Understanding Real Estate Holdbacks

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Understanding Real Estate Holdbacks

In a Real Estate transaction, at the time of closing, you often hear the recommendation of using a holdback. A real estate holdback protects a home buyer. They allow for easier resolution of issues between the buyer and the seller. A holdback is a contract term used when a seller fails to fulfill their contractual commitments at closing time. Alternatively, holdbacks for part of an agreement outside of the contract when issues arise on possession. It means holding back funds in trust, or reserved, from the seller until a seller completes a certain item or task. In addition, the hold back is held until the buyer and seller resolve a conflict.

The act of holding back funds in trust acts as motivation for the seller to fulfill their contractual obligations while protecting a buyer. Below, we include more information on real estate holdbacks. For more information, contact the real estate lawyers at Kahane Law Office. With a Calgary office and an Edmonton office, we assist with real estate matters across Alberta.

When To Use A Holdback

Many situations arise where holdback facilitate resolution between buyer and seller. In addition, they assist in protecting a buyer by motivating a seller to complete their contractual obligations. For example, the following situations benefit from a real estate holdback:

  • Repair to the property not completed by the seller by the closing date. For example, fixing a roof, completing tile work in the main bathroom or installation of a functioning toilet;
  • Replacing a broken window;
  • An RPR is not in compliance with municipal bylaws;
  • Renovation work is still being carried out due to a delay in materials; and lastly
  • Completion of landscaping and construction of new detached garage.

When To Negotiate A Real Estate Holdback

There are two instances when people negotiate a holdback. Firstly, the desired provision of a real estate holdback is negotiated and written into the purchase contract. This way, the issue or repair is agreed upon by both parties a head of time before the agreement of the purchase and sale is firm. It is important to keep in mind the complexity of the holdback, some holdback clauses may require drafting by a real estate lawyer.

Most buyers expect that on possession day their property will be perfect. In some instances, this is not the case. Imagine all the excitement of walking into your newly purchased home to find all the kitchen appliances gone. Another example is if you discover that the newly installed hardwood flooring have deep gouges in them requiring refinishing the hardwood floors. This is the alternative situation to when your real estate lawyer negotiates a holdback with the seller’s lawyer.

Terms Included In Real Estate Holdbacks

When negotiating real estate holdbacks, there are several aspects that require addressing to best protect the parties. A proper holdback clause is clear, and provides certainty. For example, the following should form part of the agreement between buyer and seller:

Work Requiring Completion

A key component is stating the exact task or repair needing completion. Including the exact work requiring completion avoids conflict later. For example, clarity on a roof repair includes a term as to what the repair involves. Some roof repairs only involve replacing a few damages shingles. Others include replacing the entire roof, underlay and plywood. Attaching a trades detailed quote provides an exact expectation of the work. This allows the seller enough reasonable time to carry out their obligations. Both the scope of work, and the expected quality of work are crucial components. For example, is the relevant work completed by a professional or the homeowner.

Real Estate Holdback Amount

The amount or value of the holdback is relative to the task or repair that needing completion. If the amount is significantly less the seller may not agree to it and refuse to make the repairs or carry out the task and meet their obligations. For example, it makes more financial sense for the seller to give up real estate holdbacks instead of completing the repair. This often results in further complications and lead to more legal fees.

Determining Completion Of The Contractual Term

The response to this varies. For example, at times, getting a receipt for the work is enough. Other times a trigger to release funds includes the issuance of a municipal permit, an inspector, or examiner that deems the work completed. Sometimes terms are complete on the transfer of a warranty to a buyer. Lastly, a statutory declaration by the seller declaring that the task or work or item has been provided is common practice.

Time Frame For Completion Of The Term

Set a firm timeline that is reasonable to both parties. Take into consideration delays with materials, changes in weather that may interrupt or delay the work. For example, RPR compliance can take anywhere from 2 weeks to 5 months. Another example includes if the work requires digging into soil and the ground is frozen since this prohibits the works completion. Many variables can contribute to the time frame.

Provisions For Work Not Completed

Good real estate holdback terms include exact provisions for releasing funds to buyer, seller or both. For minor contract breaches such as, dry wall damage from moving out, if the lawyers from both sides cannot come to an agreement the only option for the buyer is to sue the sellers for the damages in civil court (also called small claims court) because the sellers failed to meet their contractual obligations. The other solution is for the buyer to rectify the defect at their own expense, then seeking damages from the seller as above. In addition, a good term also details who covers the any costs that exceeds the fund held in trust.

How To Minimize Your Risk?

Holdbacks function to help to resolve situations. In some instances, if poorly drafted, they end up complicating the real estate transaction. Holdbacks can be useful, but they cannot always be relied upon. Remember that your realtor is not a lawyer. Either have your realtor contact us to review the holdback clause or you can rely on us draft the holdback clause. This gives you the peace of mind you need. Purchasing a home is one of the biggest fiscal transactions most people make in their lifetime. It’s best to leave it to the professionals here at Kahane Law Office before the agreement is binding. If you have any questions related to real estate, give us a call. We are here when you need us.

Call Kahane Law Office For Help

We are a phone call away. Our real estate lawyers work closely with real estate agents across Alberta. We even have an after hours no cost phone line for agents when questions arise about real estate holdbacks. Feel free to email us your questions at this real estate email address. In addition, feel free to call us at (403-225-8810).