Understanding the Residential Agreement of Purchase and Sale
The Toronto Real Estate Board reported that in 2011, just under 90,000 sales of residential homes took place with the average sale price of slightly over $465,000. In September of 2012 alone, there were 5,879 sales transactions with the average selling price of just over $503,000.
For residential transactions, the buyers and sellers typically use the form of the agreement of purchase and sale developed by the Ontario Real Estate Association (“OREA”), often referred to as the “Offer”. Excluding the signature page and schedules which may contain certain additional provisions, the OREA form of the agreement (the “Agreement”) is only four pages long. Yet, it does not appear uncommon for the parties to sign the Agreement without fully reading or understanding all of the provisions, paying attention only to some of the key “business terms” such as the purchase price and the closing date. The purchase or sale of a home is usually the largest transaction into which most individuals enter on a personal level. As such, the Agreement certainly requires more attention and this article is intended to provide a basic and general overview of the Agreement for the buyers and the sellers.
The Agreement contains certain self-explanatory “fill in the blank” provisions, but care must be taken to ensure that they are accurately completed, including the names of the parties, the purchase price, the property description, the deposit and the closing date. The date of the agreement is for reference only.
Once the Offer is made by one party and accepted by the other, the Offer becomes a binding agreement of purchase and sale (subject to any conditions set out therein). A subsearch of title would be appropriate to ensure that the seller is indeed the registered owner and that the legal description to be entered is accurate.
With respect to the property description, in addition to the municipal address and the legal description, there are blank spaces for the dimensions of the frontage and the depth of the property, followed by the words “more or less”. The words “more or less” are not a licence for guesswork as the buyers will have an expectation to receive a lot of the size set out in the agreement. Dimensions should be accurate and based on a survey. With respect to the closing date, choose a date that is not a Saturday, Sunday or a Statutory Holiday. If possible, avoid closing on a Friday before a long weekend.
While the buyers and sellers understand the significance of the closing date, there is on occasion some confusion over the “Irrevocability Date” clause. Irrevocability sets out a certain time period after making the Offer during which such Offer cannot be revoked. If the Offer is not accepted in time, then the Offer is null and void.
Another set of “fill in the blank” provisions deals with chattels to be included in, and fixtures to be excluded from the purchase price, as well as the rental items. Chattels are any objects located in the home that are not physically affixed to the building, while fixtures are screwed, bolted, glued or otherwise intended to be attached to the building with some permanence. The fixtures are considered a part of the building and are automatically included, unless they are specifically listed as excluded. As such the seller should never make an assumption that the fancy chandelier in the dining room that has been in the family for centuries is not included. Therefore, chandeliers, mirrors, shelves or any other fixtures that the seller wishes to take with them should be specifically listed. In contrast to the fixtures, the chattels are not part of the deal unless they are specifically listed as included. The buyers typically expect that the appliances are included, but to make it so, they must be listed. With higher end appliances, it is recommended that even more detailed description is provided, including the brand, colour and even serial numbers. The more detailed the list, the less potential for any arguments will exist later. When it comes to the chattels and fixtures, the realtors and lawyers live by the mantra “when in doubt, spell it out”.
If the seller does not wish to provide any warranties with respect to the chattels, it should specifically require the buyer to acknowledge such position in the Schedule “A” containing additional provisions and attached to the Agreement. It is not always obvious whether an object is affixed “enough” to be classified as a chattel or a fixture, and as such it is prudent to simply list all of the items that the buyer expects to find after the closing in the “Chattels Included” provision. Certain items (such as hot water tanks, furnaces, air-conditioning equipment) are often rented by the seller and not owned. These items should be specifically listed as rentals, so that they are not considered fixtures that are included in the purchase price.
The Agreement contains a provision with respect to the Harmonized Sales Tax (HST). In general, the HST is payable on new homes but not on resale of used residential homes. However, if a used home has been substantially renovated, it may be treated as a new home for the purposes of the HST. The Agreement provides a blank space where the HST can either be “included in” or “in addition to” the purchase price. In the event that HST is payable, providing that HST is included in the purchase price would potentially reduce the proceeds the seller actually receives, while providing that HST would be in addition to the purchase price would potentially increase the amount to be paid by the buyer.
The “Title Search” clause provides the buyer’s lawyer with a period of time expiring on a date set out in the Agreement (called the “Requisition Date”) to examine the title to the property and ensure that there are no work orders, as well as confirm that the insurance can be obtained etc. The Requisition Date should allow for a period of time sufficient for the buyer’s lawyer to complete the searches and should occur at least two weeks prior to the closing, to allow the seller’s solicitor to respond to and address any valid requisitions with respect to the title. The property’s current legal use is also to be confirmed, for example in cases where the buyer expects to continue to benefit from a rental stream of a separate basement apartment. The “Title” clause has been on occasion referred to as the “annulment clause” as it provides for circumstances in which the buyer can refuse to complete the transaction, if the buyer raises a valid objection to the title that the seller is unwilling or unable to remove or address. However, the buyer must accept the title subject to certain utility easements, municipal and zoning agreements and certain restrictions on land registered on title (so long as such agreements have been complied with).
In Ontario, the transfers of properties can be completed electronically. The buyer’s and seller’s solicitors will electronically sign and submit the transfer for registration online, from their respective offices, but are to be bound by certain agreements developed by the Law Society of Upper Canada, as set out in the “Closing Arrangements” clause of the Agreement.
The “Documents and Discharge” clause provides that the seller is not obligated to provide the buyer with any documents or surveys that are not already in the seller’s possession. The clause also provides that discharges of institutional mortgages (mortgages held by a bank, trust company, insurance company etc.) can be registered within reasonable time after the closing, so long as the seller’s solicitor undertakes to pay the existing mortgagee from the closing proceeds in accordance with the mortgage statement provided prior to the closing, and the seller provides a direction to the buyer to that effect. Any other mortgages must be discharged prior to the closing of the transaction.
The “Insurance” clause provides that until the closing takes place, the property is at seller’s risk and covered by the seller’s existing insurance company.
However, if the property is damaged after the Agreement is signed but prior to the closing, then the buyer can elect to either terminate the Agreement or receive the proceeds of the insurance and take the property in “as is” condition. The buyer is to arrange for insurance after the closing.
The “Planning Act” provision briefly states that the Agreement shall comply with the subdivision provisions of the Planning Act. While entire books have been written on that topic, the buyer and seller must be aware that the entire deal will be null and void if that statute is not complied with. For example, violation would occur where the seller conveys one parcel of land while retaining an adjoining parcel, without obtaining the regulatory body’s consent for such subdivision (subject to certain exceptions). The Agreement also addresses the issue of the seller’s residency in Canada, to ensure that if the seller is not a Canadian resident, that any taxes owed pursuant to the Income Tax Act have been paid. The “Adjustments” clause deals with the fact that certain amounts are paid or received by the seller in advance, such as realty taxes, unmetered utilities or rent, and the parties agree to adjust the amount required to be paid to close, as of the actual closing date.
The Agreement also provides that “time is of the essence”, meaning that any time limits must be strictly adhered to. The “Tender” clause deals with the situation where either party sets out to demonstrate that it is ready, willing and able to close the transaction on the closing date, by delivering certain documents to the other party or its solicitors. For example, a buyer would deliver the closing documents and the money, while the seller would deliver the transfer and the keys.
The Agreement contains certain representations and warranties provided by the seller. One such provision, entitled “Family Law Act” deals with the fact that a spouse of the seller has certain rights with respect to the property pursuant to the Family Law Act. Any spouse is to consent to the sale by signing where indicated. Another seller’s representation is contained in the provision entitled “UFFI” stating that the seller has not insulated the property with insulation containing ureaformaldehyde and to the best of its knowledge, the property does not and has never contained such insulation.
Schedule “A” of the Agreement of Purchase and Sale is to contain any special provisions, additional representations by the seller or acknowledgments by the buyer, or any conditions of either the seller or the buyer that must be satisfied or waived prior to the closing. For example, the parties may agree that the completion date may be changed to another date upon giving notice to the other party. The buyer may require a representation that the property was not used for growth or manufacture of illegal substances or that the underground fuel tank complies with all legal requirements and regulations. Examples of the conditions that the buyer may consider, include: (i) the condition to arrange for financing, (ii) the condition for buyer to arrange for inspection by a home inspector (this is important as otherwise, the Agreement specifically provides, in bold font, that the buyer will not be obtaining an inspection of the property), (iii) the condition for the buyer to determine that a certain building permit is available or that environmental laws have been complied with, (iv) the condition for buyer to arrange for insurance of the property, or any other conditions or other provisions that are desirable in the circumstances.
In order to get the Agreement right, the buyers and sellers will have to heavily rely on the expertise of their realtors and lawyers, but should make every effort to read and understand the Agreement provisions before rushing off to sign.
The content of this article is intended to provide general information for the reader and is not intended as advice or an opinion to be relied upon in relation to any particular circumstance. For specific applications of the law to a particular set of circumstances, the reader should seek professional advice.
* Faruk Gafic practices in the areas of commercial real estate and leasing as well as corporate law with McLean & Kerr LLP, a law firm based in Toronto.