An assignment of an Agreement of Purchase and Sale is when the original purchaser (Assignor) from the Builder agrees to allow a new purchaser (Assignee) 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.
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.
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. The Builder’s agreement will 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.
As pre-construction realtors, we are able to negotiate with the builder to receive the right to assign the agreement at the time of purchase.
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. When negotiated well, we are sometimes able to get the builder to allow an assignment even though this is not specifically stated in the contract.
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.
We will begin the process of listing your property for sale as an assignment. As the builder will not allow the listing on the MLS system, we will list the property through other mediums and methods of giving the property maximum exposure to buyers.
When we have a buyer for the property we will begin the negotiation. It is only after we have worked out the deal with the prospective buyer that we would apply for the consent to the transaction from the Builder.
In most instances the original buyer pays the fee to the Builder.
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.
Closing of the transaction depends on the stage of construction that has been completed. Most builders will only give consent to an assignment is if the assignment is finalized prior to 60 days before occupancy. The latest possible date that a buyer can occupy the unit is upon occupancy closing. 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.
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.
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.
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.
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.
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.
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.
An insider’s guide to buying new construction in Toronto.