Real Estate Transaction Clauses & Mortgage Details
Schedule A = standard attachment that can
contain all types of clauses // information
The clauses // information contained in
Schedule A supersede the Agreement of
Purchase and Sale
Pay Balance
◦
6 Key Elements to the Pay Balance
1.
By whom?
2.
Amount?
3.
Adjustments?
4.
How to be paid?
5.
To whom?
6.
When to be paid?
◦
Example: Buyer agrees to pay additional $100,000
subject to adjustments by certified cheque/bank
draft to seller on completion of transaction
◦
Pay balance = sum of money that buyer must
produce on closing day
◦
If any of the six elements or “by bank draft or
certified cheque” or “subject to adjustment” are
missing, pay balance is not well written
◦
We do not need to include name of the seller or the
closing date in the clause
◦
Calculating pay balance
Purchase Price (PP) – Seller Take Back (STB) – Assumed
Mortgage (if applicable) – deposit(s)
STB = PP – Cash (CAN)
Cash = total cash deposits + assumed mortgage + new
mortgage
Mortgage Clauses
◦
New First Mortgage
Most lenders provide streamlined approval processes
and standardized financing packages for arranging
new first mortgages
These are typically written as a condition precedent (no
deal until condition is waived)
Prepayment of mortgage
Not a right but a privilege under mortgage document
Pre-payment lets borrowers make additional payments or
pay off mortgage before its term ends without penalty
◦
Assumed Mortgage
When a buyer assumes mortgage, they take over
existing mortgage balance owed by the seller
They also become responsible for terms, payments and all
monies owed to the mortgagee (lender)
Buyer may save appraisal fees, survey costs and select
legal fees if they assume existing mortgage
Seller can save any interest differential or payout
penalty that may apply (normally so if a Closed
mortgage is in place)
This kind of clause is normally a true condition
precedent (if lender does not approve assumption of
mortgage by buyer, there is no deal)
◦
Seller Take Back (STB)
STB offers opportunity for creative packaging to suit
the needs of the client
These are positive negotiating tools that serve both
the interest of the buyer and the seller
Buyer may be able to avoid certain costs and
paperwork that are normally associated with
conventional lenders
Seller can improve marketability using attractive terms
or achieve personal investment objectives
STBs are most effective with unique/older properties
where buyers bring significant down payments to the
negotiating table and sellers have enough financial
reserves to assist
Postponement Clause
◦
If the second mortgage term is more than the first
mortgage term, a postponement clause is a must
◦
For instance, a property has a first mortgage of
$150,000 for a term of 4 years and a second
mortgage (STB) of $30,000 for a term of 5 years
◦
When the first mortgage expires, the second
mortgage will move to its place
This is important because the first mortgage lender
will pay first in case you default
◦
If mortgage renewed after four year term, it will
stay in its position and not replace the other
◦
Land Registry is based on “first-come-first-served”
◦
Postponement Clause insures that STB/second
mortgage will always come after the first one
◦
STB mortgage cannot be assigned without obtaining
consent from the lender/seller
◦
STB clauses can be identified because they start
with the seller agrees to take back
Mortgage Condition
◦
“Approximately” is ok
◦
“Could say not more than” is still ok
◦
“Not less than” might be problematic
This could represent an Oklahoma situation whereby a
property is being over-financed
In this situation, salesperson should insure that the
mortgage condition (first mortgage) should include the
phrase “not more than” and be written as a True
Condition Precedent such that it cannot be waived
This protects sellers who offer STB, but the
salesperson should also insert a clause to protect the
seller from over financing that results from an
Oklahoma situation
◦
How should the assuming mortgage clause be
worded?
Bad example: “The buyer agrees to assume the first
existing mortgage held by XYZ Bank for not less than”
This is wrong because it should say “not more than” for an
Oklahoma situation
Assumed mortgage condition cannot be waived but near
the end it says this condition can be waived by the buyer
It cannot be waived because it is up to the bank to approve
– it must be fulfilled and the buyer cannot waive it
If Oklahoma:
Not less than = wrong
Condition may be waived = wrong
Assuming mortgage condition in Schedule A
Buyer must send seller the following document
Waiver = wrong
Termination = wrong
Fulfillment = right
Conditional upon mortgagee approval
The following sentence must always be there: “This offer
is conditional upon the buyer obtaining approval of the
charge/mortgage”
Sale of Buyer’s Property (SBP)
◦
This must be accompanied by an escape clause
◦
It protects both the buyer and the seller
Offer is conditional upon sale of buyer’s property, of
which if he gives notice by a prescribed date, is
fulfilled (failure to do so renders the offer null and
void) – this benefits the buyer because he can waive
the offer with due notice
The seller may continue to offer property for sale and
receive offers from other buyers. In the event that he
receives another satisfactory offer, he may notify buyer
to waive condition in prescribed time
If a seller gets a better offer, he must give notice of it
in no more than 48 hours
UFFI (Foam Insulation)
◦
If you have UFFI installed, you should insert a clause
that states that the buyer acknowledges that the
property contains urea formaldehyde foam insulation
◦
PHD = physical stigma of property that affects it
If UFFI is removed, this negative aspect goes away too
◦
UFFI = health hazard which must be disclosed to the
other party in writing
◦
Written disclosure means you should put UFFI 1
Clause in Schedule A
You should delete pre-printed UFFI clause and add it to
Schedule A if you have UFFI
Insurance Clause
◦
Normally written as a condition precedent (waived)
For example, a clause may say that it is the
responsibility of the buyer to find insurance for the
property and they must give notice to give fulfilment
of this condition before a certain date, or else the offer
shall be null and void. It will further state that the
condition is for the benefit of the buyer and may be
waived at the buyer’s sole option by giving notice to
the seller
Identification
◦
This is a FINTRAC requirement
◦
Buyers and sellers must be verified in all transactions
◦
This can be done by checking driver’s license and filling in
Form 630 which is the FINTRAC Individual Identification
Record
◦
If the party is out of the country, the real estate MUST
arrange to have the party meet with a contracted agent in
the country they are in to verify their ID
Copies of Agreement of Purchase and Sale
◦
Registrar must make best effort to ensure that all parties
to agreement receive a copy of it as soon as possible and
that deposits and other related documents be delivered
The registrant is required to disclose any
competing offers to all persons making
competing offers, but cannot disclose any
details related to the substance of the offers
Substance of the offers includes deposit
amount, conditions, price and closing date
Amendments made through the parole evidence rule
If you ever want to make a change to a firm offer
(contained in an Agreement of Purchase and Sale),
you must draft An Amendment to the Agreement of
Purchase and Sale
An Amendment can only alter purchase price,
completion/closing date, Deposits, Names – only for
firm offer that requires changes
Buyer and seller both must agree and sign the
Amendment document to make changes to the
Agreement
Example:
◦
Jake is a salesperson from X Realty and is
representing a client buyer. The client is interested
in purchasing development land in Toronto. Jake
finds a suitable property meeting the client buyer’s
requirements. This property is listed by broker Jen
of Y Realty Inc. with total commission of 3.5%. The
Broker/Owner Tim insists that Jake obtain a
Confirmation of Co-Operation and Representation
(OREA Form 320) from Y Realty Inc. MLS Listing
Information says the Co-Operating Brokerage will
get 1.5% commission.
What happens if salesperson Jen does not
sign the form and payment to X Realty is not
made?
◦
In case of an unsigned form, it might be difficult for
X Realty to collect commission from Y Realty Inc. if
they refuse to forward appropriate funds
◦
If the sale was an MLS transaction, regulations and
by-laws of the local real estate trust board (TREB as
we saw in Phase 1 also arbitrates) provide for
immediate payment by the listing brokerage to the
co-operating brokerage
But these only apply if the brokerages are operating
within the same jurisdiction
◦
It can become problematic if the listing brokerage
is uncooperative and is in a different jurisdiction
◦
OREA Form 320 (The Confirmation of Co-operation
and Representation) is used between boards
This is also used for exclusively listed properties
Tarion warranties are not administered by the
Ontario government, but by Tarion Warranty
Corporation
◦
It is a new home warranty (not seasonal)
◦
1 year coverage = everything
◦
2 year coverage = Foundation Walls etc.
◦
7 year coverage = major structural defects
◦
Septic tank coverage = up to $25,000
◦
New home coverage = up to $300,000
◦
Amenities coverage = up to $50,000 per unit with a
maximum of $2.5 million per building
Coverage of Resale Homes
◦
Warranty remains with a home even if ownership
changes due to a resale, except if:
Temporary/seasonal – cottage not sufficiently
insulated to allow year-round living, or not built on a
permanent foundation
Homes built on existing foundations or footings, or
otherwise converted, including:
Industrial buildings converted to residential condos
Residential apartment buildings converted to condos
Properties held by limited partnerships for purposes of
investment, in which investors purchase the unit
Homes where contractor only erects shell and owner
completes interior work himself
Explore essential clauses like Schedule A and Pay Balance in real estate transactions, along with insights on mortgage clauses such as new first mortgage and assumed mortgage. Understand the key elements and considerations involved in payment balances and mortgage arrangements in property deals.
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Presentation Transcript
Schedule A = standard attachment that can contain all types of clauses // information The clauses // information contained in Schedule A supersede the Agreement of Purchase and Sale
Pay Balance 6 Key Elements to the Pay Balance 1. By whom? 2. Amount? 3. Adjustments? 4. How to be paid? 5. To whom? 6. When to be paid? Example: Buyer agrees to pay additional $100,000 subject to adjustments by certified cheque/bank draft to seller on completion of transaction
Pay balance = sum of money that buyer must produce on closing day If any of the six elements or by bank draft or certified cheque or subject to adjustment are missing, pay balance is not well written We do not need to include name of the seller or the closing date in the clause Calculating pay balance Purchase Price (PP) Seller Take Back (STB) Assumed Mortgage (if applicable) deposit(s) STB = PP Cash (CAN) Cash = total cash deposits + assumed mortgage + new mortgage
Mortgage Clauses New First Mortgage Most lenders provide streamlined approval processes and standardized financing packages for arranging new first mortgages These are typically written as a condition precedent (no deal until condition is waived) Prepayment of mortgage Not a right but a privilege under mortgage document Pre-payment lets borrowers make additional payments or pay off mortgage before its term ends without penalty
Assumed Mortgage When a buyer assumes mortgage, they take over existing mortgage balance owed by the seller They also become responsible for terms, payments and all monies owed to the mortgagee (lender) Buyer may save appraisal fees, survey costs and select legal fees if they assume existing mortgage Seller can save any interest differential or payout penalty that may apply (normally so if a Closed mortgage is in place) This kind of clause is normally a true condition precedent (if lender does not approve assumption of mortgage by buyer, there is no deal)
Seller Take Back (STB) STB offers opportunity for creative packaging to suit the needs of the client These are positive negotiating tools that serve both the interest of the buyer and the seller Buyer may be able to avoid certain costs and paperwork that are normally associated with conventional lenders Seller can improve marketability using attractive terms or achieve personal investment objectives STBs are most effective with unique/older properties where buyers bring significant down payments to the negotiating table and sellers have enough financial reserves to assist
Postponement Clause If the second mortgage term is more than the first mortgage term, a postponement clause is a must For instance, a property has a first mortgage of $150,000 for a term of 4 years and a second mortgage (STB) of $30,000 for a term of 5 years When the first mortgage expires, the second mortgage will move to its place This is important because the first mortgage lender will pay first in case you default If mortgage renewed after four year term, it will stay in its position and not replace the other Land Registry is based on first-come-first-served
Postponement Clause insures that STB/second mortgage will always come after the first one STB mortgage cannot be assigned without obtaining consent from the lender/seller STB clauses can be identified because they start with the seller agrees to take back
Mortgage Condition Approximately is ok Could say not more than is still ok Not less than might be problematic This could represent an Oklahoma situation whereby a property is being over-financed In this situation, salesperson should insure that the mortgage condition (first mortgage) should include the phrase not more than and be written as a True Condition Precedent such that it cannot be waived This protects sellers who offer STB, but the salesperson should also insert a clause to protect the seller from over financing that results from an Oklahoma situation
How should the assuming mortgage clause be worded? Bad example: The buyer agrees to assume the first existing mortgage held by XYZ Bank for not less than This is wrong because it should say not more than for an Oklahoma situation Assumed mortgage condition cannot be waived but near the end it says this condition can be waived by the buyer It cannot be waived because it is up to the bank to approve it must be fulfilled and the buyer cannot waive it If Oklahoma: Not less than = wrong Condition may be waived = wrong
Assuming mortgage condition in Schedule A Buyer must send seller the following document Waiver = wrong Termination = wrong Fulfillment = right Conditional upon mortgagee approval The following sentence must always be there: This offer is conditional upon the buyer obtaining approval of the charge/mortgage Sale of Buyer s Property (SBP) This must be accompanied by an escape clause It protects both the buyer and the seller
Offer is conditional upon sale of buyers property, of which if he gives notice by a prescribed date, is fulfilled (failure to do so renders the offer null and void) this benefits the buyer because he can waive the offer with due notice The seller may continue to offer property for sale and receive offers from other buyers. In the event that he receives another satisfactory offer, he may notify buyer to waive condition in prescribed time If a seller gets a better offer, he must give notice of it in no more than 48 hours
UFFI (Foam Insulation) If you have UFFI installed, you should insert a clause that states that the buyer acknowledges that the property contains urea formaldehyde foam insulation PHD = physical stigma of property that affects it If UFFI is removed, this negative aspect goes away too UFFI = health hazard which must be disclosed to the other party in writing Written disclosure means you should put UFFI 1 Clause in Schedule A You should delete pre-printed UFFI clause and add it to Schedule A if you have UFFI
Insurance Clause Normally written as a condition precedent (waived) For example, a clause may say that it is the responsibility of the buyer to find insurance for the property and they must give notice to give fulfilment of this condition before a certain date, or else the offer shall be null and void. It will further state that the condition is for the benefit of the buyer and may be waived at the buyer s sole option by giving notice to the seller
Identification This is a FINTRAC requirement Buyers and sellers must be verified in all transactions This can be done by checking driver s license and filling in Form 630 which is the FINTRAC Individual Identification Record If the party is out of the country, the real estate MUST arrange to have the party meet with a contracted agent in the country they are in to verify their ID Copies of Agreement of Purchase and Sale Registrar must make best effort to ensure that all parties to agreement receive a copy of it as soon as possible and that deposits and other related documents be delivered
The registrant is required to disclose any competing offers to all persons making competing offers, but cannot disclose any details related to the substance of the offers Substance of the offers includes deposit amount, conditions, price and closing date
Amendments made through the parole evidence rule If you ever want to make a change to a firm offer (contained in an Agreement of Purchase and Sale), you must draft An Amendment to the Agreement of Purchase and Sale An Amendment can only alter purchase price, completion/closing date, Deposits, Names only for firm offer that requires changes Buyer and seller both must agree and sign the Amendment document to make changes to the Agreement
Example: Jake is a salesperson from X Realty and is representing a client buyer. The client is interested in purchasing development land in Toronto. Jake finds a suitable property meeting the client buyer s requirements. This property is listed by broker Jen of Y Realty Inc. with total commission of 3.5%. The Broker/Owner Tim insists that Jake obtain a Confirmation of Co-Operation and Representation (OREA Form 320) from Y Realty Inc. MLS Listing Information says the Co-Operating Brokerage will get 1.5% commission.
What happens if salesperson Jen does not sign the form and payment to X Realty is not made? In case of an unsigned form, it might be difficult for X Realty to collect commission from Y Realty Inc. if they refuse to forward appropriate funds If the sale was an MLS transaction, regulations and by-laws of the local real estate trust board (TREB as we saw in Phase 1 also arbitrates) provide for immediate payment by the listing brokerage to the co-operating brokerage But these only apply if the brokerages are operating within the same jurisdiction
It can become problematic if the listing brokerage is uncooperative and is in a different jurisdiction OREA Form 320 (The Confirmation of Co-operation and Representation) is used between boards This is also used for exclusively listed properties
Tarion warranties are not administered by the Ontario government, but by Tarion Warranty Corporation It is a new home warranty (not seasonal) 1 year coverage = everything 2 year coverage = Foundation Walls etc. 7 year coverage = major structural defects Septic tank coverage = up to $25,000 New home coverage = up to $300,000 Amenities coverage = up to $50,000 per unit with a maximum of $2.5 million per building
Coverage of Resale Homes Warranty remains with a home even if ownership changes due to a resale, except if: Temporary/seasonal cottage not sufficiently insulated to allow year-round living, or not built on a permanent foundation Homes built on existing foundations or footings, or otherwise converted, including: Industrial buildings converted to residential condos Residential apartment buildings converted to condos Properties held by limited partnerships for purposes of investment, in which investors purchase the unit Homes where contractor only erects shell and owner completes interior work himself
