Less than 10 years ago residential real estate assignments were a license to print money. As the British Columbia real estate market boomed, thousands of buyers signed condo pre-sale contracts - not because they intended to ever move into the suite, or even rent them out, but because they wanted to ‘flip’ the contracts for a profit as prices continued to rise or when the developments were complete. Some condos were bought and sold two or three times before construction was even finished.
In both the commercial and residential real estate industries, it has become common for contract holders to assign leases or contracts of purchase and sale to other individuals and entities. In the commercial realm, business owners may opt for an assignment if they change their corporate identity, if the premises are sold, or if they sublease unused space to another business. If all goes well, and the rent keeps getting paid, things go smoothly. However, given that most commercial landlords will experience a tenant dispute, and that residential real estate law more very complex than most people realize, that’s a big “if”.
Residential real estate pre-sale assignments
Assignments of pre-sale purchase contracts for condominium developments can carry significant risks for all of the parties involved. Most buyers trying to assign one of these contracts are surprised when legal complications arise. The typical reasoning is that since the development is not completed and since the contract seems simple, the assignee should bear any risk and the assignor should generate an easy profit from a rising real estate market.
The most common misunderstanding people have is the belief that once a contract is assigned, the assignor no longer has any obligations to the vendor (typically, a developer or original pre-sale contract holder). As a general rule, this is a false belief. Unless the agreement expressly states the assignor will not be liable for anything - and the vendor agrees to it - the assignor remains exposed if anything goes wrong.
In the case of a condo pre-sale, if the new buyer fails to complete the purchase for any reason (e.g. inability to qualify for a mortgage when the building is ready for occupancy), the vendor can sue both the assignee and assignor for forfeiture of the deposit, as well as any additional damages, such as the cost to sell the unit to someone else.
This risk was highlighted in late 2008 and 2009 when real estate prices declined significantly due to the recession. This left many people with pre-sale contracts for condos they could no longer afford or could not assign to someone else. Vendors such as developers sued assignees and assignors for tens or even hundreds of thousands of dollars of damages as a result. I met more than one assignor who was shocked to be named as a defendant in a lawsuit during this time.
The risks in an assignment of a commercial lease are less obvious than those in a residential situation. For example, a commercial lease often requires the lessee to provide formal notice of changes to the landlord before the landlord can exercise its right to terminate the lease or sue for accelerated rent. A lease assignment affects this obligation.
Once a contract is assigned, landlords often stop dealing with the old tenant (assignor). If the new tenant (assignee) fails to meet its obligations, the landlord will provide notice of default to the new tenant.
In some cases, however, the landlord may sue both the old and new tenants. If the old tenant did not notify the landlord of the assignment, if the original lease was altered in any way without the landlord’s approval or if the new tenant damaged the property, the landlord may have cause to sue both parties. The benefit of the assignment - as opposed to replacement of the contracting parties - will have been inadvertently lost. To make matters worse, the new tenant might not have the resources to pay a judgment against it, and the landlord will be out-of-pocket for damages such as lost rent or repairs unless the money is recovered from the original assignor.
Practical steps to protect yourself
An assignor should first determine if the vendor or commercial landlord will agree that the assignment will free him/her/the business of any liability. Most savvy businesses will not agree to this. If that is the case, the assignor should obtain an indemnity (an exception against penalties) from the assignee. Furthermore, the assignor should be satisfied that the assignee has the means and capability of following through on any obligations.
Landlords can safeguard their interests by including language in the original lease and/or assignment stipulating that notice to an assignee will be deemed sufficient notice to the assignor, thus getting around the need to provide separate notice to both. This, however, may not be enough to overcome legislated requirements to provide statutory notice.
Assignments can be a useful and profitable tool for landlords, tenants, developers and real estate purchasers. That said, everyone involved should remember that assignments are legal documents. Failing to understand the associated risks may leave all parties involved ill-prepared to deal with liabilities. It is always prudent to get advice from a professional before entering into, or approving, an assignment of a commercial lease or a residential property purchase contract.
What is an Assignment of an Agreement of Purchase and sale?
At its essence, an Assignment of an Agreement of Purchase and Sale – informally known as “flipping a home” – is a simple concept:A buyer of a new home allows someone else to take over the purchase contract, which allows that person to buy that same home him or herself.
More specifically, the original buyer enters into a formal Agreement of Purchase and Sale with a Builder, and then allows another person – who we will call the “new buyer” – to step into his or her shoes through what is legally known as an “Assignment” of that original Agreement or Offer to buy.The new buyer pays the original buyer a higher price than what was set out in that original Agreement, with the difference begin the original buyer’s profit. All of this takes place after the original buyer has agreed to buy from the Builder, but before the deal closes; the original buyer never takes title to the property.
This arises primarily with homes: For newly-built homes with typically long closing dates (e.g. often 18 months or more), an Assignment is particularly attractive in situations where the Builder has already sold all of the units in the development early on, but where there is still demand for soon-to-be-completed homes and new condominium units in the development.The assignment of a new condominium unit is also interesting for similar reasons, although the time frame may be significantly longer depending on when the assignment occurs.This puts the original buyer in position to make a profit by inflating the new price well above what he or she agreed to pay the Builder in the first place.
And what is the benefit to the new buyer?There can be several:
- The new buyer may be able to buy into a desirable neighbourhood at a time when there are no more units available to be purchased directly from the Builder;
- Even taking the original buyer’s profit into account, the assignment may give the new buyer a price advantage over other properties that are currently on the market; and
- Depending on the timing of the assignment, the new buyer may be position to choose finishes and make minor changes to the yet-to-be-built home.
Whatever the respective motivations of the original and new buyer, the assignment of an Agreement of Purchase and Sale has many specific features – and just as many potential pitfalls.What follows is a discussion of some of the key points.
When Can An Agreement of Purchase and Sale Be Assigned?
Unlike the standard Toronto Real Estate Board (TREB) or Ontario Real Estate Association (OREA) agreements, many Builders’ own (i.e. customized) Agreements of Purchase and Sale contain a clause that generally prohibits the assignment of the contract outright – or else allows it only certain very strict conditions and in exchange for a significant fee payable to the Builder.
In fact, the vast majority of new home or condominium-purchase agreements do not allow the original buyer to assign the contract to someone else and stipulate that any attempt by the buyer to do so, or to list the home for sale on the Multiple Listing Service (MLS) or otherwise, or else list the property for rent, will put the original buyer in breach of the Agreement. This triggers the Builder’s right, with notice, to terminate the original Agreement, keep the original buyer’s deposit, and seek additional damages from him or her.(And in most cases, the original buyer’s Agreement is “dead”; i.e. he or she cannot go back and try to complete the transaction as if no assignment had taken place).
All of this means that anyone who has agreed to purchase a home from a Builder should give careful consideration to, and should seek legal advice prior to signing the Agreement, or in the case of condominium units during the 10-day cooling-off period in order to determine whether it’s possible to assign the Agreement in the first place.
This in turn involves a careful review of the clauses in that Agreement.
Typical (and Not-So-Typical) Provisions
As a practical matter, there are as many variations in these types of provisions as there are Builders.
Many Agreements of Purchase and Sale will include a largely-standard “No Assignment” clause, which disentitles the original buyer from “directly or indirectly” taking any steps to “lease, list for sale, advertise for sale, assign, convey, sell, transfer or otherwise dispose of” the property or any interest in it.
A potential exception – and this is important – arises if the Builder gives prior written consent, although in the more draconian version of these kinds of contract, that consent may be “unreasonably and arbitrarily withheld” by the Builder, essentially on its whim. In other words, the buyer is not allowed to deal with the property, unless the Builder pre-approves it in writing, but in many cases the Builder has no obligation to give that approval and may withhold it for any reason whatsoever, including unreasonable and arbitrary ones.
(With that said, the “No Assignment” clause in some Agreements will allow for express exceptions or situations where the Builder will not withhold consent, for example:a) Assignments made to a member of the original buyer’s immediate family; or b) where the Builder has determined that a sufficient and satisfactory percentage of the available units have already been sold).
The bottom line is that the basic clause in an Agreement of Purchase and Sale may or may not allow for the assignment of the Agreement to a new buyer, and if it is allowed, it will be subject to specified conditions such as obtaining the Builder’s written consent.Most Agreements will embellish this basic clause by adding further written stipulations such as:
- Having both the original buyer and the new buyer sign an Assignment Agreement that has been drafted by the Builder;
- Mandating the original buyer will not assign the Agreement until the Builder has managed to sell a certain percentage of the units in the overall development (e.g. 85 or 90%), and even then it must be with the Builder’s written consent as usual;
- Requiring the original buyer to pay a fee to the Builder of (for example) $5,000 plus taxes as part of obtaining the Builder’s consent to the assignment;
- Requiring the original buyer to pay another fee plus taxes to the Builder’s lawyer (ostensibly as a sort of “legal processing fee”);
- Getting the pre-approval of any lending institution or mortgagee that is providing funding to the Builder for construction or otherwise;
- Assuming the Builder agrees to the assignment in the first place, prohibiting any further assignments of the offer by the new buyer to any subsequent party;
- Confirming that the breach of any of the original buyer’s promises in relation to how and when an assignment can occur will be considered a breach of the whole agreement (and one that cannot be remedied); and
- Requiring the original buyer to confirm in writing that the property is not being purchased for short-term speculative purposes.
- Note that even if the Agreement of Purchase and Sale does not expressly allow or provide for it in writing, some Builders will permit an original buyer to make an assignment nonetheless.This is because it is always in the Builder’s discretion to give up (usually for a fee) its right to technically insist on the purchase going ahead with the original buyer.
Getting the Builder’s Consent
It’s important to remember that, initially, the original buyer and the Builder had a valid legal contract in place that obliged the buyer to purchase a home or condominium unit from the Builder.That original buyer, for whatever reason – whether it’s a change of circumstances (such as a change in a marital situation, job transfer to another city, province or country; birth of children resulting in a home/condominium unit being too small for the buyer), cold feet, or simply the desire to make a profit – has subsequently decided to “sell” that right to buy to the new buyer.
To protect the Builder, the Assignment will contain clauses that are designed to safeguard the Builder’s rights.The most important one is that, as discussed, the Builder must give its written consent to the Assignment.This will often involve specific Builder-imposed requirements, fees and forms which must be completed.
Once consent has been obtained, there may be additional restrictions on the manner in which the original owner can market the property.For example, some Builders will insist that the property is not to be listed on MLS (where it may be competing with the Builder’s own listings for still-unsold home and units in the same development); if the original owner does so nonetheless, it will be tantamount to a breach of the Agreement of Purchase and Sale which could entitle the Builder to damages, or rescission of the Agreement of the Purchase and Sale while retaining the deposits paid, as well as the monies paid for extras.
However, aside from any marketing / advertising restrictions that may be imposed, the original buyer must clearly indicate in any listing that it is an assignment of an Agreement of Purchase and Sale, not merely an ostensible sale from the original buyer.
Continuing Liability After Assignment
One key provisions in the Agreement of Purchase and Sale – and one that is easy to overlook – may significantly impact whether an original buyer will want to assign his or her agreement at all.
Even though the original buyer has essentially transferred his or her right to buy the property to the new buyer, the original buyer is not fully off-the-hook.Rather, under the terms of the Assignment document, the original buyer can remain liable to go through with the contract if the new buyer does not complete the transaction with the Builder.
This written obligation appears in the original buyer’s Agreement of Purchase and Sale, and is couched in phrases that give the buyer continuing liability for the “covenants, agreements, and obligations” contained the original agreement.But the net effect is that the original buyer remains fully liable should the agreement between the Builder and the new buyer collapse.The Agreement may also stipulate that the assignee, meaning the person receiving the benefit of the assignment (i.e. the new buyer) must sign an “assumption covenant” which creates a binding contract between the new buyer and the Builder.
(Incidentally, in contrast some Builder’s agreements quite conveniently allow the Builder itself to freely assign the agreement to any other Builder registered with Tarion, which assignment completely releases the Builder from its obligations.)
The original buyer’s continuing liability under the Assignment Agreement is a major drawback in these types of arrangements. The original buyer always has to balance the risks and rewards inherent in this scenario.
Documenting the Transaction
Assuming that the assignment of an offer is even permitted by the Builder, then (as with all contracts) it must be documented to reflect and protect the legal right of the parties.
The technical aspects of an assignment require more than simply taking the original buyer’s Agreement of Purchase and Sale with the Builder, scratching out his or her name, and replacing it with the new buyer. (Although, in some cases people do try to “squeeze in” assignment-of-offer terminology into a new Agreement of Purchase and Sale made out in the new buyer’s name – but this is definitely NOT recommended).
Rather, a properly-documented transaction makes reference to the Agreement of Purchase and Sale between the original buyer and the Builder, but adds a separate document called an “Assignment of Agreement of Purchase and Sale.”The Ontario Real Estate Association (OREA) provides a standard form that can be used, although in many cases those Builders who permit Assignments will insist that the original buyer and the new buyer use the Builder’s customized assignment forms, rather than the OREA standardized version.
The Specifics of the Deal –Who Pays What?
Recouping the Original Buyer’s Costs
At the point where the Assignment is being negotiated, the original buyer has typically paid a deposit to the Builder, may have pre-paid for certain upgrades and extras, and has a large balance owing.This means that in the course of striking a deal to achieve the assignment, the original buyer should give some serious thought to the various costs, fees, pre-paid deposits, and tax repercussions of the deal, and how these should be reflected in the price that he or she will want the new buyer to pay under the Assignment Agreement. The timing of the payment(s) will also be a consideration.
For both original buyer and new buyer who are considering an assignment arrangement, here are some of the questions to ask:
- Does the price to be paid by the new buyer include any fee that the Builder is charging in exchange for the original buyer’s right to assign the Agreement of Purchase and Sale?
- Does it include any deposits paid by the original buyer to the Builder, after the Agreement was signed?Does it include any interest that has been earned on those deposits?
- Does it clearly state that the new buyer will take over the entire contract, including the adjustments that are to be paid to the Builder on closing?Or are those adjustments to be split between new and original buyer?
- Does the price include money paid by the original buyer for extras and upgrades?
- Are there any additional deposits that are still owing to the Builder, under the original agreement?
- Who is responsible to pay the additional fee (i.e. the Builder-imposed fee) in exchange for the Builder giving consent?Usually, this will be the original buyer, but the parties may negotiate otherwise.
- Does the new buyer agree to take on responsibility under the original Agreement for making additional deposit payments until the final closing date (which may still be months or even years away)?
- Does the new buyer have a full understanding of the amount of all the adjustments that must be paid to the Builder pursuant to the original Agreement?
- If the original buyer has negotiated any special financial incentives into the Agreement of Purchase and Sale that has been reached with the Builder, have these been addressed in terms of whether the new buyer will receive the benefit of them?
In any case, the final purchase price payable from the new buyer to the original buyer will typically be made up of:
- The outstanding balance owed to the Builder by the original buyer, that will now be payable by the new buyer;
- The total deposits already paid by the original buyer to the Builder;
- The total payments already paid by the original buyer to the Builder for any upgrades, extras, etc.; and
- The profit that the original buyer stands to make in the deal.
Deposits, and Interest on Deposits
The treatment of deposits, and the interest they may have earned, merits a brief separate discussion.
Under virtually all Agreements of Purchase and Sale with Builders, the original buyer will be required to pay a series of deposits to the Builder, starting with the initial deposit paid when the Agreement is signed, and on a set payment schedule thereafter. The total of those deposits can be significant.
Once the Agreement has been assigned to the new buyer, how those deposits are treated will form part of the negotiations.Typically, the original buyer will get those deposits back from the new buyer as part of the overall purchase price of the assignment transaction; he or she will usually receive them at the time the assignment agreement is entered into and the Builder has consented to the assignment.
The potential problem with an Assignment Agreement is financing. The original buyer will want his deposit funds returned before closing, but if the new buyer does not have funds on-hand, he or she may find that financing is very difficult to obtain because banks do not advance mortgage funds at the time an Assignment Agreement is entered into; rather, the financial institution will provide funds only on final closing.This can serve as a roadblock to the new buyer’s ability to repay the deposits and potentially to embark on the transaction at all.
The question of who is entitled to the Interest on any deposits pre-paid to the Builder is also a topic for the original and new buyers to discuss.In many cases, the interest will be only a small amount (if any) and may be credited to the new buyer, rather than the original one.However, in cases where the original buyer has paid significant deposits over time, and where larger interest amounts have accrued, the parties may want to negotiate a different outcome.
Land Transfer Tax
Land Transfer Tax is also an important consideration in Assignment Agreement arrangements.
When negotiating the deal, the original buyer and the new buyer must discuss the structure of the deal between them, to ascertain the exact selling price on which the Land Transfer Tax (and any Municipal Land Transfer Tax) should be payable i.e. whether it is the original buyer’s price with the Builder (net of HST and the HST New Housing Rebate, which is discussed below), or whether it’s the newly-inflated price being paid by the new buyer under the Assignment.
Generally speaking, it will be the latter, although in some assignment arrangements the parties have attempted to structure it so that they pay the Land Transfer Tax based on the lower initial price asked by the Builder, while taking the position that difference between that and the increased price is merely the “fee” paid to acquire the original Agreement of Purchase and Sale entered into with the Builder (thus avoiding having the tax calculated on the higher sale price).
In any case, once the Assignment Agreement is reached, it will be the new buyer who is obliged to pay Land Transfer Tax and any Municipal Land Transfer Tax on closing, not the original buyer.
HST and the HST New Housing Rebate
The issue of how HST is to be treated in an assignment scenario is a crucial one, but is fraught with pitfalls.
The first issue is how HST on the transaction should be calculated. Because the new buyer’s price will inevitably be higher than the one the original buyer agreed to pay to the Builder, there is an important issue as to whether the difference – meaning the original buyer’s profit – should be subject to HST (and if so, who will pay it in the transaction).
This determination hinges on whether the assignment is a “taxable supply” under the tax legislation, and on whether the original buyer can be considered or deemed a so-called “builder” of the home for HST purposes.This, in turn, involves a number of complex legal concepts and factual findings – including the intentions of the original buyer as to whether the home is going to be a primary residence.
Next, there is the issue of the HST New Housing Rebate. In a typical scenario, the original buyer may have been entitled to the HST New Housing Rebate, based on meeting numerous qualifying requirements and stipulations. However, once he or she assigns the Agreement, that eligibility is obviously lost because he or she is no longer taking title to the home on closing. Only one HST New Housing Rebate application per dwelling can be filed.
But once there has been an assignment, it is the new buyer’s circumstances that will determine whether the opportunity for an HST Rebate exists. He or she will have to meet the stipulated legislated requirements, and may either apply directly to the Canada Revenue Agency (CRA), or arrange with the Builder to have the rebate amount credited right at closing.
(Note that the new buyer may want to take steps to protect his or her position in this regard.For example, when negotiating the Assignment Agreement, the new buyer should make the agreement conditional on receiving written confirmation from the Builder that any HST New Housing Rebate will be credited to him or her on closing (assuming that the qualifying requirements are otherwise met).Otherwise, if this commitment is not in writing then the Builder, being entitled to exercise its discretion on whether to credit the buyer with the rebate amount on Final Closing, can withhold it and force the new buyer to apply to CRA directly after closing.Obtaining this commitment in writing is especially important given the likely lack of prior dealing between the Builder and the new buyer.
Other Things To Consider
Who is Responsible for the Documentation?
In addition to ascertaining whether the original buyer or the new buyer will pay for certain items, it is also important to determine – in advance – which of them will take care of arranging the documentation.The questions to ask:
- Who will prepare the documents needed to achieve the Assignment?And who will bear the cost?
- Will the Builder’s lawyer prepare the Builder’s needed consent to the Assignment?
- Since the new buyer cannot renegotiate any of the provisions of the Agreement that the original buyer entered into with the Builder, are any of those terms objectionable, and if so, how will they be resolved and who will bear the cost?
As discussed, the Assignment Agreement will be conditional on the Builder giving its consent.From the new buyer’s standpoint, it should also be made conditional on him or her giving close review to the original Agreement of Purchase and Sale (as signed by the original buyer), the Assignment Agreement, as well as any amendments, waivers, notices (and for condominium purchases, the Disclosure Statement) etc.If for no other reason, it will give the new buyer a chance to consider the specific list of adjustments for which he or she will be responsible to pay on closing.Needless to say, this review should be undertaken with the guidance of an experienced lawyer.
Once the terms of the assignment are settled and the Builder’s written consent has been obtained, the Assignment Agreement must be drafted and is attached to the original Agreement of Purchase and Sale that the original buyer entered into with the Builder.
Incidentally, the Builder may have certain requirements that must be incorporated into the process and accommodated as well.For example, the Builder will require the new buyer to provide I.D., and will need confirmation that he or she has the financing required to close in place.
When negotiating the assignment arrangement, the original and new buyers must be aware of the impact of the New Home Warranty Program as administered by Tarion, particularly if the home being “flipped” is a condominium unit.
There may be financial issues for the new buyer to work out before the deal can go ahead.
As usual, the transaction may be conditional on financing, which will be arranged on the higher price that the new buyer has agreed to pay. However, since some mortgage brokers may be unfamiliar with financing an assignment transaction, getting approval for the new buyer’s purchase may be challenging. This is something that needs to be investigated long before the original buyer and the new buyer start their negotiations in earnest.
A final issue to be negotiated is who is paying the commission with respect to the Assignment Agreement transaction.This includes consideration of the specific commission rate, together with the details on how and when the commission gets paid.
While an Assignment Agreement can be beneficial to both the original and the new buyer – and even to the Builder (in extra fees) there are many issues to be addressed and negotiate.
As an agent, make sure your client obtains legal advice prior to finalizing any agreement to assign the original Agreement of Purchase and Sale.
Be careful… be aware… and think!”