In real estate, timing is everything. During the last 6 months, there have been winners and losers in the real estate market. Those Sellers who were fortunate to sell and close prior to the dramatic change in the market were the winners and those who bought at inflated prices and closed may be the losers, however, they may have benefited from lower interest rates on their mortgages. As real estate lawyers, we see the good, the bad and the ugly. The ugly part of our job is advising either Buyers or Sellers when deals are falling apart. While we always to our best to provide advice in difficult situations, in some cases, there is no solution and the deal does not close. It is then up to the litigation lawyers and the courts to resolve the dispute. In many cases, Buyers could not close because they bought without a condition on financing and either wanted out of a bad deal or could not quality for a mortgage. In other cases, Sellers could not close on their purchase deals because of defaulting Buyers on their sale deals. Regardless of the reasons, every time there is a change in the market, chaos inevitably follows and no one wins except the litigation lawyers.
Recently, I have seen other reasons why deals don’t close or are delayed and these have nothing to do with changing market conditions. Many of these problems can be avoided if realtors took extra care when preparing an Agreement of Purchase and Sale (“Agreement”). This column will give examples of unforeseen problems that may arise and how realtors can avoid them to ensure a hassle free closing for all parties involved.
- Tenants-It goes without saying that buying or selling a tenanted property creates challenges. If you are representing the Buyer, you must determine if your client is prepared to assume the tenant or if it wants vacant possession on closing. Absent anything to the contrary in the Agreement, vacant possession is expected on closing. If the Buyer wants to assume the tenant, then the appropriate clause for a tenant assumption must be in the Agreement. If the Buyer wants vacant possession, then the realtors must address the issue of terminating the tenancy. When I once asked an inexperienced realtor about a deal where the property was tenanted and the Agreement called for vacant possession, the realtor said that the tenant “told me” that he would be vacating the property. This is not good enough. There are specific rules regarding how a tenancy can be terminated and every realtor needs to be familiar with these. If acting for the Seller, if the Agreement requires vacant possession on closing, the Seller must ensure that the tenancy is properly terminated and that the property is vacant on closing. Failing to do so will jeopardize the deal and even worse expose the Seller to possible litigation. Even with everything properly done in terms of notifying the tenant, there is no guarantee that the tenant will in fact vacate the property. Accordingly, there is always a risk that a tenant can make life difficult for a Seller by refusing the vacate the property. Unfortunately, in my opinion, the tenant holds all the cards and it is very difficult, expensive and time consuming to evict a tenant. The bottom line is that realtors need to be very careful when representing a Buyer or Seller of a tenanted property.
- Fixtures and Appliances- Listing agents should be careful in allowing the following clause into the Agreement-“The Seller warrants and represents that all fixtures and chattels included in the purchase price shall be in good working order on closing” Even if you substitute ”normal working order”, it makes no real difference in my view. The problem in allowing this clause in the Agreement arises when the Buyer attends at the property before closing and discovers that one of the appliances is not working. Invariably, the Buyer’s lawyer will rely on this clause to request a holdback on closing. This results in many e-mails and phone calls between the lawyers and may delay closing. Further, if a deficiency is discovered after closing, you have an unhappy Buyer when the Seller takes the position that the appliance was working on the closing date. In my view, this can be avoided if listing agents amended the clause in the Agreement to state that the fixtures and chattels are being purchased in “as is” condition. After all, the Buyer must understand that they are buying used appliances. If they are concerned about them working, then they should inspect and test them when submitting their offer.
- Notice of Security Interest (NOSI)-When acting for a Seller, it is insufficient to ask the Seller if there is any equipment on the property that is rented. The most common rental item is a hot water tank and there is a provision in the Agreement which requires the Buyer to assume the rental contract. However, there are some items in the property that are considered rent to own items. Examples of these are HVAC equipment, water softeners, water heaters, etc. With rent to own items, in some cases the owner of the equipment may register what is called a NOSI on the title to the property. This NOSI is a lien on the property which is like a mortgage and if not dealt with correctly in the Agreement, the Buyer could force the Seller to discharge the NOSI and pay it off in full. From my experience, the companies who register these NOSI’s may require the rental items to be bought out at inflated prices. It is therefore important for the realtor to ask if the Seller has any rent to own items in addition to rental items and if so, these should be included in the section six (6) of the Agreement which requires the Buyer to assume the rental contract. Failing to do this could result in a windfall for the Buyer and a shock for the Seller.
As you can see, there is no such thing as a simple real estate deal. Sometimes, market forces will force a deal to go sideways and not close. When this happens, there unfortunately, is not much that can be done by the realtor or the lawyer. However, as can be seen from the examples above, there are things that a good realtor can do to minimize the risks and protect their clients.