The inspection showed repairs are necessary to the furnace or hot water tank. Or perhaps the Real Property Report shows a deck with a height above ground of more than 0.61 metres (24 inches) with no railings, contrary to the building code. The seller agrees to provide you with a $1,000 credit on closing so you can make the repairs yourself and ensure they are done properly and add any extra enhancements you desire. This credit actually reduces the purchase price by $1,000. Your lender must be notified of this change in the purchase price. This could reduce the amount of your mortgage. If you are using a 90% mortgage, the amount of the mortgage will be reduced by $900. You will only be left with $100 to complete $1,000 worth of repairs. Instead, you decide to have the seller complete these repairs. Since the seller is leaving the property, the seller has no incentive to ensure the repairs are done to any particular level of professionalism. Also, the seller is in a rush to get the repairs done before the closing date. This leaves no room for you to add any enhancements to the repair service. Some people attempt to solve this by having a holdback that will only be released upon satisfactory completion of the agreed repairs. Unfortunately, there can be substantial differences of opinion as to the definition of adequate work. Holdbacks work best when there is a black and white issue with no question of quality or level of service.
So how can you make sure the required repairs are done to your level of satisfaction without “reducing the purchase price” which leads to a reduction in your mortgage? Our preferred alternative is to have the lawyer pay the agreed amount directly to a third party. For example, the $1,000 required for furnace repairs will be paid directly to the furnace repair company of your choice on closing. Or, the $1,000 is paid directly to the building contractor or lumber supply company on closing.
During the course of a real estate negotiation, you may hear someone suggest using a holdback to resolve an issue between the parties. One example is where a deficiency is noted during a home inspection. The buyer may ask the seller to make the appropriate repairs. However, to ensure the seller is sufficiently motivated to make such repairs, the buyer may propose holding back a portion of the sale proceeds until the repair is completed. In general, we recommend avoiding such holdback arrangements. Although they are intended to resolve a situation, they may in fact complicate the real estate transaction.
The seller will want to make any repairs at the lowest cost and with the least amount of effort as possible.
Once repairs are made, there may be a dispute between the buyer and seller with respect to whether or not the repairs were made to the standard contemplated by the parties at the time the contract was signed.
If the parties cannot agree on whether or not a repair has or has not been made, they will expend additional time, energy, and money arguing over what may have been a relatively minor issue, to begin with.
The wording of holdback clauses is tricky. Extra wording is required to cover all the different outcomes such as a failure to complete the repairs before the completion date and the consequences of this.
Holdbacks can be problematic. There can often be disagreements as to whether a holdback is warranted and on what terms and conditions. If there are holdbacks contemplated in your case, please ensure you understand the details and if there are any questions, either contact us directly or have your realtor talk to us so that we have a complete understanding of the issues.
If you are considering seeking compensating from the seller for repairs identified during a home inspection, or for any other reason, here are some suggestions to more effectively deal with the situation.
Simply reduce the purchase price. By doing so, you will minimize the potential for delays in completing your purchase.
If you insist on a cash-back arrangement, we suggest the contract contain provisions which require that the cash-back amount be held in a lawyer’s trust account with such funds being released only upon receipt of invoices evidencing that the repairs for which the cash was held back have been completed. Additionally, all payments from the lawyer’s trust account should be made directly to the contractor performing the work to mitigate any lender concerns that a buyer is obtaining a cash kickback they are not entitled to receive.
Rather than a cash-back, have the amount in question paid directly to a renovation company, supplier or contractor.
If a deficiency is noted which requires repair, it is far simpler to negotiate a reduction in the purchase price or provide payment to a third party and make the repairs yourself. Please note, this can lead to complications for you such as a reduction in your mortgage eligibility. This avoids disputes with respect to whether or not a repair has been adequately completed and gives you full control over the manner in which a repair is completed.