My law practice has reviewed countless of Agreements of Purchase and Sale and closed many real estate transactions. From our experience, we have seen “the good, the bad and the ugly”. Below is a summary of many of the drafting errors that realtors often make when preparing an offer or an Agreement of Purchase and Sale:
1) Seller’s representations and warranties — most Agreements will contain representations or warranties such as the chattels and fixtures being in good working order or that the property has not been a marijuana grow house. However, there is no obligation on the seller to give any representations or warranties. In some cases a warranty will be provided when it should not be. For instance, we have seen cases where the dishwasher is not working, however, a warranty is given. Warranties should not be provided in the Agreement unless the seller is prepared to stand behind them. This mistake can lead to problems, such as the deal not closing and/or a lawsuit after closing.
2) Survey — the most common error we see is where the realtor allows the seller to sign the Agreement with a clause that states “the seller will provide the buyer with a survey of the property showing the current location of all structures, dwelling, etc”. This clause is often included without the realtor verifying with the seller that such a survey exists. This can also create a problem if a structure such as a deck is built on the property and not shown on the survey. The result is that the seller will often look to the realtor to pay for the cost of a new survey. This common error can be avoided by reading the clause and verifying with the seller.
3) Status certificate — making a condominium purchase conditional on a review of the status certificate is always preferred. Even in the case of a bidding war for a property, it is risky to not make the Agreement conditional on a lawyer’s review of the status certificate and condominium documents. The realtor or buyer cannot assume that they know the building well enough to not include a condition on status certificate review. The status certificate can reveal potential problems that a buyer should know about before making a firm offer.
4) Estate sales — these can be complicated. If you are selling a property and the owner is deceased, many questions need to be asked at the outset. Does the deceased have a will? Has probate been applied for or obtained from the court? Selling a property owned by a deceased without knowing about probate and making the closing date too soon can create major problems. Before finalizing the offer, you should confirm that probate (court approval giving the estate trustees authority to sell the property) has been obtained. If not, the Agreement must address what will happen if probate is not available prior to closing.
5) Rental/Rent to Own items — this is a particularly contentious issue. The seller may think that they own the hot water tank, HVAC equipment or water tank. Accordingly, it will be listed on the Agreement as included in the purchase price and free and clear of all liens and encumbrances. However, we are seeing many cases where in fact the seller has signed a rent-to-own agreement which allows the owner of the item to register a notice of security interest on title to the property. The buyer will insist that the equipment be paid out in full on closing. The buyout figure can be thousands of dollars which the seller will be liable to pay. Accordingly, a realtor should always confirm with a seller that all chattels and fixtures are fully owned and not leased.
6) Closing Dates — Closing dates, which used to be 60-90 days from the date that the offer was signed have become increasingly shortened. A two week closing is not unusual. However, problems can arise where the buyer does not have its financing in place. Some buyers believe that they can obtain a mortgage approval in 1 or 2 days. With the new mortgage rules, getting a mortgage and ensuring that your lawyer receives the mortgage instructions at least 1 week prior to closing is not always possible. Delays in obtaining financing are the number once cause of closing delays. Buyers are not entitled to an extension of the closing date. In a rising market, a seller may refuse an extension request which could lead to a loss of deposit and a lawsuit for breach of contract. If you have a quick closing, it is imperative that the closing date allow sufficient time to allow the buyer to have its financing in place.
7) Buying and Selling on the same day — buying and selling on the same day is not something that I recommend. A delay in the sale transaction (for instance, the buyer needs an extension due to financing delays) will impact both the sale and the purchase. Where there are stacked deals, one deal not closing can impact several and the costs can quickly add up. If your client has an option, he or she should consider bridge financing which can alleviate the stress and costs of selling and buying on the same day.
As you can see, there are many pitfalls and risks when drafting an Agreement of Purchase and Sale. While standard precedent clauses are helpful, relying on these alone can lead to potential problems. Asking your clients the right questions is extremely important and will facilitate smoother closings and can reduce the likelihood of disputes, problems and potential costs down the road.