Standard Contract of Purchase and Sale Clauses: Common Misunderstandings and Confusions – Part One #566
CATEGORY: Legally Speaking
TAGS: Contract of Purchase and Sale Possession Risk Management Standardized Clause Title Clause
The standard Contract of Purchase and Sale (CPS) is a familiar form of contract. Parties in a transaction and their representatives have come to expect the standardized form of CPS when contracting for residential real estate. However, some clauses in the CPS can be confusing for buyers, sellers, and REALTORS® alike.
In this two-part series of articles, we will review some of the clauses in the standard CPS, which can cause confusion or misunderstanding, so you can advise your clients and provide accurate information.
Possession (Section 5)
Section 5 of the CPS sets out the terms related to possession of the property. This section clearly states the time and date the buyer will obtain possession of the property. However, confusion arises when tenancies are involved. The standard clause starts from the requirement that the seller will provide the buyer with vacant possession of the property. However, this vacant possession is subject to any existing tenancies listed in this section of the CPS. Therefore, any existing tenancies not listed in this section of the CPS, as an exception to the vacant possession or tenancies entered into after the date of the CPS (even if it’s for the same space or unit) must be terminated, and the tenants must vacate the property by the possession date. Buyers who wish to obtain vacant possession of a tenanted property must include a clause in the CPS requesting the seller give legal notice to the tenant and provide the appropriate form along with their offer. At the same time, sellers who do not know that the starting point is vacant possession, may not be aware of what needs to be included in this section. All notices must be made in accordance with the Residential Tenancy Act (The “Act”).
Another source of confusion regarding this section is if the possession date occurs on the same day as the completion date. This is because the time for closing is not fixed in the CPS, whereas possession of the property is fixed at a specific time. This can cause issues if closing occurs late or after the possession date.
REALTORS® should consider and discuss with their client whether vacant possession is possible, and if not, they should ensure that they list all tenancies in Section 5 of the CPS, which will transfer to the buyer. When representing a buyer who requires vacant possession, ensure clauses are added to the CPS requiring the seller to give notice to the tenant under Section 49 of the Act, and consider whether the timing for possession will be sufficient for the notice period required under the Act. Additionally, if the possession date is going to be the same day as the completion date, then Section 5 must be modified (or additional terms added to Section 3 of the CPS) to note that possession will only occur after the sale's closing on the completion date.
Risk (Section 16) and Viewed Clauses (Section 8)
Section 16 (Risk) and Section 9 (Viewed) of the CPS can also cause conflict and confusion if damage occurs to a property after risk has transferred but before the possession date. Section 16 states that all buildings on the property remain at the seller's risk until 12:01 am on the completion date, after which time the risk passes to the buyer. This means that risk transfers before the transaction actually closes, since closing typically occurs between 9 am-5 pm on the completion date. So, what happens if the deal doesn’t close, but technically, risk has already transferred? Or if damage occurs on the completion date before the transaction closes?
To further complicate matters, in BC the possession date is usually one to three days after the completion date, meaning the title to the property has transferred, as has the risk (which transfer at 12:01 am on the completion date), however, the seller is still in possession of the property. This issue is made more complex by Section 8 of the CPS, which states that the property will be in substantially the same condition on the possession date as on the date the buyer viewed the property (as noted in this section of the CPS). So, if the risk transfers to the buyer as of one minute into the completion date, but the seller must deliver the property in substantially the same condition as the viewed date, then what happens if there is damage to the property that occurs at any time between the completion date and the possession date?
The answers to all the questions above are all based on a mixture of fact and law. Therefore, the best practice is to advise the buyer to obtain insurance over the property commencing at 12:01 am on the completion date but also to advise sellers to keep existing insurance policies in place until after the possession date. This results in an overlap of insurance policies for the property but ensures that both parties are protected if they are required to remedy the damage under either Section 16 or Section 8.
Title (Section 9)
Section 9 is another clause that can cause issues for sellers and REALTORS®. This section relates to title to the property. Typically, in a residential real estate transaction, the seller and their listing agent understand that the seller’s mortgage must be discharged from title to the property. However, this isn’t only what Section 9 says. Section 9 states that the buyer will obtain title to the property free and clear of all encumbrances except charges contained in the original Crown grant, and restrictive covenants and rights of way in favour of utilities and public authorities. Sellers and REALTORS® often forget how narrow these exclusions are. For example, this clause does not include easements, restrictive covenants or building schemes (which are fairly common). Therefore, if not properly addressed in the contract, the buyer can demand that any private easements be discharged at closing, and it's likely the seller will not be able to comply with the contract and discharge encumbrances that are not addressed in the contract.
REALTORS® should ensure that they review title to the property carefully and consider if additional terms need to be added to the CPS related to charges that will remain on title following the transfer of title to the buyer.
REALTORS® need to ensure they understand the standard terms of the CPS and can explain and review them with their clients. Additions or revisions to the standard CPS clauses may be needed, depending on the circumstances. Stay tuned for Part Two of this article, in which we will discuss other CPS clauses: Time, Representations and Warranties, and Acceptance Irrevocable.
For additional information on the CPS and standard clauses, the CPS Residential Toolkit offers annotated forms reviewing the terms, REALTORS® and consumer videos, guides on how to complete the form, FAQ and links to PD opportunities to further knowledge on contracts. See it here.
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