Offer to purchase a residential property: Tips for buyers

For a number of years now, residential home purchasers have been faced with what is known as a “seller’s market”. A “seller’s market” occurs when there is a shortage of housing for sale or when there are more buyers wanting to purchase than homes available for sale. In a seller’s market, purchase prices tend to be higher because of the increased demand, and as the name suggests, sellers typically have the upper hand during negotiations.

In a seller’s market, many listings receive multiple offers. In order to be competitive, buyers have to submit offers over and above the listing price and with few or no conditions. Without including conditions in the offer, buyers are left with inadequate protection on what is likely the biggest purchase of their lives.

With inflation at the highest it has been in 40 years and interest rates rising, there will no doubt be a shift to a more balanced market in the coming months/years. Buyers may again have the opportunity to negotiate a better deal including having the ability to include certain terms and conditions within their offer to purchase a property.

With changing market conditions in mind, here are some tips on how to navigate your next offer to purchase a residential property.

Get expert(s) advice:

Before you consider submitting an offer to buy a residential property, you should engage the relevant experts/trusted advisors – typically accountants, bankers/mortgage brokers, lawyers, realtors, etc. Meet with them in order to understand each step of the purchase process, including any risks associated with the purchase.

Depending on the type of property you are purchasing (single family detached home, townhouse, condominium, cottage, etc.) and the nature of the purchase (principal residence, rental/investment property etc.) there will be specific legal, tax and/or financing/mortgage implications that you will want to be aware of It is imperative that you have a plan and understand all aspects of the transaction before moving forward.

The “Offer”:

One of the most important steps in the process of acquiring residential real estate is a well-drafted agreement of purchase and sale (the “Offer”). This document will be your first line of defence in protecting your significant investment.

In Ontario, specifically in the residential real estate market, it is standard practice for real estate agents or lawyers to prepare the Offer via a standardized agreement provided by the Ontario Real Estate Association[1] (“OREA Agt.”). In most cases, standardized agreements can simplify the negotiation between parties and allow the seller/buyer to focus on the specific business terms and conditions related to the purchase/sale of the subject property.

The OREA Agt. should not be blindly relied upon and will require modification in order to accommodate the specific terms and conditions of your transaction; if you rely solely on the pre-printed OREA Agt. you do so at your own peril. A close review of each specific term is essential to make sure the document properly reflects the agreement between the parties.  Every property and each transaction is unique; it is important that the offer be prepared/reviewed by a real estate professional familiar with such matters

Here are some important terms and conditions to consider as a buyer when submitting an Offer:

1. Due Diligence Period: In most cases, your Offer should be conditional upon a “due diligence” period where the Offer can be revoked at your sole discretion. The goal of such condition is to provide you and your expert(s) time to satisfy yourself on certain requirements like financing, inspection, insurance, etc. with the ability to terminate the Offer if an issue arises.

As an example, you may decide to hire an expert to inspect the land and buildings in order to confirm the state of the property and any maintenance and repairs that may be required in the near future.

A due diligence period should be calculated based on the time required to complete the task. Your experts should be able to provide guidance on the appropriate time period.

You should also confirm who will be responsible for completing a specific task.  For example, a condition upon inspection will require that you personally retain an inspector and arrange through the real estate agents for an appropriate time to visit for the property for the purposes of the inspection.

2. Disclosure of documents by the Seller: The seller may have kept records over their period of ownership. As the potential new owner, you can request that the seller provide you with any and all document(s) that the seller has in its possession or control pertaining to the property.

Here are some examples of document(s):

1. Copy of appraisal report of the property;
2. Copy of any known repair/installation;
3. Copy of any fire retrofit work completed;
4. Copy of current or previous inspection reports;
5. Copy of existing lease(s) as applicable;
6. Copy of any survey of the property;
7. Copies of occupancy permits and building permits;
8. Copy of Building condition reports, including reports on building structure or a building’s mechanical, plumbing, electrical and heating, ventilation, and air-conditioning systems;
9. Copies of any equipment leases; and
10. Copy of any warranty documents for all chattels included in the purchase price.

Keep in mind that the availability of documentation related to the property will vary from one seller to another, and their willingness to provide such documentation may vary as well.  You should be cautious if a seller is unwilling or unable to produce simple documents as requested; an inability to provide documents for review may simply reflect the seller’s record keeping over their period of ownership or it may be the result of an issue which the seller may not want to disclose. In such case, it would be prudent to seek guidance from your real estate lawyer on alternative options to confirm any missing information.

3. Representation and warranties: These can be used in your Offer to confirm past and present facts for a specific item (known as a representation) with a promise of indemnity (known as a warranty) in case the facts are found to be false. It may be appropriate to request specific representations and warranties in your Offer.

Here are some examples of types of representations and warranties for consideration:

• EQUIPMENT – GOOD WORKING ORDER – The Seller represents and warrants that all the mechanical, electrical, heating, ventilation, air conditioning systems, and all other equipment on the real property shall be in good working order. The Parties agree that this warranty shall survive and not merge on completion of this transaction.

• RENT – The Seller represents and warrants, that, during the period of the Seller’s ownership, the property has been rented in accordance with Landlord and Tenant legislation and that any rent increase has been affected in accordance with relevant rent review legislation. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction.

• SEWAGE SYSTEMS – The Seller represents and warrants, that, during the Seller’s occupancy of the building, the sewage system has been and will be in good working order on closing. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction.

• LIGHTING FIXTURES – The Seller represents and warrants that all lighting fixtures on the premises are to be in good working order on completion. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction.

• SWIMMING POOL – The Seller represents and warrants that the swimming pool, its equipment, and the fencing of the said pool, comply with all applicable by-laws, regulations, and legislation. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction.

• GROW-OP/ILLEGAL SUBSTANCES – The Seller represents and warrants that during the time the Seller has owned the property, the use of the property and the buildings and structures thereon has not been for the growth or manufacture of any illegal substances, and that to the best of the Seller’s knowledge and belief, the use of the property and the buildings and structures thereon has never been for the growth or manufacture of illegal substances. This warranty shall survive and not merge on the completion of this transaction.

• ENVIRONMENTAL – The Seller represents and warrants, that: all environmental laws and regulations have been complied with, no hazardous conditions or substances exist on the land, no limitations or restrictions affecting the continued use of the property exist, other than those specifically provided for herein, no pending litigation respecting Environmental matters; no outstanding Ministry of Environment Orders, investigations, charges or prosecutions regarding Environmental matters exist, there has been no prior use as a waste disposal site, and all applicable licenses are in force. The Seller agrees to provide to the Buyer upon request, all documents, records, and reports relating to environmental matters that are in the possession of the Seller. The Seller further authorizes (insert appropriate Ministry), to release to the Buyer, the Buyer’s Agent or Solicitor, any and all information that may be on record in the Ministry office with respect to the said property.

• The Parties agree that this representation and warranty shall form an integral part of this Agreement and survive the completion of this transaction.

From a buyer’s perceptive, all representation and warranty clauses provided by a seller should always “survive closing and not merge” on closing. The main purpose is that such clauses are used to provide disclosure or protection to a buyer and by surviving closing, it will allow the buyer to enforce the representation and warranty after Closing. You should always consult your real estate lawyer in order to understand the limitation on relying on such representations and warranties. For more details on representations and warranties, here is a great article by a fellow lawyer (Drew Hasselback):   https://financialpost.com/entrepreneur/representations-and-warranties-the-same-thing-only-different

Conclusion:

Preparing an Offer for the purchase of residential real estate is not an exact science and each property will come with its own intricacies and challenges. This is why you will want to surround yourself with seasoned experts who can provide valuable guidance on how to manage your risk throughout the purchase process. At the end of the day, it will come down to the negotiating power between you and the seller(s).

For all your real estate questions, feel free to contact our Real Estate team at Soloway Wright LLP.

[1] For more information, please visit www.orea.com