaser with information on registered encumbrances (such as mortgages or liens), rights of way and easements (among any other various registered items) that may need to be addressed before closing.
Chattels Included: It is important to be very specific when describing the chattels that will be included in your Agreement. If a purchaser is unable to obtain serial or model numbers for each chattel, the purchaser should, in the very least, describe the make, model, material and any other distinctive features of the chattels. This will ensure that sellers are unable to swap any items before closing.
HST and Other Taxes (when applicable): In addition to obtaining the advice of a realtor and legal representative, purchasers should also obtain the advice of an accountant in order to determine the tax implications of a purchase (i.e. what taxes may be payable upon the purchase) and to obtain information on any filings or self-assessments that may be necessary. This issue is very important and should be dealt with very early on in the offer stage. It is highly recommended that you obtain proper tax advice before all conditions are waived and before the Agreement becomes binding or “firm”. During this assessment, your legal and/or accounting professional can advise you on the allocation of the purchase price between the lands, buildings, chattels and fixtures and any HST and Land Transfer Tax that may be payable. After seeking such advice, you will also be aware of the taxes involved in the purchase of the property and will have eliminated any deal-breaking surprises.
Conditions: Given the circumstances of the real estate market and the amount of interest in the property being purchased, inserting conditions into the Agreement may or may not be appropriate. No matter what the circumstances are, it is vital to do as much due diligence as possible on the property and current owners in order to make sure that you are aware of any issues that may affect the property or that could affect the future use of the property. If, during the conditional period, you find an issue, you can then decide if it is a deal breaker or not and still have time to cancel the transaction with minimal penalty (if any). All conditions inserted into the Agreement should be for the sole benefit of the Purchaser, in its sole and absolute discretion. Below are several examples of conditions to consider:
- Purchaser being satisfied with an up to date survey of the property and/or site plans and/or other building/property drawings
- Purchase being satisfied with the environmental and physical condition of the property including the results of any environmental or physical assessments/inspections it performs
- Purchaser being satisfied with the leases or other contracts affecting the property
- Purchaser being satisfied with building and zoning by-laws and any
- Purchaser being satisfied with a condominium status certificate (if purchasing a condominium)
- Purchaser being satisfied that the property has not been used for any illegal purposes
- Purchaser being satisfied with all contracts affecting the lands and buildings, including any leases and operating contracts
- Purchaser being satisfied with a building inspection
- Purchaser being satisfied that it can obtain all necessary approvals in connection with any current or future use of the property
- Purchaser obtaining financing
Indemnities: An indemnity is protection against liabilities or a promise to pay for costs, damages or liabilities (etc…) caused by one’s actions. As a purchaser, you want to make sure that you will not be left responsible for any liabilities or damages that were caused by the seller before the closing date. It may be advisable to insert a seller’s indemnity whereby the seller will indemnify the purchaser for liabilities, loss, costs or damages (etc…) that the purchaser may suffer as a result of any claims that arise after the completion date with respect to matters that occurred while the current owners owned and operated the property. For example: “The seller shall operate the property until the closing date as would a prudent owner and the seller shall be responsible for any and all damage caused to the property up to and including the closing date.”
Representations and Warranties: There are certain statements of fact or assurances as to certain facts that, as a purchaser, you should be able to rely on in order to make sure that you are able to obtain good and clear title to the property. It is very important to insert representations and warranties of the seller into your Agreement (in addition to those included in the standard OREA Agreement). If, after closing, it is determined that a seller has breached a representation and/or warranty, the purchaser will be able to rely on the Agreement to strengthen any claim against the seller. However, representations and warranties are not a substitute for the purchaser doing its own due diligence on the property. Below are several examples of representations and warranties that a purchaser should consider inserting into the Agreement:
Damage to the Property: It is prudent to make sure that on the closing date you are receiving the property in a condition that was expected. Damage may be caused as a result of the seller moving out of the property. The removal of chattels, fixtures, furniture and other equipment may result in significant and costly damage. Therefore, purchasers should insert a clause into the Agreement to the effect that the seller will be responsible for any damage caused to the property, structures, chattels, fixtures and equipment that occurred prior to or on the closing date. It is highly recommended that you inspect the property with your realtor on or just before the day of closing to make sure that you are satisfied with the condition of the property. As a purchaser, it is much easier to settle matters with respect to damage before the transaction closes. Given the right circumstances, a purchaser may want to hold back funds or ensure that any damage is fixed before the closing funds change hands.
- In addition to the insertion of conditions, it is also prudent to insert a clause whereby the seller will agree to provide the purchaser with authorization of those authorities having jurisdiction over the property to release any information contained in their files directly to the purchaser. This information will assist the purchaser in completing their due diligence on the property. Obtaining all necessary information to perform due diligence is vital and so it is suggested that a clause be inserted into the Agreement which states that the seller will make all documentation and/or information available to the purchaser if the purchaser so requests.
- Seller has good title to the property and the authority to sell or transfer the property
- On closing, the property will be free and clear from all encumbrances
- No other entity has the right to purchase the property (such as a right of first refusal)
- There are no known legal actions or threatened legal actions against the property
- There have never been any toxic or hazardous substances stored in/around the property
- Utilities/taxes are paid up to date
- Seller is not a non-resident of Canada
- The property is currently being used in accordance with all applicable laws
- Leases are in good standing without any defaults and rent is paid up to date
- Any/all third party contracts can be terminated at any time
The above is a general summary of important items to consider when purchasing property and is not intended to be legal advice. For specific information and to obtain legal advice, please contact Kronis, Rotsztain, Margles, Cappel, LLP.
