28 Oct Real Estate Undertakings & Holdbacks
Undertakings and Holdbacks in Real Estate Transactions
The closing of a real estate transaction in Canada (registration of the deed, the delivery of keys and release of money) is not usually the end of the legal process. Often, in order to complete a real estate deal the buyer, seller and their lawyers give undertakings that the other parties can rely upon to deal with certain issues after closing.
What is an Undertaking in Law?
An undertaking, in the case of real estate transactions, is a special promise made in order to induce (convince) the other party to close the transaction, and it can be enforced as if it were a separate contract.
On a typical home sale the seller will undertake to pay out its mortgage, tax and utility accounts and to provide vacant possession. The buyer, and the buyer’s lawyer, will rely on those promises to complete the transaction.
Sometimes the undertakings involved in the sale of a house or property are very significant and the failure to comply with them could have serious consequences. For example, if a seller does not pay out the mortgage the property would continue to be subject to it, and the seller’s mortgage holder could foreclose or sell the property to enforce payment of the mortgage. Where there is a potential for such material negative consequences the buyer’s lawyer may insist that the seller’s lawyer also provide their undertaking to pay the amount necessary to discharge the seller’s mortgage or other lien from the property, and obtain and provide a registered discharge after closing. As stated clearly by the Law Society of Upper Canada, Lawyers are under professional obligations not to give an undertaking that they cannot complete, and if a lawyer fails to meet obligations created pursuant to an undertaking given by them they may face professional discipline including possible disbarment as well as be sued for any resulting loss the buyer may have as a result of relying upon the undertaking.
Real Estate Holdbacks
In other cases, a deal may not be able to be completed because some contractual obligation cannot be met at closing. For example, a seller may have contracted to sell the home with a working dishwasher, but just before closing the dishwasher stops working. If there isn’t time to complete the work and the parties want to close (rather than extend) the transaction, then the seller may offer to have a holdback of a certain amount of money from the closing proceeds to ensure that the work is done to the mutual satisfaction of the parties following closing. Negotiation can include consideration as to how much should be held back, who will hold the funds (the buyer’s lawyer or the seller’s lawyer), when and how the holdback funds will be released, and what happens if the estimated holdback amount is not correct.
The seller is not required to agree to the holdback; if he does not do so then the buyer’s remedy may be to close under protest and sue for an abatement (reduction) of the purchase price. Because litigation is costly, inconvenient and the result of a law suit is never certain, lawyers may encourage their clients to enter into a holdback arrangement in respect of minor contractual issues that are not capable of being resolved by the closing date.
Whether you are buying or selling a home, considering an investment property for yourself or by way of a joint venture, renting commercial space, mortgaging or developing land, our real estate lawyers on staff know how to protect your investment.