Structuring Holdbacks During Negotiations

Date: November 6th, 2019
By: Ron Thibeault

Handling Closing Day Issues In Your Offer

Buyers are often surprised during our meetings to learn that a pre-possession walk-through is not a right. In fact, technically Buyers don’t have access to the property until the funds have already been released on the day of closing.

In almost all cases, Buyers expect their newly purchased home to be perfect. It is an emotional time and the excitement is palpable. They walk into a dirty home and all of that excitement disappears.

Can You Holdback Money?

The first inclination of Buyers is to demand that money be held back from the Seller to cover the costs of the cleanup. Unfortunately, the reality of a real estate transaction is that Buyers are not entitled to holdback money from the closing funds for minor breaches of contract.

The standard form contract in use in Alberta does not give Buyers an automatic right to withhold funds unless that right has been agreed to in the purchase contract.

What constitutes a minor breach? That is not easy to quantify but examples of this would be where the home has not been cleaned as required, an appliance is not working or there is some drywall damage.

Can You Minimize Risk?

This is simply a question of negotiation at the time of your Offer. Will the Seller accept a clause in the contract giving the Buyer a right to holdback funds if the property is not up to standard at closing? It is unlikely, but certainly something worth attempting to negotiate.

If, for example, a term of your Offer obligates the Seller to get carpets professionally cleaned, a clause should also give you the right to holdback a preset amount at closing pending the production of receipts showing the work having been done.

You should also ensure that a term is added to your original offer giving you the right to a walk-through either the night before or morning of closing.

Simply put, if there is work to be completed by the Seller before closing, you and your Agent must ensure that the Offer has terms added that protect you in the event those matters aren’t resolved as required. The wording of these holdbacks is vital. Your Realtor is not a lawyer so if there are any questions either contact us or have your agent contact us to review what should be included in the holdback clause.

Buying Foreclosed Properties Comes With Risks

Date: November 5th, 2019
By: Ron Thibeault

So, you want to get a deal? Looking at a foreclosed home? Well, the risks in doing that might be more than you expected. Often what looks to be a fantastic deal really might not be exactly that in the end.

Normally, the Seller gives certain warranties to the Buyer that the property will be, amongst other things, in the same condition as when it was originally viewed, that there are no compliance issues, that there are no defects the Seller is aware of. This is not the case in a foreclosed property.

Risk? What Risk?

The major issue in dealing with a foreclosed property is that the lender who has foreclosed will be selling the property with no warranties whatsoever. A typical term of an Offer relating to a foreclosed property specifically states that the property is being sold on an “as is” basis.

What does this really mean? In layman’s terms it means that you assume all of the risks with foreclosed properties and may ultimately be left holding a property that has serious deficiencies.

In a standard transaction, the Seller warrants to the buyer that there are no compliance issues and is obligated to provide evidence of that. In a foreclosure situation, you will likely not know of any compliance issue until you go to sell the property in the future and, most importantly, will be left with the problem because the lender sold the property “as is.”

What Is The Worst That Can Happen?

How serious can the problem be? If you purchase a property with a serious compliance issue, say a portion of the garage was encroaching into the neighbouring property, you might not be able to resell that property until that issue is resolved, which could include moving the garage; you have absolutely no recourse as against the owner/lender who sold it to you.

Ultimately, buying a foreclosed property is not for the faint of heart. If you decide to make an offer on one you should ensure that your agent is fully aware of how to protect you and discuss the issue with us prior to making your offer. Sometimes deals really are too good to be true but we can help you get through the process.

Choosing a Real Estate Lawyer Making the Right Choice Up Front by Ron Thibeault

Date: May 5th, 2016
By: Ron Thibeault

One of the questions that people have asked over and over again is how to select a real estate lawyer. The answer is pretty complex because there is no easy, fits everyone answer. Of course, not every jurisdiction requires that you have a real estate lawyer. However, when one is needed choosing a real estate lawyer involves a large number of variables ranging from experience to personality issues. There are, though, some basic things that everyone should be working from.

The first issue most people focus on is price …WRONG! Price is only one factor and unless the fees of one lawyer are 30% more than another then it should become a minor fact. Why?… It’s simple actually…. by focusing on price you sometimes fail to take into account the more important issues like experience and knowledge. Price should only be a factor when all other things are relatively equal or when the price from one lawyer to another varies dramatically.

The biggest concern we all should have when selecting a lawyer is experience. This is the same as with any other business… you want the best person available to help. It’s not when things are going well that you have to worry it’s when things are going badly… it is at this time that the experience of your lawyer is most important.

How do you judge experience? Again, there is no fast easy answer. There are, however, some basic questions you should be asking. Here are a few of them:

  1. How many real estate transactions of my type do you do in an average month?
  2. Who are your assistants, what are their roles and how much experience do they have?
  3. When it comes time to meet to sign documentation who will I meet with?
  4. What are the steps that I will have to go through from this point forward and what can you do to make the process easier?
  5. What are your fees and are they firm quotations or simply estimates?

These basic questions will help you get a feel for the person you are dealing with and will help you make a decision. Do not rush to get answers… make sure that you take your time and get the lawyer to flesh out all answers as much as possible. Once you have armed yourself with this basic information compare your notes and make your decision.

What should you do once you select who it is you want to represent you? There is no easy answer to this but the KEY is simply this… do not wait for your lawyer to contact you unless they instruct you to do that. Don’t assume that your real estate lawyer will know every single thing about the file or what is happening. With so many lines of communication – seller’s lawyer to buyer’s lawyer, seller’s realtor to seller’s lawyer, seller to seller’s lawyer, etc. – the possibilities for one line of communication to falter are always there.

The important thing is for you to ensure that the lines of communication are open on your side. In other words, if your Realtor, the other party or anyone else contacts you about anything to do with the transaction, simply call your lawyer and pass on the information that you have received or have been asked to divulge. What may seem to be a fairly straightforward thing at the moment might have important legal ramifications down the road.

Ron Thibeault

When Deals Don’t Happen! The Ins & Outs Of Releases

Date: May 5th, 2016
By: Ron Thibeault

Unfortunately, we are in the type of market where transactions sometimes fall apart. There are various reasons for this but in most cases it is where 1 party or the other is at fault. That being the case, we think it is vital for you to understand the implications of this to you and your clients and how to handle this situation.

The first issue that comes to mind is how to handle the situation where there is a rumour or it is determined that the Buyer or Seller will not close. Step 1 is to immediately refer your clients to their lawyer (have them find an experienced real estate lawyer if they haven’t already done so). Do not take any steps until this has been done and your clients have obtained legal advice. Steps you have your clients take may ultimate doom a specific remedy that they might be entitled to.

There have been a number of occasions where a well-timed and drafted letter to the other party saves that transaction by spelling out the consequences of a breach of contract. In other cases, it helps strengthen the case for your client for future claims if necessary. This is why you must ensure that they have obtained legal advice so that you can act appropriately.

The next vital question is how to protect your commissions. In cases where it is the Buyer not closing on a firm transaction, the rules are clear cut and spelled out in the Listing Contract. What though if it is the Seller that is unable to close on a firm transaction? In those cases it is vital that you immediately contact your Broker to determine whether a Caveat can be registered. The registration of a Caveat is 1 way to try and protect commission but is not as foolproof as it sounds.

One of the factors that can cause a Seller to be unable to close is where there are insufficient funds to pay the existing registrations and the lenders are unwilling to negotiate. In those cases your caveat will have little or not value should the property wind up in foreclosure as your caveat will simply be wiped from title.

The key point here is to remember, when acting for a Seller, to confirm prior to the Listing that there are sufficient funds to complete the deal and if there aren’t, then the issue must be addressed prior to any Offers being accepted. If you are presenting an Offer on behalf of your Buyer client you have to review title to confirm that there are sufficient funds to close failing which you may be setting your client up for failure as well as putting your commissions at risk. If there is any question as to the sufficiency of funds, the transaction should be conditional on the confirmation to ensure that there are no surprises close to the Completion Day.

The next question pertains to your client in a failed transaction situation and how to address their concerns. If your client is not at fault for the failure to close you have to be cognizant of the fact that they may have additional rights you are not aware of. Simply put, you are folly to try and advise them as to their rights and obligations. It is in the best interests of the party at fault to try and secure a release of liability; this is not necessarily the case for the non-offending party. There are a number of claims that have been advanced against Realtors giving, or being determined to have given, legal advice as to the implications of signing a Release.

Ultimately, releases have long term consequences that may not be clear for a variety of reasons not the least of which is your clients potentially foregoing any future claims. There are occasions where your clients will not know all of the consequences of a failed transaction so it is vital that this fact is brought to their attention. Getting them to the right advice is crucial.

Ron Thibeault

Not All New Home Warranty Programs are Created Equal

Date: April 14th, 2016
By: Ron Thibeault

I have recently been involved in 2 different transactions where a smaller builder provided their own “warranty” for defects and then offered a new home warranty from Progressive New Home Warranty.

Where you are acting for a Buyer on a purchase from a Builder, even if your client is prepared to accept the Builder’s own “warranty” there is the question of whether their lender will accept that. In most cases the answer will not be positive: normally the lender will require some level of third party warranty against structural issues. Part of your role is to ensure that this issue is addressed within the Offer.

Importantly for your client, most major programs provide coverage for them as well for deficiencies at walkthrough. This is not the case where the Progressive Home Warranty Program is used. In both of these cases I mentioned the Builder used the Progressive warranty. The clients were lulled into a false sense of security on the issue as there is a specific exclusion that reads as follows:

“Items requiring repair or not list as acceptable on the following checklist are considered deficiencies and are NOT covered by warranty. These items or any other items that would be noticed through a reasoanble and prudent inspection at time of Possession, are not defects and are therefore subject to the terms and conditions of the purchase contract and are not covered by warranty”

Effectively your clients are left with absolutely no recourse should the Builder not complete any walkthrough deficiencies. Ultimately, this is the main purpose of why people need 3rd party warranties: to protect against the Builder NOT completing or performing their obligations. The Builder’s own warranty is useless because it is the Builder who has failed to do something!

Ultimately this means that you must be very vigilent when drafting offers for new homes covered by this program. In particular, you have to ensure that there is a reasonable way to employ and enforce a holdback for deficiencies that covers your client in case they need to hire a 3rd party contractor to complete work that the Builder is unwilling or unable to complete. The value of that holdback should be determined by a proper inspector who is familiar with the type of construction involved.

Failing to deal with these matters up front can and will cause serious issues at closing as these type of contracts are usually signed on the standard form Offer to Purchase which gives very limited rights to the Buyer at closing. Ultimately, a Builder’s own “warranty” is worth absolutely nothing. For your clients, some 3rd party programs may offer little more.

Ron Thibeault

The Dangers of Clause 6.1(g) Standard Forms Gone Amuck

Date: April 14th, 2016
By: Ron Thibeault

Perhaps one of the biggest challenges to face Realtors in the last several years is starting to have serious and negative impacts on our industry. The change in question is the amendment to the Real Estate Purchase Contract by the AREA Forms Committee to include the new clause 6.1(g). The consequences of this change, if they weren’t fully understood, should have been as it is literally causing havoc in the industry.

If you aren’t familiar with it, clause 6.1(g) outlines that the property complies with any registered restrictive covenants (“RC’s”). This sounds inconsequential but in reality it is already causing deals to close late or, in the worst case, to be terminated.

Effectively, as a result of this clause your sellers are now warranting that the property complies with any restrictive covenants on title (old and new RCs). This doesn’t seem to be that big an issue until you understand that prior to this change there was no such warranty meaning that Buyers who purchased properties with these old RCs on them before the change in the Contract are now required to deal with these and are responsible for the costs associated with the attempt to remove or amend the RC; the problem is that it isn’t always possible to do so.

On a number of properties in the City there are old RCs from as far back as 1908 that contain restrictions on how a property can be developed. Some of them, and these are fun to read like a time capsule, restrict an owner from having pigs, horses, brothels, drinking houses on the Property; some however, are far more problematic in that they limit the distance from the street, the number of dwellings per frontage, the size of the property, etc. Some of these are referred to as “building schemes” and they can affect 100’s of properties in a neighbourhood.

The history on this issue will help you understand why this is such a problem. Prior to this change, the issue of old RCs was effectively ignored once a Buyer had executed a Purchase Contract and had waived conditions. The reason for this was simple; the Standard Contract did not contain a warranty with regards to them. The prior Contract simply sought out City Compliance on a RPR and if you have ever read a Compliance Stamp it clearly excludes any opinion as to compliance with RCs.

Effectively, these could be ignored unless the Buyer, pre-offer, made it an issue in a contract through the insertion of either a term or condition relating to this. In fact, we often recommended this to Buyers who had intentions of using the property for the purposes of further development. At that point, if the Seller accepted that term or condition they would be obligated to resolve the issue (the key being “if the Seller accepted”).

Now with the change approved by the AREA Forms Committee the obligation to resolve any issues with a RC is imposed on the Seller with the situation being that these issues are sometimes very difficult to resolve. In some cases, the Courts will require notice of the application to amend or remove a RC be given to all of the affected parties that can sometimes number in the 100’s; any person coming forward to dispute the removal can effectively result in the application failing. Effectively, there are now some unmarketable properties in Calgary notwithstanding the fact that they may have been bought and sold any number of times in the last 50-100 years. Every lawyer in the province now has these potential issues on any number of files and, as a result, so do a number of Realtors.

In a recent case in our office, my clients bought a new home from a Builder. The standard AREA Resale Contract was used; including clause 6.1(g). On title was a 1951 RC that outlined any development could be no closer than 27 feet from the any street or avenue fronting the land and no more than one home per 50 feet of frontage (I assume that when the Builder bought the lands there was only 1 home and that they didn’t review the title prior to buying the land).

The RPR was not delivered to our office in time for the closing so the deal was delayed until that was available as per clause 4.5 of the Contract. We had identified the potential issues to counsel for the Seller earlier with regards to the RC but these concerns were not addressed until close to the Completion Day. The Sellers’ lawyer assumed (wrongly) that all we needed was a compliance stamp and not a confirmation that the property was not in contravention of the RC.

When the RPR was received at our office, the front of the home was only 21 feet from the property line and not the required 27. Second, this was an attached dwelling on 25 feet of frontage. Both of these put the property offside of the RC.

As a direct result of clause 6.1(g) our client was left on the scheduled Completion Day not taking keys while the issue was being resolved. In this case the transaction was delayed over 45 days while the Seller’s lawyer dealt with how to remove the RC; my client was not prepared to accept a risk that the marketability of the Property would be reduced if the Covenant could not be removed.

To understand the risk here, if the RC couldn’t be removed (as will be the case in some situations) my client was prepared to walk from the transaction meaning a lot of work and effort would have been wasted by every professional on the file. Fortunately, our efforts resolved the issue for both our client and the new owner of the lot next door whose purchase had closed without their counsel noticing the issue or resolving it. But again, the delay cased both stress and a level of uncertainty that was unnecessary but for the existence of clause 6.1(g).

Coincidently I have another client in our office as this is being written whose sale cratered because of an old RC. My Sellers purchased the property prior to the change when there was no warranty in the Standard Contract and are now selling with that warranty in place. A prospective Buyer received legal advice about the old RC that indicated it may be problematic. Needless to say, my clients are shocked that they now have to resolve this issue notwithstanding the fact that everyone before them had no such obligation to an old 1938 RC.

All of this could have been avoided by either not making the change or, alternatively, grandfathering any property constructed before the date that the change in the Contract was made. Now, we have a serious and ongoing problem that is causing serious issues for innocent Sellers; sometimes changes that sound good in theory have serious and unintended practical consequences.

In the end, as a Realtor you have to ensure that:

  1. When acting for a Seller you pull title and ALL RC’s that may be of concern and review the RC’s on that title prior to accepting the listing. Failure to do so means you may have a property that is effectively unsellable if clause 6.1(g) remains in the Contract;

  2. When acting for a Buyer, you pull title and ALL RC’s that may be of concern and review the RC’s on that title prior to submitting the Offer. Notwithstanding the fact that the Seller has to deal with the issue, because they may not be able to remove the RC you have to ensure that your Buyers aren’t left with nowhere to go on the day of Closing or are forced to close in less than optimal circumstances;

  3. If you are acting for a Builder client who wants to build and subdivide lots, you MUST insert a condition of review of the title and encumbrances to the satisfaction of your client;

  4. REMEMBER – Compliance from the City is not evidence of compliance with the restrictive covenants registered on title; and

  5. Start to take an active interest in changes to your Contracts and contact AREA and voice your concerns with regards to changes like 6.1(g) that don’t really make sense given the history of this issue.

Ron Thibeault

Understanding Collateral Mortgages When Mortgages Don’t Add Up

Date: April 14th, 2016
By: Ron Thibeault

I would hazard to guess that every Realtor in Calgary (and the rest of Canada) has been mystified when they see a mortgage registered on a title that is for the same amount as when your Seller purchased the home. I know because I have received a number of phone calls about this very issue.

The concern for you as an agent is to ensure that there is enough equity in the Property to satisfy the terms of the contract but also ensure that you get paid; this is after all an occupation and not a hobby. What you likely don’t know is that your Seller likely executed a newer product called a collateral mortgage that most banks are now pushing their clients into. In most cases, it isn’t properly explained to your clients and they have no idea what they have agreed to.

Not so long ago, your clients were offered 2 main products as a “mortgage” solution: either a fixed rate mortgage that was registered for a set amount at a set rate or a line of credit where the security is registered for the maximum amount approved at the approved rate; pretty straight-forward in terms of understanding. If ultimately you were having issues with your lender you could talk to a competitor, pay a nominal fee (often waived) and walk across the street. This has changed with the use of collateral mortgages.

A collateral mortgage is effectively a promissory note that is secured by a mortgage on a property. The promissory note can be for significant value even though the Buyer did not borrow that much money. Typically what you see are collateral mortgages registered for the purchase price (or appraised amount if it is higher). The rate on the registered mortgage is also significantly higher than the client agreed to (Prime + 10% for TD, Prime + 7% for RBC, etc.). Effectively, what lenders are doing is finding a way around the maximum allowable security by making the mortgage security for a separate promissory note.

What your client hears when discussing this with their lender (if it is discussed at all) is that this is a great product that will allow them to borrow future advances as long as the property qualifies, they qualify, the loan never exceeds the registered amount or the registered rate. To your clients this sounds really exciting because they can save on future legal fees and have fewer issues should they need or want more money from the lender. However, there are some negative aspects of this loan that need to be divulged.

There are some issues that Buyers have to be aware of when the lender “fits” them into a collateral mortgage. Most importantly, there is a reduction in the flexibility in changing banks. If you have a collateral mortgage you cannot simply “transfer” to another institution like with a standard mortgage. You will have to discharge the collateral mortgage and reregister another mortgage with a different lender; all at your own costs. If you want to do this mid-term in your mortgage you will also have to pay any mortgage payout penalties that are included.

Another issue relates to obtaining other loans from different lenders. Because the collateral mortgage has a right of re-advance (i.e. additional money can be advanced on it) subsequent lenders will look to the maximum that can be advanced on the loan and not the balance when making a decision on a loan. Say for example you have a collateral mortgage for $500k on a home that is valued at $500k but the balance you owe is only $200k. You find out that a different lender is offering great rates on home equity lines of credit. When you approach that bank thinking that there is about $200k of equity left over ($500k x 80% = $400k – $200k balance = $200k equity) you will be denied because the collateral mortgage, which is a first charge, can always be brought back up to $500k meaning there is potential no equity for the 2nd lender to attach to.

The final issue with some collateral mortgages is that they can be used to secure more than just your home. In some cases, lenders include other loans like credit cards, etc. In return the client usually gets a secured rate on those products. The danger with this type of product is that other debts secured by the collateral loan could result in action being taken again everything secured. On other words, defaulting on a credit card could technically result in action against your home. Not all lenders use this form so it is important for a client to ask their lender about this issue specifically.

Are collateral mortgages a good change? Depends on who you are. In the majority of cases, clients have long standing relationships with their lenders and in other cases people rarely change lenders other than when they are selling their property. Whether it fits for your client is a question that their mortgage broker or lender has to address with them. The key is for them to address it early and not wait until the client attends the lawyers’ office to find out what they have agreed to.

Ron Thibeault