By Darren Richards
You may have heard the oft told story about the poor chap whose house caught fire. His lawyer said, “Shouldn’t be a problem. What kind of coverage do you have?” The poor chap answered, “Fire and theft.” The lawyer frowned. “Uh oh. Wrong kind. Should be fire OR theft.”
It’s usually told by people in a bar lamenting a tough day dealing with their lawyer (or somebody else's lawyer). Lawyers split hairs. They complicate things. They hinder rather than help get deals done. Most of us real estate lawyers really try to be different - really. But sometimes the devil really is in the details. Over the next one million months or so I’d like to relate some contract pitfalls that really do matter. They can cause all sorts of trouble, from deals falling through, late closings, or substantial monetary damages.
This month we’ll deal with . . . .
Holdback Terms: These are usually added to the Real Estate Purchase Contract as additional terms or even attached as an addendum. They are designed to address a known issue that the Seller must deal with by a specified time and they are designed to (A) motivate the Seller to actually get the agreed upon work done and (B) compensate the Buyer in the event the Seller fails to do so. So what is it that lawyers really hate about these terms? They don’t often exist!
That’s right, the parties fail to address the issue and don’t even put any such terms in the contract. I’ve even heard it said by more than a few clients that they were told not to worry about it - that’s something the lawyers can deal with. While it’s true a good lawyer can appear to work miracles on occasion, we aren’t always able to re-negotiate a contract that has gone unconditional. And that’s what we are essentially asked to do in that situation.
Here’s a scenario: The Buyer has agreed to pay $300,000 but the parties have agreed that “the Seller must clean out the garage [that is stuffed floor to ceiling with junk] by the Closing Date”. All conditions are removed. Both parties are bound to the terms of the contract. The Buyer’s lawyer will need to submit the Transfer and Mortgage for registration several days before the Closing Date and then pay the purchase price on the Closing Date. Then the Buyer takes possession and finds…a lot of junk still in the garage.
The Buyer has two options: he can sue for breach of contract (nobody wants to have that headache), or he can get the junk out of the garage himself or pay to get someone to do it. Nobody wants that headache either.
The simple solution would have been to add into the garage clean-up clause of the Contract some simple wording to the effect “The Buyer’s lawyer shall hold back the sum of $1000 [or whatever the actual cost would be to hire out the job]. Should the Seller fail to remove all items currently stored in the garage prior to noon on the Closing Date, the holdback funds shall be returned to the Buyer as full and final settlement.”
Note: If the Buyer really doesn’t want the headache of getting the job done, negotiate a higher Holdback, giving more motivation to the Seller to get it done.
When a holdback isn’t negotiated at the Contract stage prior to condition removal, there’s no leverage and the holdback negotiations are at risk of being less than optimal. The Seller can quite rightly take the position that the deal is done and there will be no holdback (the Seller will likely, however, promise that he’s bound by the Contract and will get it done -truly!).
So there you have it - a little detail that has very big implications. Anytime the Seller has to do something not yet done at the time of the forming of the Contract (condition removal), please negotiate a holdback. We lawyers love that. And you will too.
Darren Richards is a partner with Richards Hunter Toogood. He focuses on both residential and commercial Real Estate and Corporate/Commercial Law serving both small and medium sized owner-managed business in the Edmonton and surrounding region. Mr. Richards also acts for major banking institutions and other lenders in relation to their commercial loan facilities. Reach him at: email@example.com or www.rht-law.ca.