Keeping It Enforceable: The Essential Terms of a Purchase Contract
It is not uncommon for parties to enter into contracts for the purchase and sale of real estate that contain defects which may affect their enforceability.
To be enforceable, a purchase contract must set out the essential terms of the agreement; in particular, it must clearly describe the "three Ps" (parties, property and price) and other key terms such as the completion date and the particulars of any vendor financing or leaseback. Although these legal requirements are well known, even the most experienced real estate professional will occasionally fail to adequately describe one or more essential terms in a purchase contract.
There are several basic steps that can be taken when preparing a purchase contract to help ensure it is enforceable.
Obtain a current title search to confirm the registered owner of the property.
- If the registered owner is a company:
- Obtain a company search to confirm that the company exists and has not been dissolved or amalgamated with another company or changed its name.
- Determine if the registered owner is also the beneficial owner of the property or if it is a bare trustee that holds registered title in trust for a beneficial owner.
- If the company registered on title is a bare trustee:
- Obtain the trust declaration to confirm the identity of the beneficial owner and the terms of the bare trust relationship. The beneficial owner should be identified as the vendor under the contract.
- If the purchaser wants to acquire the shares of the bare trustee so as to avoid triggering property transfer tax, include the essential terms of the share purchase in the purchase contract.
- Avoid using "or nominee" language when describing the purchaser as it can create uncertainty as to the purchaser’s identity. Instead, include a provision in the purchase contract that specifies to whom the purchase contract may be assigned and whether the purchaser will be released from its obligations upon the assignment.
- Ensure that the legal description of the property set out in the purchase contract matches what is shown on a current title search and that the current permitted encumbrances are listed. Failure to perform this step is a common source of errors in purchase contracts.
- Obtain a copy of the subdivision plan for the property to confirm that all the legal parcels to be acquired have been included in the purchase contract. All too often, one or more parcels are inadvertently omitted.
- Obtain a B.C. Assessment search of the property to confirm its civic address. This search may also disclose whether additional legal parcels are associated with the civic address.
- If the property is to be subdivided from a parent parcel prior to closing, identify who is responsible for pursuing subdivision approval and what happens if it is not obtained by a certain date (e.g., does the purchase contract terminate?). Also, a plan outlining the layout of the proposed parcel (rather than a mere description of its size) should be attached to the purchase contract, and the list of permitted encumbrances should include any encumbrances to be granted in connection with the subdivision.
- If the vendor is responsible for constructing improvements on the property, clearly describe what is to be built and by what date. The agreed plans and specifications should be attached to the purchase contract or incorporated by reference.
- Clearly state the purchase price and how the purchase price may be paid (e.g., wire transfer, bank draft, solicitor’s trust cheque).
- State whether the purchase price includes or excludes GST. If the property is GST-exempt, include a representation from the vendor to that effect.
- Identify who will hold the deposit and how it will be treated. For example, if the purchaser defaults, will the deposit be forfeited to the vendor as the vendor’s sole and exclusive remedy or without prejudice to the vendor’s other remedies? If the deposit is to be paid directly to the vendor, will the purchaser be entitled to secure it with a deposit mortgage? In what circumstances will the deposit be returned to the purchaser?
- If the vendor will provide take back financing, state the term, interest rate and payment dates and whether it is to be secured by a mortgage. If there will be mortgage security, attach the form of mortgage or provide that the parties will use the standard mortgage terms prescribed under the Land Title Act (British Columbia) or other standard terms already filed in the Land Title Office.
- If the purchase price is tied to the size of the property following subdivision or the amount of density that can be achieved, specify the formula for determining the purchase price and insert
a sample calculation to ensure both parties understand how the formula works.
- If the purchase price is to be allocated between different components of the purchased property (e.g., land, building, chattels, shares), state that any failure to agree on an allocation will not affect the enforceability of the purchase contract and that each party may make its own allocation.
Other Essential Terms
- If the completion date is tied to the occurrence of a certain event (e.g., 30 days after a rezoning bylaw is enacted), stipulate an outside date by which such event must occur and what happens if it does not occur (e.g., does the purchase contract terminate?).
- If the vendor wishes to lease the property (or part of it) back from the purchaser, describe the essential terms of the lease (including the names of the landlord and tenant, the premises, the rent, the commencement date and the term) and attach the form of lease.
The foregoing is not an exhaustive list of the steps to take or items to consider when preparing a purchase contract. Each purchase contract will have its own special considerations, and it is advisable to obtain legal advice when in doubt.