Recently, many clients came to us about the troubles they faced in their real estate closings. Many individuals signed legal documents without understanding the meaning of the paperwork, resulting in many problems. Those include:
- When a spouse is not a registered owner on the deed, what is his/her entitlement to the matrimonial home?
- Confusion regarding whether the property is a principal residence (no taxes when sold) or an investment property (seller must pay capital gains when sold)
- Disputes and problems when the house is passing down to future generations
Unfortunately, those clients did not receive a clear explanation of the documents they were signing and were only told those were routine paperwork that everybody must sign. They were also not explained the choices they have, such as the 3 different ways of going on title. But since they did willingly sign the documents, they cannot back out of the legal obligations they agreed to in writing.
To help everyone understand the real estate closing process better, today we will highlight the three most important things you must understand about buying or selling your property. As well, you need to know what your real estate lawyer is supposed to do for you.
Review Your Agreement of Purchase and Sale
Your agreement of purchase and sale, or more commonly referred to as the Offer, is a legally binding document. The offer is typically written by the realtor and signed by the seller and buyer without first undergoing a lawyer review.
Because of this, you can run into many problems. So, we always suggest that a “solicitor review condition” be put in the agreement. This allows the buyer and/or seller’s lawyer to examine the signed Offer to see if there are any legal problems. If there are, then the buyer or the seller can back out of the Offer. If there is no solicitor review condition, then the Offer cannot be backed out without legal or monetary consequences once it’s signed.
So what are some legal problems that commonly appear on the Offer?
Status Certificate
If the property in question has a management company, then your lawyer must review the status certificate. This review requirement should not be waived on the Offer without having the lawyer walk you through the status certificate first.
Amongst other things, the status certificate will tell you how much the management fee is each month, whether the seller has been paying the management fee on time (if not, then this must be fixed before closing), and whether the fee will likely increase recently (e.g. due to major renovations done by the management company).
Also, the status certificate will say whether the management company is currently undergoing litigation with any other party. If so, then there is a risk that they may lose the litigation and their condo general insurance is not enough to cover the damages. When both of those things happen, the unit owners may need to contribute to paying for damages.
The things in the house – who does it belong to?
There are 3 types of “things” within the property being sold.
The first type is called chattels, which are moveable objects that are not attached to the property. Common examples are tables and chairs, washer and dryer, sofas and free-standing shelves. There is a section on the Offer called “chattels included”. Only the objects listed in this section will be sold with the house to the buyer, at no additional fees. Anything not listed here, the seller may take them away on or before closing. So, if there are any expensive chattels you want to keep as a buyer, ensure it’s listed here in as much details as possible.
The second type is called fixtures. Those are objects that are attached to the house and cannot be easily removed without damaging the property. Common examples include built-in cabinets and shelves (attached to the wall), built-in writing stations (attached to the floor), and chandeliers (attached to the ceiling). There is a section on the Offer called “fixtures excluded”. This means that only the fixtures listed in this section may be removed by the seller and not sold to the buyer. Thus, this section is crucial to the seller – any expensive fixtures they want to take away must be explicitly stated here.
Rental items are objects that are not owned but rather rented by the seller. Common examples include hot water tank and solar panels. There is a section on the Offer called “rental items”. Anything listed here must be assumed by the buyer after closing, meaning they must pay the rent associated with the equipment until its contract expiry. Now, the contract usually lasts 10-20 years, which is a big commitment for the new owner. So as the buyer, you should review the contract before agreeing to take on the rental items. While as the seller, you must list every single rental item here, otherwise you are forced to buy the item out (costing usually $10k – $50k) on or before closing.
For more information, read our blog here: https://varitylaw.ca/2019/03/25/whats-in-an-agreement-of-purchase-sale-for-real-estate/
Conduct Due Diligence Searches
After your real estate lawyer reviews the Offer with you, they are supposed to conduct due diligence searches, which consist mainly of the following:
Title Search
Real estate ownership, or deed, is registered, and this information is open to the public. However, usually a real estate lawyer or a realtor must search it through their system and provide it to their clients.
If there are any major legal or ownership problems associated with the property, those would be registered “on title”. Common examples include debts incurred by the seller, such as mortgages, and litigation in relation to the property.
Most people have a misunderstanding: the person who incurred the debt or litigation is solely responsible for it. The problem is that sometimes that person does not have enough money to pay off the debts or litigation. That is why their creditor would register the debt onto the property, so in the worst-case scenario, the creditor may sell off the property to pay for the debt. This means that the creditors have a right to the property even if it exchanges hands. In essence, those registered debts “attach” to the property, not just to the person who incurred them.
This is why all registered debts, litigations, and other problems must be resolved before closing, so the buyer does not end up inheriting it.
Writ Search
If the seller loses a litigation but fails to pay for damages, or has unpaid debts registered with the Court, then there will be a “writ” in the seller’s name.
Any writs that is in the seller’s name before closing must be resolved. This is because, like debts registered on title, the writ’s creditor would have a right to the property. Any writs in the seller’s name registered after closing is not attached to the property and would not be a problem for the buyers.
Unfortunately, the writ system identifies the debtor by name only, and this is done very imprecisely. For example, even if the seller’s name is somewhat similar to the debtor, the writ system would pick it up. For instance, if the seller’s name is Tom Lee Smith, and the debtor’s name is Tom Smith, Lee Smith, Tommy Smith, Lenny Smith, etc., the writ system would say Tom Lee Smith could be any of those debtors.
The only sure way to prove that Tom Lee Smith is not any of those debtors is for his lawyer to contact the creditor’s lawyer and get a letter stating otherwise. Most creditors’ lawyers would charge a couple of hundred dollars to issue the letter, and the seller would need to pay for this before closing to clear their name and ensure a smooth closing.
Title Insurance
Apart from the title search and writ search, most real estate lawyers would not undergo any other searches, such as a PPSA search to see if the chattels and fixtures have debts attached to them, a property tax certificate to see if there are property taxes owing, etc.
Instead, they would rely on title insurance, which is an insurance purchased by the buyers at closing. At a maximum, this insurance would cover the entire purchase price. So if you bought a house for $1 million and then later on discovered there were other legal problems, such as unpaid property taxes or unregistered debts, title insurance would pay those on your behalf, up to a maximum of $1 million. Unlike property insurance, you only have to pay for title insurance on a one-time basis at closing. Title insurance would remain valid and protect you until you sell the property or pass it onto someone else.
Explain Your Mortgage Documents and Deed Options
Most buyers won’t have enough funds to purchase the property without a mortgage. So, their real estate lawyer would have to complete their mortgage closing documents, receive the mortgage funds from the bank, and register the mortgage on title as a debt (this would be a registered debt that would show up in a future title search).
There are many details regarding mortgage documents, which we will explore further in another blog. For now, we will just mention two important things. First, the registered amount of the mortgage and the amount you actually received as the buyer may be different. For example, let’s say you are buying a property for $1 million and you are getting a mortgage for $600,000. Although the bank only funded you $600,000, they may require your lawyer to register the full purchase price ($1 million) as the mortgage on the title.
The reason they do this is to discourage you from getting a second mortgage with another bank, and also to encourage you to borrow more money from them in the future. Don’t worry, in the end, you still only need to pay back the amount you actually received from the bank (in this example, being $600,000). But you will unlikely be eligible to borrow more money from other subsequent lenders.
Second, a prepayment penalty. Most mortgages are “closed”, meaning that even if you have funds to repay all the outstanding mortgage at once, you will be charged an interest penalty. For example, let’s say you borrowed $800,000 with a term of 5 years. In the second year of your mortgage, you suddenly inherited $1 million, and you want to pay back all the outstanding mortgage. As only 1 year has passed since you got the mortgage (a short amount of time), you will be charged a very high prepayment penalty, likely into tens of thousands of dollars.
To avoid this, you should rely on the prepayment amount offered by the banks. This is usually 10 + 10, meaning in one calendar year, you can increase your monthly payments by 10% and your annual payment by 10%, without having to pay any penalties. Those payments also contribute directly to your principal outstanding and not to your interest. Of course, the details of prepayment options vary between lenders, so be sure to talk to your mortgage advisor first.
Importantly, if you sell the property before the mortgage term ends, you must repay the entire amount outstanding at closing. This will also result in prepayment penalties. The same applies if you refinance with another bank, or in the unlikely event that you pass away before the mortgage term is up.
Lastly, your lawyer should explain the three different ways you can go on the deed, please watch our 1 min video here: https://www.youtube.com/shorts/HO6qM-pBsgA
Conclusion
The top three essential things in a real estate purchase/sale closing are reviewing your Offer (ideally before you sign it), conducting due diligence searches, and planning for your mortgage and deed options.
Keep in mind that real estate ownership is a long-term investment that requires careful planning and should not be treated as a one-time transaction. The decisions you make throughout closing usually affect you decades and generations down the line.
If you are looking for a real estate legal team that will explain all your options clearly and treat your purchase/sale as a lifelong plan (discuss options for taxes, inheritance, divorce, etc.) rather than as a one-time transaction, please book a 1st free consultation with us here: https://calendly.com/sabrina-668/1stfreeconsult
