We are often asked to review real estate purchase contracts (sometimes referred to as “offers to purchase”) before an offer is made by a buyer or accepted by a seller. It’s a great opportunity for the lawyer to highlight important issues and help you avoid common problems.
There are many background searches and other matters that a lawyer will review or consider prior to giving advice about a specific contract. This blog post highlights a few of the key issues that we look at in reviewing a residential real estate purchase contract. I have organized them from the perspective of Seller and Buyer.
Issues from the Seller’s Perspective
- Is the Seller married? One of the very first things that a lawyer will do is review a copy of the title to the property. If there is only one person registered as the owner, then the lawyer will need to gather information about whether the seller is married. This is because of the Dower Act, which is an Alberta statute that is designed to protect a married spouse who is not on the title to the family home from having the property sold (or otherwise disposed of) without his or her consent. So, if there is only one person on the title, if the seller is legally married (not common law) and if the property being sold is the family home, then usually the seller’s spouse (wife or husband) will need to consent to the sale and sign certain of the transfer documents. There are some exceptions to this, and your lawyer can assist you with determining whether the Dower Act is an issue for your sale or not.
- Is the Seller required to supply a real property report and a compliance certificate? Most standard contracts for residential properties include a provision requiring the seller to provide the buyer with a Real Property Report (“RPR”) reflecting the current state of improvements on the land and evidence of municipal compliance (or legal non-conformance). [See our prior blog post on RPRs for more information on these documents]. So, one of the first things that we ask is whether the seller has these documents and, even if so, if there have been any changes to the house or other structures on the property since the RPR was prepared. If there have been changes (such as the addition of fences, gazebos, or decks, to name some of the most common issues), the standard contract terms would require a new RPR to be obtained. If a new RPR has to be obtained, this can take anywhere from 3-8 weeks depending on how busy the local surveyors are at the time. Not having these documents available prior to closing can delay a closing, or require that some funds from the sale be held back until the documents are available. A new RPR and compliance letter from the municipality can cost between $700 to $1,000 to obtain. It may be possible to change the contract (before it is fully signed) to either remove the requirement to provide these documents, or to confirm that the Buyer will accept an older version of these documents where applicable.
- Will the sale proceeds generate sufficient funds to pay all of the required obligations? It is important to ensure that the funds available on closing of the sale will be sufficient to pay all of the typical costs: realtor commissions, mortgages on title, property taxes, legal fees for the sale, and any others that apply.
- Is there sufficient time prior to closing? While sellers are often keen to have their property sold quickly, it is important to be mindful that a variety of things have to happen between the signing of the contract (and the lifting of any required conditions) and the closing date in order for the deal to close efficiently. Of course, there is often substantial work for the sellers to move out if the property is not already vacant. We recommend at least 2 weeks between condition removal and closing. Sellers should also ensure that the closing date allows enough flexibility for them to schedule an appropriate appointment with their lawyer prior to closing. (So, don’t sign your contract and then head off to Mexico until the day before the scheduled closing date!!).
Issues from the Buyer’s Perspective
- Will the purchase be financed with a mortgage? It is important for a lawyer to know whether the purchase will be financed with a loan or whether the Buyer has sufficient cash to close the deal without financing. Where a mortgage loan is involved, it is important for there to be an appropriate financing condition. A financing condition means that the purchase deal is not “firm” or “final” until such time as the Buyer has lifted or waived this condition. This is necessary even if the Buyer has been “pre-approved” for a certain amount of a loan. This is because pre-approval is generally focused on credit-worthiness and the ability of a Buyer’s income to support a certain maximum loan payment. However, lenders normally need to do an approval/appraisal process related to the specific property being purchased (to ensure that the land is valuable enough to support the amount of the loan).
- Is there a need for other conditions? Since there is generally a “buyer-beware” approach to purchasing property, we recommend that Buyers consider other common conditions, such as a property inspection condition, or (where the water is by a well) a water potability condition.
- Is the Buyer eligible to own the land? We handle many transactions involving rural land. In Alberta, land ownership is subject to the Foreign Ownership of Land Regulations. These regulations are designed to ensure that Alberta’s rural, agricultural and recreational lands are largely kept in the hands of Canadians. So, if a Buyer is purchasing lands outside of a City, Town, or Village, the Buyer’s lawyer will need to confirm the Buyer’s citizenship (or permanent resident status) in order to confirm if the Buyer is eligible to own the land.
- Is the Seller required to provide a RPR and Compliance Certificate? This is discussed in #2 above from the perspective of the Seller. However, looking at this issue from the perspective of the Buyer, lawyers will generally advise that it is preferable to be provided with these documents so that the Buyer can be sure of the property boundaries, that all of the structures on the land are within the property boundaries, and that the development on the property complies with the municipal land use requirements.
- Is there sufficient time prior to closing? This may be an issue from the Buyer’s perspective as well. In particular, if a mortgage loan is required for the purchase, the mortgage lender will need to send instructions to the lawyer handling the purchase. It can take time for these instructions to be sent, for the lawyer to have the opportunity to prepare all of the required documents, and for the buyer to obtain all of the things necessary to satisfy the bank that the loan is ready to be advanced (such as confirmation of insurance). Again, a minimum time period should be 2 weeks between removal of any financing condition and the closing date. Longer may be required if the lender is not a chartered bank, or the financing was arranged through a mortgage broker.
Of course, there are many other things that your lawyer will review and discuss with you. At Patriot Law Group, we encourage people to talk to a lawyer before signing any important contract. We are happy to discuss your purchase (or sale) with you. Feel free to contact us.