Toronto Real Estate Lawyers (Part 10): Agreement of Purchase and Sale


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This is the first of a series of articles about Agreements of Purchase and Sale in Ontario.

In this article, I’ll be discussing what is an Agreement of Purchase and Sale and the first page of the APS – which deals with the information section (including the purchase price and the deposit), the irrevocability clause, and the completion date.

What is an Agreement of Purchase and Sale?
An Agreement of Purchase and Sale is a written and binding agreement concerning the purchase and sale of real property. It typically appears as the Ontario Real Estate Association’s ["OREA"] Agreement of Purchase and Sale (a standard form). Almost all Realtors use this form. Purchasers and sellers use this form to list their conditions which must be met in order for the deal to be transacted. Common terms and conditions include: financing, home inspection, title, fixtures and chattels, status certificate (in the case of a condo), etc. The Agreement of Purchase and Sale generally begins as an offer made by the buyer; once the seller accepts, the agreement can only be terminated according to the terms and conditions of the agreement itself or by mutual agreement. Parties may also try to call ‘foul’ on the other side and terminate the agreement unilaterally on the basis of, among other things, undue influence, duress, fraud, misrepresentation, etc. It’s important to note that, as per the Ontario Statute of Frauds (http://www.canlii.org/en/on/laws/stat/rso-1990-c-s19/latest/rso-1990-c-s19.html), all agreements dealing with real estate must be in writing to be valid.

The Information Section:
The Information Section is the first part that appears in OREA’s standard form Agreement of Purchase and Sale. Here, you need to include:

* the date of the agreement;
* the full legal names of the parties;
* the legal description of the property (check with a Realtor and Lawyer to confirm this);
* the purchase price; and
* the deposit.

Purchase Price:
Here a few points worth mentioning about the purchase price.

If you’re buying a new home, you will be liable to pay GST (presently at 5%) on the purchase price to the builder. So while you probably will not be dealing with a Realtor to buy a new home (you can make a deal with a builder directly) and can avoid paying their commissions (http://dynamiclawyers.com/DL_blog/toronto-real-estate-lawyers-part-2-real-estate-agent-commissions/29/), you’ll end up paying GST.

If you’re purchasing a resale home, then you don’t have to pay GST. Also worth mentioning is that, if you’re selling a home that is your principal residence, you don’t have to pay capital gains tax. Whether your home qualifies as a principal residence is the stuff of another blog…so let’s keep going…

A common question that may come up is: how is the purchase price determined? You should definitely speak to a Realtor about this. They’ll look at a number of factors to help gauge what the fair market value of the property is, including:

* Location of the property;
* Size of the property;
* Age of the property;
* Condition of fixtures and chattels;
* Features and amenities;
* Upgrades (e.g. finished basement, pool, hardwood floors, ceramic tiles, etc.);
* Comparative properties that have sold in the area very recently;
* Relative location to schools, hospitals, etc.;
* General market conditions;
* Client’s budget;
* Potential future value (for investment purposes);
* Rent-ability;
* Propensity for a bidding war;
* Easements and restrictive covenants;
* Time the property has been on the market;
* Proximity to highways; and
* Municipal by-law, zoning, taxes, etc.

Deposit:
A deposit is not legally required, but the purchaser typically includes provisions for a deposit to give the seller reassurance that the deal will get done. The deposit is part of the purchase price and is adjusted as a credit to the purchased on closing. Under the additional terms and conditions (at the end) of the Agreement of Purchase and Sale, the buyer’s agent or lawyer will try to include a provision saying that the Deposit shall be refunded to the buyer if the conditions of the Agreement of Purchase and Sale are not met.

So what should the deposit be? Realtors in the GTA will likely say between 2 to 5%, although a higher deposit may make the offer look more attractive to the seller.

What Happens to the Deposit Upon Default
What happens to the deposit if the deal does not go through? If the purchaser refuses to close the deal without legal cause (e.g. the vendor has satisfied all of the conditions to closing or they have otherwise been waived), then the deposit may be forfeited to the vendor. If the vendor refuses to close, the purchaser would be entitled to their deposit.

When an offer to purchase is made, the purchaser usually gives the seller a deposit toward the purchase price. A deposit is not legally required, but the purchaser typically includes provisions for a deposit to give the seller reassurance that the deal will get done. The deposit is part of the purchase price and is adjusted as a credit to the purchaser on closing. It is typical to see the buyer’s Realtor or Lawyer include provisions in the Agreement of Purchase and Sale saying that the deposit shall be refunded to the buyer if the conditions of the Agreement of Purchase and Sale are not met.

The deposit is generally only released in very limited circumstances:

* a mutual release signed by all the parties;
* performance and completion of the Agreement of Purchase and Sale;
* a term or condition concerning the deposit in the actual Agreement of Purchase and Sale; or
* court action leading to a judgment.

With respect to court action, if the buyer refuses to close without legal cause (e.g. the vendor has satisfied all of the conditions to closing or they have otherwise been waived), then the deposit may be forfeited to the seller. If the vendor refuses to close without legal cause, the purchaser would be entitled to their deposit.

In Iyer v. Pleasant Developments Inc., [2006] 210 O.A.C. 90, 45 R.P.R. (4th) 147, the Ontario Divisional Court set out the following principles about the nature of “deposits” in Agreements of Purchase and Sale where there was uncertainty (i.e. no provision to the contrary) as to what happens to the deposit upon default by the purchaser:

* A deposit may be forfeited without proof of damages. In other words, even in the case where the seller resells at a purchase price that is high enough to compensate for any loss from the first sale, the seller may nevertheless retain the deposit.
* The use of the word “deposit” in an Agreement of Purchase and Sale, while not determinative, will imply that the payment is intended for forfeiture upon the purchaser’s breach. If the agreement is silent and the purchaser defaults, the deposit, by its very nature is forfeited to the seller.
* There are circumstances where the loss of a deposit may be subject to relief from forfeiture. If there is relief, the deposit is returnable, in whole or in part, to the defaulting purchaser.

Whether a Court will return a deposit to a defaulting purchaser depends on a three-part test (all of which must be satisfied):

* Was the conduct of the purchaser reasonable in the circumstances?
* Was the purpose of the deposit to secure the payment of the purchase price?
* Was there a substantial disparity between the value of the property forfeited and the damage caused to the seller by the breach?

In Gajasinghe v. Dewar, 2007 CarswellOnt 5738, the Ontario Superior Court of Justice applied this three part test and refused to return a $20,000 deposit to the defaulting purchaser. Although the Court found that the purpose of that deposit was to secure the purchase price and that there was a substantial disparity between the amount of the deposit and the amount of damages suffered by the seller, the purchaser’s conduct was not reasonable. Specifically, the Court found that the purchaser’s actions were “indicative not of a purchaser who was ready and willing to close but rather of one who was searching for an excuse not to close”.

Deposit Held in Trust:
The deposit gets placed “in trust” with the listing real estate brokerage (unless otherwise arranged) pending completion or other termination of the Agreement of Purchase and Sale. The standard clause says that it will be placed in a NON-INTEREST bearing trust account. If the buyer is placing a large amount of money as a deposit and wants interest, they’ll need to specify that in the Agreement of Purchase and Sale. The deposit can be made within 24 hours of acceptance of the agreement or otherwise (e.g. in due course or forthwith or in increments of 30 days, etc.) as per the terms of the Agreement of Purchase and Sale.

Irrevocability Clause:
The irrevocability clause says that the offer cannot be revoked or taken back for a set period of time (specified in this clause). If the offer is not accepted after that time, then the Offer is automatically terminated – deemed null and void – as per OREA’s standard form).

Completion Clause:
This is the closing date, plain and simple. Typically, vacant possession takes place no later than 6:00 p.m. on the date of closing.

ABOUT THE AUTHOR: Michael Carabash, B.A., LL.B., M.B.A.
Dynamic Lawyers Ltd. was founded by Michael Carabash, a Toronto business lawyer with Carabash Law. Virtually everyone has a wide range of legal issues they need help with - such as writing a will, fighting a traffic ticket, buying or selling real estate, writing a contract for services, reviewing a lease agreement, having documents notarized or commissioned, dealing with a motor vehicle accident, etc. Michael wanted ordinary people in need of common legal services to be able to conveniently and cost-effectively get answers and quotes from local lawyers. At the same time, he also wanted lawyers to be able to market their services directly and effectively to the public.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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