The first step: The letter of intent
Mostly exploratory in nature, the letter of intent outlines the key points of the potential transaction that may interest the parties. As such, it is not legally binding and must not be allowed to evolve into an offer to purchase. How? Avoid including too many details or clauses that could create obligations, as well as conditions that might imply a commitment.
However, there are exceptions: exclusivity clauses, which prevent the seller from negotiating with other parties for a set period of time, and confidentiality clauses.
The offer to purchase: The centrepiece of the transaction
The offer or promise to purchase is the cornerstone of a real estate transaction:
- Key terms: The offer defines the key terms of the pending sale and includes suspensive or resolutory conditions that shape the process.
- Deposit: The offer typically provides for a deposit to be applied to the sale price at closing. Should the buyer fail to complete the sale as required, the deposit is usually forfeited to the seller as liquidated damages.
- Payment arrangements: The offer specifies how the purchase price will be paid (up front in cash or by making arrangements with the seller for a mortgage secured balance of the sale). In this case, note that the buyer will not be able to take out an additional mortgage in excess of xx % of the purchase price. This is to ensure that the seller's mortgage is paid and given priority.
- Seller's representation: The offer specifies the seller's legal representation and must include a clause stating that if anything changes between signing and closing, the seller must notify the buyer to mitigate the risk of post-transaction disputes.
- Due diligence: The offer contains details on the due diligence period during which the buyer can request inspections and audits of the property, reducing the risk of post-transaction disputes.
- Legal Warranty: The offer may also address the legal warranty. Note, however, that if no mention is made in the offer, the sale is made by default with legal warranty (warranty of ownership and warranty of quality).
Suspensive and resolutory clauses: Essential to an effective and well-structured offer
A suspensive clause delays the obligation to complete the sale until certain conditions are met, such as obtaining financing or approval for a zoning change. If the sale depends on the latter to allow for commercial use, the offer will not be final until approval has been granted.
When using a suspensive clause, it is important to include:
- A final date by which the condition must be met, otherwise the offer is rescinded.
- That the condition benefits only one party to avoid the other party using the unmet condition as a reason to rescind the offer—while the beneficiary of the condition could simply waive it to avoid jeopardizing the offer.
The conditional offer is binding and does not become final until the conditions are met or the beneficiary has written them off. If one of the parties refuses to sign the deed of sale, the other can enforce the transfer of title to guarantee the closing of the transaction until the deposit is returned as liquidated damages.
Conversely, a resolutory clause, which cancels the offer if a specific condition is not met, provides additional protection. For example, it could state that the offer is contingent upon the seller terminating the lease to occupy the property after the sale.
Firm deadlines
It is essential that the parties' intentions and choice of timeline are made explicit by stating that the deadline is "firm" or "de rigueur" The Quebec courts have confirmed that if deadlines are not clearly defined as firm, they will be considered as general guidelines. For example, a deadline for obtaining financing or authorization. However, even if deadlines are marked as firm, the parties must comply with them. If a deadline cannot be met, written notice is preferable to postponing the current firm deadline. If the parties let the deadline pass, the court may find that the parties no longer deem the deadline firm.
The deed of sale: Formalizing the transaction
Because it is published in the Land Register, the deed of sale finalizes the transaction by reiterating the terms of the offer and making them enforceable against third parties. It must also include a legal description of the property, a sale price (if not, it could be considered a donation), and be endorsed pursuant to the Act respecting duties on transfers of immovables (welcome tax).
Note that the property being sold must sit on a full lot, since partial lots are not eligible for publication. Finally, contrary to popular belief, the deed of sale can be signed solely by the concerned parties and does not need to be notarized.
As you can see, each document -the letter of intent, the offer to purchase, and the deed of sale – plays a unique role in a real estate transaction. A key point to remember is the importance of formulating your offer clearly and in detail.. By being specific about the deadline and making sure all terms and conditions are made explicit, you lessen the risk of misunderstandings and establish a solid foundation for the transaction.
Don't miss our next article, where we will explore the due diligence process.
This article was published in Les Affaires on November 7 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
