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Mastering legal precision in real estate transactions: Insights from an industry expert

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While real estate agents inherently function as salespeople, their responsibilities extend beyond mere transactions, encompassing rigorous adherence to FINTRAC compliance and the meticulous drafting of legally binding agreements.

Drawing from my experience as a broker of record, lawyer and former realtor manager, I observed an alarming number of inadequately formulated agreements that left the buyer, seller or both parties vulnerable to substantial legal complications. Consequently, prioritizing legal precision becomes paramount.

In pursuit of a deeper understanding of the challenges faced by realtors, I engaged in a discussion with Benjamin Berry, a seasoned lawyer and co-founder and chief legal officer of Doormat, a company using technology to simplify the real estate closing process.

Our conversation delved into the common mistakes made by real estate professionals and explored effective strategies for minimizing risks, safeguarding both the realtor and, more significantly, their clients.


Natalka Falcomer (NF): What are common legal pitfalls in Agreements of Purchase and Sale?


Benjamin Berry (BB): Occasionally, realtors insert clauses with insufficient details that aren’t fully fleshed out, leading to complications in scenarios like holdbacks for repairs.

Thankfully, realtors generally do not make many legal mistakes in drafting Agreements of Purchase and Sale, but occasionally they will insert a new clause for a client without fully considering all the potential directions in which the situation could unfold.

For example, if a purchaser wants to hold back funds until a furnace is repaired, what happens if the furnace can’t be repaired? Can the seller replace it with a used furnace, or does it have to be a brand-new furnace? If the furnace can be repaired, who decides whether the repair is adequate? Does a neutral third party have to make an inspection and if so, who chooses the inspector? How long can the holdback be held for? Is the lawyer holding the funds entitled to charge legal fees for holding the funds and if so, who is responsible for paying those fees? Would it make more sense to simply deduct the cost of a new furnace from the purchase price? 

It’s important to consider questions like these when drafting an agreement. This doesn’t necessarily require legal knowledge, though it can be helpful to consult a lawyer for advice.


NF: How can realtors avoid legal mistakes in Agreements of Purchase and Sale?


BB: My suggestion for any non-standard clauses is to run them by a lawyer before using them, as the lawyer enforcing the clause may have considerations a realtor wouldn’t be aware of. Some lawyers may review these clauses for free, while others would do so only if they are representing the person you’re asking them to review the contract for. I would encourage realtors to seek out relationships with lawyers, so they have a trusted person to turn to when they need advice on a file.

In practice, I know that a lawyer may not always be available to review or draft a clause on a short turnaround, so I would encourage realtors to carefully consider what could go wrong with a situation when drafting a clause, what each party is responsible for and how the situation can be resolved regardless of how it unfolds.


NF: What trends are impacting real estate transactions today?


BB: We’re seeing big changes from a few years ago when interest rates were lower, which generated greater demand from purchasers, giving sellers more power to push for unconditional agreements.

There are now fewer bidding wars, allowing buyers to be more careful in drafting offers with conditions for financing and inspection. I think this results in less volatility, where buyers are better able to determine whether they can afford their purchase before they fully commit and whether the property is as good as advertised, or as good as it looked when cleaned and staged. I think we’re seeing less buyer’s remorse as a result, and probably fewer lawsuits resulting from buyers’ inability to close due to lack of funds, or lawsuits against sellers for failing to disclose defects.

On the seller side, I think there has been some reticence to sell unless the owners absolutely have to sell because many people were (and currently still are) locked into low interest rates from the pandemic era. Many of those low-interest mortgages will be maturing in the next year or so, meaning homeowners may decide there’s less downside to moving since they’ll have the same interest rates regardless. Most people who sell will also have to buy somewhere else, so this may result in a busier market in the near future.


NF: Are agreements falling apart and if so, why?


BB: With more conditional agreements, there are more uncompleted deals due to conditions not being met. This frustrates sellers but results in fewer cases of buyers reaching the closing date without funds.

Unconditional agreements were good for sellers as long as the buyer could actually complete the transaction they agreed to, which in some cases they could not. We’re seeing fewer requests for extensions, hopefully less time wasted on deals the buyer was never able to complete and more deals completed by committed, satisfied buyers.


NF: What about refinancing? Are homeowners opting for this instead of selling? 


BB: When interest rates dropped during COVID, we saw a lot of people choosing to refinance to take advantage of the lower rates. Since interest rates have risen, homeowners are holding onto their current interest rates.

I think many people in this situation will have to renew sometime in the next year or so, resulting in a surge of refinancing, particularly with private lenders who do not have as strenuous conditions for qualifying. Some people who need to refinance may instead choose to sell and buy somewhere else, which might liven up the market.


NF: Any additional insights on the current real estate landscape?


BB: Most of the agents and mortgage brokers I speak to seem to be more positive about the market this year, with expectations of growth for some of the reasons I mentioned. I think the pandemic market was a bit of an anomaly, but things will fall somewhere between that market and the one we’ve seen for the past year or so.


The takeaways


When crafting Agreements of Purchase and Sale, realtors should prioritize meticulous attention to detail, especially when incorporating non-standard clauses. The key is to anticipate potential scenarios and ramifications, avoiding vague or insufficiently detailed provisions. Essential considerations include outlining specific terms for holdbacks, repairs or other contingencies, along with clear guidelines on dispute resolution.

Collaborating with legal professionals during the drafting phase is strongly advised, ensuring that the agreement aligns with legal standards and safeguards the interests of both buyers and sellers. Realtors should view the agreement as a comprehensive roadmap, addressing possible twists and turns to provide clarity and minimize the risk of legal complications down the line.

By adopting this proactive and precision-focused approach, real estate professionals can enhance the integrity of their transactions and foster trust with clients.


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