This guide should help you with completing your Assignment Agreement.
Builders Cancelling Incentives as a Condition of Assignment!
We complete many Assignment transactions and have recently come across a significant issue with more and more builders and affecting clients buying or selling a unit by way of Assignment.
After the transaction between the New Buyer (Assignee) and Seller (Assignor) is firm, and formal application for consent to the Assignment is made to the Builder, the Builder is insisting on removing certain incentives that the original Buyer/Assignor may have received under the terms of the original Builder Agreement. Such incentives can be quite substantial and range from caps to development charge levies, to common expense credits, to other incentives given at the time of the original purchase. The New Buyer/Assignee is then effectively asked to pay more for the property on final closing than was anticipated under the terms of the Assignment Agreement. This is resulting in disputes between Assignors and Assignees as to who is responsible for such extra costs. It is a difficult problem to resolve because the Assignor and Assignee have a firm agreement, subject only to the Builder’s consent, and that Agreement does not contemplate who will pay for these extra costs.
Some recent examples of this are:
• On a Large Project on Adelaide St., East – the Builder deleted the Development Charge cap, common expense credit and free leaseback provision. As part of the builder consent document, they only replaced the Development Charge cap, at a significantly higher amount; and
• On a project at Yonge and Eglinton- the Builder deleted the Development Charge cap (which was $0) and did not replace it. This means the New Buyer/ Assignee would be fully responsible for increases in development charge rates from July 1, 2015, which may amount to thousands of dollars.
If you are acting for a New Buyer/Assignee we would suggest the following clause to protect your client:
It is understood and agreed that the Assignee is taking an Assignment of the original Agreement of Purchase and Sale with the Builder/Vendor as it currently exists and as reviewed by the Assignee and his solicitor, including all incentives, adjustment caps, upgrades, etc.. In the event that the Builder/Vendor removes any such incentives as a condition of granting consent to the Assignment, or in any way requires an amendment to the original agreement such that the Assignee will incur expenses in addition to those set out in the original agreement with the Builder/Vendor as reviewed by the Assignee, the Assignor agrees that the costs and value of same will be deducted from the balance due to the Assignor on Final Closing.
If you are acting for the Assignor we would suggest the following clause to protect your client:
The Assignee agrees and understands that as a condition of granting consent to this Assignment the Builder may withdraw or remove incentives provided under the terms of the original Agreement with the Builder. In the event that the Builder removes any incentives as a condition of granting consent to the Assignment, the Assignee nevertheless agrees to proceed with the Assignment and accept any related costs or increase to the price to be paid to the Builder on final closing.
Another option is to make the Assignment Agreement between the New Buyer/Assignee and Seller/Assignor conditional on there being no changes made to the original Agreement with the Builder. In that regard, we suggest the following addition to the standard condition on Builder’s consent clause:
This Assignment Agreement is conditional on obtaining consent from the Builder to the Assignment without any amendments or changes to the existing Agreement of Purchase and Sale with the Builder/Vendor.
If you are in the middle of an Assignment deal right now, we suggest that you amend your clauses immediately!
If you are working on the purchase of a Preconstruction Condominium with a client who is being told that the purchase includes a right to Assign the property to a New Buyer, we recommend that during the initial signing of the Builder’s Agreement, within the 10 day cooling off period, that the following clause be inserted to protect your client:
The Vendor agrees that in the event of an Assignment of this Agreement the Assignee will not be required to accept any changes to this Agreement. In particular, any amendments, incentives, adjustment caps, or upgrade credits, etc. in this Agreement will apply and be transferred to the Assignee.
Assigning New Home Agreements
With an estimated 150 to 200 new condominium projects under construction in the GTA, as well as numerous homes and subdivisions being developed, there is a great deal of interest in assigning Agreements of Purchase and Sale for new condos and houses.
What is an Assignment?
An assignment of an Agreement of Purchase and Sale is when the original purchaser from the Builder agrees to allow a new purchaser to take over the contract with the Builder. The original purchaser does not have to close with the Builder and does not take possession (if occupancy has not taken place) or title to the property. The new buyer takes over and completes the property purchase with the Builder.
What are the Advantages of an Assignment?
There are a number of advantages to assigning a contract. They are as follows:
To the Seller/Assignor
- The seller/assignor does not usually have to pay the Builder’s closing costs and land transfer tax;
- The seller/assignor does not have to pay the GST/HST rebate back to the Builder. This would be payable on closing by anyone who does not intend to occupy the property, and sells it, or will not have it occupied by a family member. If the seller/assignor was renting out the property, he would still have to pay the rebate back to the Builder on closing and claim it back from the government. This can be a significant expense;
- The seller/assignor avoids the carrying costs (mortgage, maintenance fees, taxes, etc.) for the time between listing the property and selling a property.
To the Buyer/ Assignee
- The buyer/assignee may receive a price advantage over current properties on the market;
- The buyer/assignee will receive a brand-new home and, depending on when the assignment takes place, have the ability to make finish selections;
- The buyer/assignee may be able to avoid Toronto Land Transfer Tax if the original Agreement of Purchase and Sale was signed before December 31, 2007;
- The buyer/assignee may be able to take advantage of the deposits of the original buyer and be able to put less of a down payment on a property than he would otherwise have been able to.
When Can You Assign an Agreement?
Unlike standard TREB/OREA agreements, most new home agreements contain a clause that prohibits the assignment of the contract to any individual. There are exceptions to this where, at the time the initial contract was signed; the Builder has specifically agreed to allow for an assignment of the contract. However, this is unusual and the vast majority of new condo or house contracts do not allow for the assignment of an Agreement of Purchase and Sale. Moreover, they specifically advise that if the buyer in any way tries to sell, assign, or list for sale (on the MLS system or otherwise) the property, the buyer is in breach of the Agreement of Purchase and Sale and the Builder is entitled to cancel the deal and the buyer loses his deposits. Therefore, it is very important not to list a property for sale on the MLS system or enter into this type of agreement without considering whether or not the original buyer is entitled to assign the Agreement.
Receiving Consent from the Builder
If the original buyer has the right to assign the agreement under the terms of the contract, he should find out what the Builder’s requirements for doing so are. There are often specific requirements, fees, and forms which must be completed if the Builder is going to consent to an assignment.
It is still possible to obtain consent to an assignment even though the contract does not include a clause entitling the original buyer to make an assignment. There are many Builders who will allow assignments even though this is not specifically stated in the contract. It is always up to them to waive the prohibition against the assignment and allow the original buyer to assign the agreement. As is the case when the contract allows for the assignment, they will always have their specific forms and criteria which must be met, as well as a fee to be paid. The sales office should be contacted to determine if the Builder will agree to allow an assignment and if so under what circumstances. Some Builders will allow an assignment but prohibit a listing on the MLS system, while others may not have such a restriction. Each case is different.
If the agreement prohibits an assignment and the Builder does not allow them, there is little, if anything that the original buyer can do and he will have to wait until after closing to sell the property.
What Do You Do Once You Determine That Consent Can Be Obtained?
When you determine that the builder will consent to an assignment, one must be careful on how you list the property. If the property can be listed on the MLS system, you do so as an assignment of the agreement. If the builder will not allow listing on the MLS system, you may have to list the property through other mediums or methods of giving the property exposure to buyers, such as by word-of-mouth. Under no circumstances should you list the property on the MLS system if the builder does not allow it as this may result in the original buyer being in breach of the Agreement of Purchase and Sale.
What Do You Do When You Have A Prospective Buyer?
When you have a buyer for the property you would begin the negotiations in the usual manner. It is only after you have worked out the deal with the prospective buyer that you would apply for the consent to the transaction from the Builder. You would not want to apply for consent where you do not have an otherwise firm deal with the new buyer, as you could lose the assignment fee which must be paid to the Builder.
What Do You Have To Think About When You Are Negotiating The Assignment Deal?
There is a lot to think about on assignment transactions. The essential elements, however, are as follows:
What is the purchase price and does it include the adjustments that the Builder will charge on closing?
Most assignment agreements have the new buyer taking over the contract, in its entirety, and paying the adjustments to the Builder on closing. However, in some instances the new buyer and original buyer agree to split the adjustments (other than those for taxes and maintenance fees).
Who will pay the assignment fee?
In most instances the original buyer pays the fee to the Builder.
How much money will the seller/assignor get and when?
Usually the original buyer has paid deposits to the Builder under the contract. When the contract is assigned these deposits are taken over by the new buyer. The original buyer will usually want his deposits back as well as the profit on the sale. From the original buyer’s perspective, the more funds that he can obtain before final closing the better. From the new buyer’s perspective, the less he can pay before final closing the better. Please note that if the new buyer does not have sufficient funds to put down on the purchase he may not be able to cover the original buyers deposit before final closing. This is because the bank does not fund a mortgage on an assignment nor on consent of the builder. The bank funds on final closing. The way that a balance is usually struck between the new buyer and the original buyer is that upon the Builder’s signed consent to the assignment to the new buyer the original buyer receives the deposits he has paid to the Builder back. He then waits for final closing to obtain his profit. Again, however, it is important to note that each deal is different and that this can be structured in any way that the parties agree.
When will closing take place?
Closing of the transaction depends on the stage of construction that has been completed. If the occupancy closing has not taken place then the new buyer will have no choice but to wait until the occupancy closing. The earliest possible date that a buyer can occupy the unit is upon occupancy closing. If occupancy closing has taken place, then the closing date can be set to any time after the Builder signs consent to the assignment. It is important to note that the new buyer will have to pay occupancy fees usually from the day that he takes occupancy of the property just like the original buyer would have had to pay. If the new buyer takes occupancy midmonth then an adjustment between the lawyer for the original buyer and the new buyer will be made.
Who will receive the interest on the deposits paid by the original buyer?
In most cases, this is a small amount and the new buyer gets the benefit of the credit for any small interest payments on the deposits paid to the Builder. However, if significant deposits have been paid and they have been sitting with the Builder for some time then the original buyer may want to include a clause which entitles him to the interest on the deposits. Most of the time, the new buyer would respond that as he is paying the adjustments on closing he should have the benefit of the interest on deposits. Again, this is a matter to be negotiated between the parties.
Who will receive the benefit of any creditor incentives given to the original buyer?
Very often the original buyer will have negotiated some special incentives into the contract and it will have to be decided whether the original buyer will retain the benefit of these or whether these will be assigned to the new buyer.
What To Do Once You Have Negotiated The Terms Of The Contract?
After you have considered the terms of the contract above, you will have to write up an agreement to assign the property. This is usually now done by way of the TREB assignment agreement to which a schedule detailing how payments will be made is attached. This schedule is attached to the agreement as is the original Agreement of Purchase and Sale with the Builder. From the buyer’s and seller’s perspective, the assignment agreement should be clearly conditional on a review of the original Builder’s deal and the Assignment Agreement with the new buyer. This will allow the original buyer and the new buyer to have their lawyers look at the terms of the assignment agreement and ensure that all of the above matters have been properly considered and addressed. This will also ensure that the lawyer for the new buyer will be able to look at the original contract with the Builder to make sure that what the original buyer says he has the right to sell is in fact what he has the right to sell. It will also give the new buyer an idea of what the closing adjustments with the Builder will be, which is particularly important if he is expected to pay for them. The entire agreement should also be made conditional on the consent of the Builder to the assignment. As noted above, the Builder must agree to the new buyer taking over and the new buyer and original buyer can only be sure that they have a deal after the Builder has consented.
After the Assignment Agreement is drawn up and the conditions above are included, the agreements should be sent to the lawyer for the buyer for review and the lawyer for the seller for review. Once they have made their comments and everybody is in agreement as to the terms of the contract, the assignment application should be made to the Builder and the steps that the Builder requires for consent should be followed. This may include: confirmation of financing for the new buyer, ID confirmation for the new buyer, signing the Builder’s mandatory consent form and paying the fee.
It should be noted that even after consent the Builder will generally hold the original buyer responsible if the new buyer fails to pay and complete the deal on closing. It should also be noted that even though the Builder reserves this right against the original buyer, in most cases, it does not give the original buyer the right to complete the transaction if the new buyer does not complete the transaction. This is a risk to the original buyer and he should be aware of this possibility. This does not mean that the original buyer cannot try to complete the transaction. It merely means that he does not necessarily have the right to do so.
A Note On Financing
The transaction should be conditional on financing as in the normal course. However, you should ensure that the financing is arranged on the new assignment purchase price. Some mortgage agents are unfamiliar with financing an assignment transaction and as such getting approval for the loan on the new purchase price can be difficult. You should try and send the new buyer to a mortgage broker familiar with assignments to obtain the appropriate confirmation of financing.
Other Things To Consider
Time – It takes a little longer to put together an assignment deal because of all of the matters noted above.
HST – the original buyer has to have intended that the property be his own residence for the assignment to be exempt from HST. If the buyer did not so intend, HST may be applicable to the transaction. From the buyer’s perspective, the original buyer should warrant that HST is included in the purchase price. This may be difficult or be an issue where an original buyer has bought multiple units.
Progress Reports – The new buyer should agree to keep the original buyer posted on the progress of the transaction with the Builder. This is because once the new buyer has been granted the assignment, the Builder will no longer have to deal with the original buyer, and the original buyer will therefore not be aware of the progress of the transaction and when he will be paid. This can be put into the schedule to the agreement.
Addition Clause(s) – Even though the Builder may not have agreed to it in its assignment agreement, you should consider putting in a clause expressly allowing the original buyer to complete the transaction with the Builder if the new buyer does not.
Fees – There are extra legal fees on assignments associated with drafting and reviewing the schedule and agreement as noted above, as well as with the multiple closings associated with an assignment transaction [the new buyer’s lawyer has to close with the Builder and with the original buyer’s lawyer]. Some lawyers do not deal with assignments and you should select a lawyer for each side who is familiar with this process.