Understanding the essential elements and clauses in real estate contracts is crucial for both buyers and sellers in navigating property transactions successfully.
Real estate contracts can be complex and challenging to navigate, particularly for buyers and sellers who aren’t familiar with the intricate details and legal terminology. To simplify this process, we’ll break down the essential elements and clauses of real estate contracts, specifically focusing on the Agreement of Purchase and Sale.
Elements of Real Estate Contracts
The Agreement of Purchase and Sale is the core document in any real estate transaction. It outlines the terms and conditions that the buyer and the seller have agreed upon, including the price, the closing date, and any conditions that must be met before the transaction can be finalized.
Key details in an Agreement of Purchase and Sale include:
Offer & Closing Date: The offer date is the date when the buyer officially makes their offer to purchase the property. The closing date, on the other hand, is the date when the ownership of the property is legally transferred from the seller to the buyer. This is also when the buyer typically takes possession of the property. Both dates are important as they dictate the timeline for the entire transaction.
Offer Price & Deposit: The offer price is the amount that the buyer proposes to pay for the property. The deposit, also known as earnest money, is an amount paid by the buyer when the offer is accepted. This serves as a show of good faith that the buyer intends to complete the purchase. The deposit is usually held in a trust account until closing, where it’s applied to the purchase price.
Irrevocable Date: The irrevocable date is the deadline for the seller to accept the buyer’s offer. Until this date, the buyer cannot withdraw their offer, and the seller can choose to accept or reject it. If the seller doesn’t respond by the irrevocable date, the offer automatically expires.
Chattels & Fixtures: Chattels refer to movable personal property, like furniture or appliances, that may be included in the sale. Fixtures, however, are items that are attached to the property and cannot be removed without causing damage, such as built-in cabinets or light fixtures. The contract should clearly outline which chattels and fixtures are included in the sale.
Rental Items: Some properties have items that are rented rather than owned, like water heaters, alarm systems, or propane tanks. These items are listed in the contract, and the buyer will assume the rental agreements upon purchasing the property.
HST: The Harmonized Sales Tax (HST) is a tax applied in certain provinces in Canada. If applicable, the contract will specify how the HST is handled, whether it’s included in the purchase price or if it’s to be paid separately by the buyer.
Title Search Date: The title search date is the deadline for the buyer’s lawyer to conduct a search to verify the seller’s legal ownership of the property and to ensure there are no liens, easements, or other encumbrances on the title that could affect the sale.
Conditions: Conditions are specific requirements that must be fulfilled for the sale to proceed. These can include the buyer securing financing, satisfactory home inspection results, or the buyer selling their current home. If the conditions aren’t met by a specified date, the contract may be terminated.
Understanding these elements is key to navigating the complexities of a real estate contract. As always, it’s recommended to seek legal counsel when dealing with real estate transactions to ensure your interests are protected.
Conditions and Clauses on a Real Estate Purchase
Conditions fall into two categories:
- Pending deals: These require a confirmation and are usually described by a condition precedent clause, beginning with “this agreement is conditional upon…”
- Confirmed deals: These include an escape provision and are evidenced by the condition subsequent clause, beginning with “the purchaser shall have the right to terminate…”
There are numerous types of conditions that might be included in the Offer to Purchase. Some of the most important clauses to understand are:
Financing Condition: A financing condition is crucial for buyers who are planning to finance the purchase through a mortgage. This clause allows the buyer to back out of the contract if they’re unable to secure a mortgage from a bank or other financial institution on terms they find acceptable. It protects the buyer from being legally bound to a purchase they cannot afford.
Subject to Inspection: Home inspections are a common part of the home buying process. An inspection condition allows the buyer to hire a professional to inspect the property for defects or issues that might not be visible to the untrained eye. These could include structural issues, plumbing or electrical problems, or pest infestations. If the inspection uncovers significant problems, the buyer can renegotiate the price, ask the seller to fix the issues, or even back out of the contract without penalty.
Subject to Legal Review: This clause allows the buyer to have the contract reviewed by a lawyer before the purchase is finalized. The lawyer will ensure that the contract is legally sound, that there are no hidden clauses that could harm the buyer, and that the contract complies with all applicable laws and regulations. It provides an added layer of protection for the buyer.
Subject to Survey: A survey condition is especially important when buying land or a house with substantial grounds. A professional surveyor will precisely measure the property’s boundaries and identify any encroachments or easements that could affect the property’s value or use. They’ll also spot potential zoning or regulatory issues.
Subject to Appraisal: An appraisal condition helps ensure the buyer isn’t overpaying for the property. A professional appraiser will evaluate the home and provide an estimate of its market value. If the appraisal comes in lower than the agreed purchase price, the buyer can renegotiate the price or back out of the deal.
Making Your Own Conditions: While the conditions listed above are common, real estate contracts can be highly customizable. Buyers and sellers can include conditions that meet their specific needs. For instance, a buyer might include a condition that the sale is contingent on the sale of their current home. Or a seller could specify that the deal is subject to them finding a new home to purchase.
These clauses provide a safety net for both parties, ensuring that their interests are protected throughout the transaction. Always remember to have a qualified real estate attorney review any conditions you want to include in your contract.
Providing comprehensive legal services for real estate and development is at the core of our law firm. If you need assistance with a real estate transaction or have questions about your contract, don’t hesitate to contact us today.