Reviewing a builder’s Agreement of Purchase and Sale

Unexpected Costs When Buying or Selling a House

As a lawyer, when advising buyers of pre-construction homes or condominium units just after they have signed an agreement, I always start off the consultation by saying the same thing. These Agreements Of Purchase And Sale (APS) are very one-sided in the builder’s favour.

They are designed that way. The APS has been drafted to anticipate all the builder’s needs, such as delays in obtaining occupancy permits and other government approvals, and to protect the builder’s overall best interests. Closing dates five years in the future are not uncommon.

These agreements are also usually quite lengthy, dense with legalese language and quite intimidating to initially glance over. Builders appear to have all the bargaining power and individual purchasers interested in new subdivisions or condominiums are seemingly at their whim.

But is that necessarily the case? The short answer is “sort of” since not everything is up for negotiation.

For example, lot grading and water drainage are regulated (highly) by municipal bylaws. New buyers will not have much luck trying to negotiate changes to the slope of their yards. To get a building permit in the first place, developers usually must submit grading and drainage plans to the city that are designed by engineers. This is important to ensure water flows away from building foundations to prevent damp basements and to ensure drainage does not negatively affect adjacent properties or the city’s infrastructure.

In my experience, however, certain other things in the agreement are up for grabs.

Capping Development Charges:

Often my clients ask to “cap” development charges and levies imposed by the municipality. Such charges could include parks levies, cash-in-lieu parkland dedication payments, education development charges or even public art contributions. At the end of the provision listing all such charges and levies, ideal phrasing would be something like: “The amount of the adjustment pursuant to this paragraph shall not exceed $[X] dollars plus applicable taxes.”

It is becoming more commonplace these days to see multiple paragraphs in the adjustments section of the APS that refer to development charges. Yet sometimes only one of these paragraphs has the development charges capped. For instance, I recently saw a cap implemented with respect to charges made pursuant to the Development Charges Act, the Education Act, the Planning Act or other legislation of a similar nature, but there was no cap for levies that may be assessed as a result of specific development agreements that the builder has entered into with the municipality.

In that case, I prepared a negotiation letter addressed to the builder’s lawyer, and we were successful in negotiating a cap for the second development charges paragraph as well. Otherwise, as initially drafted, the adjustment would have been determined at the builder’s discretion and the buyer would be bound to accept whatever amount the builder chose to apportion to the property.

Capping Assignment Fees:

Another part of the APS for which a cap is commonly negotiated is assignment fees. Assigning the APS to a new buyer (or assignee) is an attractive option for many of my clients, as they can make a profit for the increased market value of the property since they signed the APS (perhaps a couple of years ago) without having to take title to the property and pay an expensive land transfer tax.

However, the APS may not allow an assignment at all as originally drafted. Moreover, listing the property on the MLS is usually strictly prohibited, as this could lead to decreased marketability for other units in the subdivision or condominium complex. Other prospective purchasers may, for instance, think there is something wrong with the pre-construction project upon seeing an MLS listing and become discouraged from buying in.

For this reason, the builder’s APS typically specifies that an MLS listing will be construed as a default under the agreement and could lead to the builder terminating the transaction, keeping all initial deposits as liquidated damages, and re-listing the property for sale to another third party (with the builder retaining the option of suing the original purchaser if the property is then sold at a much lower sale price).

To make sure all options are considered, I always ask my clients if they may be interested in assigning their APS down the road, and if they would like to negotiate a cap on assignment fees charged by the builder and the builder’s lawyer. Particularly given the fact that desires can change in five-year time periods, a client may decide to buy another resale property in the interim or choose to later invest in a different pre-construction project that appears more attractive in the long term.

Such anti-assignment clauses usually prohibit leasing the property to tenants as well, which will be important to clients seeking to purchase investment properties. One should negotiate to at least allow assignments and leasing upon receiving the builder’s consent, and the wording of such clauses should be negotiated so that consent “shall not be unreasonably withheld” rather than being in the builder’s “sole and unfettered discretion”.

Caps can be negotiated for other items as well, such as for hydro and water meter fees and/or installations. In any case, given the long-term nature of the investment when buying into pre-construction projects, prospective buyers would be well-advised to consult with a lawyer during their 10-day cooling-off period after signing the APS to see if they can sweeten their deals.