What is an Assignment of an Agreement of Purchase and sale?
At its essence, an Assignment of an Agreement of Purchase and Sale – informally known as “flipping a home” – is a simple concept: A buyer (Assignor) of a new home sells to a third party (Assignee) the right to assume the purchase contract which the Assignor had entered into with the Builder.
More specifically, the original buyer – who we will call the “Assignor” enters into a formal Agreement of Purchase and Sale with a Builder, and then allows another person – who we will call the “Assignee” – to step into his or her shoes through what is legally known as an “Assignment” of the original Agreement of Purchase and Sale. The Assignee pays the Assignor a higher price than what was set out in that original Agreement, with the difference begin the Assignor’s profit. All of this takes place after the Assignor has agreed to buy a home from the Builder, but before the deal closes; i.e. the Assignor never takes title to the property. Title is taken in the name of the Assignee.
This arises primarily with new homes and new condominiums. For newly-built homes with typically long closing dates, an Assignment is particularly attractive in situations where the Builder has already sold substantially all of the homes in the development, but there is still demand for soon-to-be-completed homes in the development. The assignment of an Agreement of Purchase and Sale of a new condominium unit is also interesting for similar reasons, although the time frame for closing may be significantly longer depending on when the Assignment occurs. This puts the Assignor in position to make a profit by inflating the new price generally well above what he or she agreed to pay the Builder in the first place.
And what is the benefit to the Assignee? There can be several:
- The Assignee may be able to buy into a desirable neighbourhood or condominium building at a time when there are no more homes or units available to be purchased directly from the Builder;
- Even taking the Assignor’s profit into account, the Assignment may give the Assignee a price advantage over other properties that are currently on the market in the area or in the development; and
- Depending on the timing of the assignment, the Assignee may still be in a position to choose finishes and make minor changes to the yet-to-be-built home/unit.
Whatever the respective motivations of the Assignor and Assignee, the assignment of an Agreement of Purchase and Sale has many specific positive features – as well as potential pitfalls. What follows is a discussion of some of the key points.
When Can An Agreement of Purchase and Sale Be Assigned?
Unlike the standard Toronto Real Estate Board (TREB) or Ontario Real Estate Association (OREA) purchase agreements, many Builders’ own (i.e. customized) Agreements of Purchase and Sale contain a clause that generally prohibits the assignment of the contract outright – or else allows it subject to very strict conditions and in exchange for a significant fee payable to the Builder.
In fact, the vast majority of new home or condominium unit purchase agreements do not allow the Assignor to assign the contract to someone else, and stipulate that any attempt by the Assignor to do so, or to list the home for sale on the Multiple Listing Service (MLS) or otherwise, or list the property for rent, will put the Assignor in breach of the Agreement. This triggers the Builder’s right, with notice, to terminate the original Agreement, keep the Assignor’s deposit, and possibly to seek additional damages from him or her. (In many cases, the Assignor’s Agreement is “dead”; i.e. he or she cannot go back and try to complete the transaction as if no assignment had taken place).
All of this means that anyone who has agreed to purchase a home from a Builder should give careful consideration to, and should seek legal advice prior to entering the Agreement of Purchase and Sale or prior to entering into an Assignment Agreement; or in the case of a condominium unit during the 10-day cooling-off period or prior to entering into an Assignment Agreement in order to determine whether it’s possible to assign the Agreement in the first place; and if so under what terms, conditions, and costs.
This in turn involves a careful review of the clauses in the Builder’s Agreement of Purchase and Sale.
Typical (and Not-So-Typical) Provisions
As a practical matter, there are as many variations of these types of provisions as there are Builders.
Many Agreements of Purchase and Sale will include a largely-standard “No Assignment” clause, which disentitles the Assignor from “directly or indirectly” taking any steps to “lease, list for sale, advertise for sale, assign, convey, sell, transfer or otherwise dispose of” the property or any interest in it.
A potential exception – and this is important – arises if the Builder gives prior written consent, although in the more draconian version of these kinds of contract, that consent may be “unreasonably and arbitrarily withheld” by the Builder, essentially in its sole discretion. In other words, the Assignor is not allowed to deal with the property, unless the Builder gives its approval in writing; but in many cases the Builder has no obligation to give that approval and may withhold it for any reason whatsoever, including unreasonable and arbitrary reasons.
With that said, the “No Assignment” clause in some Agreements may allow for express exceptions or situations where the Builder will not arbitrarily withhold consent, for example: a) Assignments made to a member of the Assignor’s immediate family; or b) where the Builder has determined that a sufficient and satisfactory percentage of the available homes/units have already been sold.
The bottom line is that the basic clause in an Agreement of Purchase and Sale may or may not allow for the assignment of the Agreement to an Assignee, and if it is allowed, it will be subject to specified conditions such as obtaining the Builder’s written consent. Most Agreements will embellish this basic clause by adding further written stipulations such as:
- Having both the original buyer (Assignor) and the new buyer (Assignee) sign an Assignment Agreement that has been drafted by the Builder;
- Prohibiting the Assignor from assigning the Agreement until the Builder has managed to sell a certain percentage of the units in the overall development (e.g. 85 or 90%), and even then it must be with the Builder’s written consent;
- Requiring evidence that the Assignee has the necessary financing to complete the transaction;
- Requiring the Assignor to pay a fee to the Builder of (for example) $5,000 plus taxes as part of obtaining the Builder’s consent to the assignment;
- Requiring the Assignor to pay another fee plus taxes to the Builder’s lawyer (ostensibly as a “legal processing fee”);
- Obtaining the pre-approval of the lending institution or mortgagee that is providing construction funding to the Builder to an assignment including approval of the Assignee;
- Assuming the Builder agrees to the Assignment in the first place, prohibiting any further assignments of the offer by the Assignee to any subsequent party;
- Confirming that the breach of any of the Assignor’s covenants in relation to how and when an Assignment can occur will be considered a breach of the whole Agreement (and one that cannot be remedied); and
- Requiring the Assignor to confirm in writing that the property is not being purchased for short-term speculative purposes.
Note that even if the Agreement of Purchase and Sale does not expressly allow or provide for it in writing, some Builders will permit an Assignor to make an assignment nonetheless. This is because it is always in the Builder’s discretion to waive its right to insist on the purchase proceeding with the Assignor.
Getting the Builder’s Consent
It’s important to remember that, initially, the Assignor and the Builder had a valid legal contract in place that obliged the Assignor to purchase a home or condominium unit from the Builder. Subsequently the Assignor, for whatever reason – whether it’s a change of circumstances (such as a change in a marital situation, job transfer to another city, province or country; birth of children resulting in a home/condominium unit being too small for the buyer), cold feet, or simply the desire to make a profit – has subsequently decided to “sell” that right to buy to the Assignee.
Once consent has been obtained, there may be additional restrictions on the manner in which the Assignor can market the property. For example, some Builders will insist that the property is not to be listed on MLS (where it may be competing with the Builder’s own listings for still-unsold home and units in the same development); if the Assignor in fact does not comply with this prohibition it will be tantamount to a breach of the Agreement of Purchase and Sale which could entitle the Builder to damages and/or rescission of the Agreement of the Purchase and Sale while retaining the deposits paid, as well as the monies paid for extras and upgrades.
However, aside from any marketing/advertising restrictions that may be imposed, the Assignor must clearly indicate in any listing that it is an Assignment of an Agreement of Purchase and Sale, with a Builder and not merely an ostensible sale by the Assignor.
The potential problem with an Assignment Agreement is financing.
As usual, the transaction may be conditional on financing, which will be arranged based on the higher price that the Assignee has agreed to pay. With the current more stringent and continual changing mortgage requirements and regulations, obtaining financing for an Assignee may be challenging. This is something that needs to be investigated long before the Assignor and the Assignee start their negotiations in earnest.
The Assignor will want his deposit funds returned before closing, but if the Assignee does not have funds on-hand, he or she may find that financing is very difficult to obtain because banks do not advance mortgage funds at the time an Assignment Agreement is entered into; rather, the financial institution will provide funds only on final closing. Additionally, the Assignor will require a Deposit to be held in trust on account of the Assignment Agreement; i.e. on account of the Assignor’s profit. This can serve as a roadblock to the Assignee’s ability to repay the Assignor’s deposits and potentially to complete the Assignment Transaction at all.
Continuing Liability After Assignment
One key provisions in the Agreement of Purchase and Sale – and one that is easy to overlook – may significantly impact whether an Assignor will want to assign his or her agreement at all.
Even though the Assignor has essentially transferred his or her right to buy the property to the Assignee, the Assignor is not fully off-the-hook. Rather, under the terms of the Assignment document, the Assignor will remain liable to complete the contract if the Assignee does not complete the transaction with the Builder.
This written obligation appears in the Assignor’s Agreement of Purchase and Sale with the Builder, and is couched in terms that impose upon the Assignor continuing liability for the “covenants, agreements, and obligations” contained in the Agreement of Purchase and Sale. The net effect is that the Assignor remains fully liable should the Agreement between the Builder and the Assignee collapse. The Agreement may also stipulate that the Assignee, must sign an “assumption covenant” which creates a binding contract between the Assignee and the Builder.
The Assignor’s continuing liability under the Assignment Agreement is a major drawback in these types of arrangements. The Assignor always has to balance the risks and rewards inherent in this scenario.
Documenting the Transaction
Assuming that the Assignment of an offer is permitted by the Builder, then (as with all contracts) it must be documented to reflect the legal rights and obligations of the parties.
The technical aspects of an Assignment require more than simply taking the Assignor’s Agreement of Purchase and Sale with the Builder, scratching out the Assignor’s name, and replacing it with the Assignee’s name. Rather, a properly-documented Assignment transaction incorporates the Agreement of Purchase and Sale between the Assignor and the Builder, and adds a separate document called an “Assignment of Agreement of Purchase and Sale.” The Ontario Real Estate Association (OREA) provides a standard form that can be used, although in many cases those Builders who permit Assignments will insist that the Assignor and the Assignee use the Builder’s customized assignment forms, rather than the OREA standardized version which in my opinion is deficient! (See attached copy of OREA Assignment form)
The Specifics of the Deal –Who Pays What?
Recouping the Assignor’s Costs
At the point where the Assignment is being negotiated, the Assignor has typically paid a deposit(s) to the Builder, may have pre-paid for certain upgrades and extras, and has a large balance still owing. This means that in the course of striking a deal to achieve the assignment, the Assignor should give some serious thought to the various costs, fees, pre-paid deposits, and tax repercussions of the deal, and how these should be reflected in the price that he or she will want the Assignee to pay under the Assignment Agreement. The timing of the payment(s) will also be a consideration in the negotiation.
For both the Assignor and Assignee who are considering an Assignment transaction, here are some of the questions to ask:
- Does the price to be paid by the Assignee include any fee that the Builder is charging in exchange for the Assignor’s right to assign the Agreement of Purchase and Sale, or is it the Assignor’s cost? Usually, this will be the Assignor’s obligation, but the parties may negotiate otherwise.
- Does it include all deposits paid by the Assignor to the Builder, after the Agreement of Purchase and Sale was signed? Does it include any interest that has been earned on those deposits?
- Does it clearly state that the Assignee will take over the entire contract, including the adjustments that are to be paid to the Builder on closing? Or are those adjustments to be divided between the Assignee and the Assignor, and if so, in what portions?
- Does the price include money paid by the Assignor for extras and upgrades?
- Are there any additional deposits that are still owing to the Builder, under the original agreement?
- Does the Assignee agree to take on responsibility under the original Agreement for making additional deposit payments remaining to be paid until the final closing date?
- Does the Assignee have a full understanding of the amount of all the Adjustments that must be paid to the Builder pursuant to the original Agreement of Purchase and Sale?
- If the Assignor has negotiated any special financial incentives in the Agreement of Purchase and Sale, have these been addressed in terms of whether the Assignee will receive the benefit of them?
In any case, the final purchase price payable by the Assignee to the Assignor will typically be made up of:
- The outstanding balance owed to the Builder by the Assignor, that will now be payable by the Assignee;
- The total deposits already paid by the Assignor to the Builder;
- The total payments already paid by the Assignor to the Builder for any upgrades, extras, etc.; and
- The profit that the Assignor negotiates with the Assignee.
Deposits, and Interest on Deposits
The treatment of deposits, and the interest they may have earned, merits a brief separate discussion.
Under virtually all Agreements of Purchase and Sale with Builders, the Assignor will be required to pay a series of deposits to the Builder, starting with the initial deposit paid when the Agreement is signed, and on a payment schedule thereafter. The total of those deposits can be significant. How those deposits are treated will form part of the negotiations. Typically, the Assignor will get those deposits back from the Assignee as part of the overall purchase price of the Assignment transaction; he or she will usually receive them at the time the Assignment Agreement is entered into and the Builder has consented to the Assignment.
The question of who is entitled to the Interest on any deposits pre-paid to the Builder is also a topic for the Assignor and Assignee to discuss. In many cases, the interest will be only a small amount (if any) and may be credited to the Assignee, rather than the Assignor. However, in cases where the Assignor has paid significant deposits over time, and where larger interest amounts have accrued, the parties may want to negotiate a different outcome.
Land Transfer Tax
Land Transfer Tax is also an important consideration in Assignment Agreement arrangements.
When negotiating the deal, the Assignor and the Assignee must discuss the structure of the deal between them, to ascertain the exact selling price on which the Provincial Land Transfer Tax (and any Municipal Land Transfer Tax) should be payable; i.e. whether it is the Assignor’s price with the Builder (net of HST and the HST New Housing Rebate, which is discussed below), or whether it’s the newly-inflated price being paid by the Assignee under the Assignment.
Generally speaking, it will be the latter, although in some assignment arrangements the parties have attempted to structure it so that they pay the Land Transfer Tax based on the lower initial purchase price charged by the Builder, while taking the position that the difference between that and the increased price is merely the “fee” paid to acquire the original Agreement of Purchase and Sale (thus avoiding having the tax calculated on the higher sale price). Having talked to the Ministry of Revenue (Land Transfer Tax Division). this month .. their position is Land Transfer Tax is payable on the Total price paid by the Assignee to the Assignor.
In any case, once the Assignment Agreement is reached, it will be the Assignee who is obliged to pay the Provincial Land Transfer Tax and any Municipal Land Transfer Tax on closing, not the Assignor. I always strongly recommend that the Land Transfer Tax be calculated on the total price being paid by the Assignee.
HST and the HST New Housing Rebate
The issue of how HST is to be treated in an assignment scenario is a crucial one, but is fraught with pitfalls.
The first issue is how HST on the transaction should be calculated. Because the Assignee’s price will inevitably be higher than the one the Assignor agreed to pay to the Builder, there is an important issue as to whether the difference –being the Assignor’s profit – should be subject to HST (and if so, who will pay it in the transaction).
This determination hinges on whether the Assignment is a “taxable supply” under the tax legislation, and on whether the Assignor can be considered or deemed a so-called “builder” of the home for HST purposes. This, in turn, involves a number of complex legal concepts and factual findings – including the intentions of the Assignor as to whether the home was going to be a primary residence.
Next, there is the issue of the HST New Housing Rebate. In a typical scenario, the Assignor may have been entitled to the HST New Housing Rebate, based on meeting numerous qualifying requirements and stipulations. However, once he or she assigns the Agreement, that eligibility is obviously lost because he or she is no longer taking title to the home on closing. Only one HST New Housing Rebate application per dwelling can be made.
But once there has been an assignment, it is the Assignee’s circumstances that will determine whether the opportunity for an HST Rebate exists. He or she will have to meet the stipulated legislative requirements, and may either apply directly to the Canada Revenue Agency (CRA), or arrange with the Builder to have the rebate amount credited right at closing. (As earlier discussed this is a matter in the Builder’s sole discretion.
The Assignee may want to take steps to protect his or her position in this regard. For example, when negotiating the Assignment Agreement, the Assignee should make the agreement conditional on receiving written confirmation from the Builder that any HST New Housing Rebate will be credited to him or her on closing (assuming that the qualifying requirements are otherwise met). Otherwise, if this commitment is not in writing then the Builder, being entitled to exercise its discretion on whether to credit the buyer with the rebate amount on Final Closing, or withhold the credit and can make the Assignee apply to CRA for the HST credit directly after closing. Obtaining this commitment in writing is especially important given the likely lack of any direct dealing between the Builder and the Assignee.
Other Things To Consider
Who is Responsible for the Documentation?
In addition to ascertaining whether the Assignor or the Assignee will pay for certain items, it is also important to determine – in advance – which of them will take responsibility for preparing the documentation. The questions to ask:
- Who will prepare the documents needed to achieve the Assignment? And who will bear the cost?
- Will the Builder’s lawyer prepare both the Builder’s Assignment Agreement and the written Consent and at whose cost?
- Since the Assignee cannot renegotiate any of the provisions of the Agreement that the Assignor entered into with the Builder, are any of those terms objectionable, and if so, how will they be resolved and who will bear the cost?
As discussed, the Assignment Agreement will be conditional on the Builder giving its consent. From the Assignee’s standpoint, it should also be made conditional on him or her reviewing the original Agreement of Purchase and Sale (as signed by the Assignor), the Assignment Agreement, as well as any amendments, waivers, notices (and for condominium purchases, the Disclosure Statement) etc. If for no other reason, it will give the Assignee a chance to consider the specific list of additional adjustments for which he or she will be responsible to pay on Closing. Needless to say, this review should be undertaken with the guidance of an experienced real estate lawyer.
Once the terms of the Assignment are settled and the Builder’s written consent has been obtained, the Assignment Agreement must be drafted and the original Agreement of Purchase and Sale is attached as a Schedule.
Incidentally, the Builder may have certain requirements that must be incorporated into the process and accommodated as well. For example, the Builder may require the Assignee to provide I.D., and will need written confirmation that he or she has the financing required to close in place whether by mortgage or the Assignee’s own funds.
When negotiating the Assignment, the Assignor and Assignee must be aware of the impact of the New Home Warranty Program as administered by Tarion. Is the property considered a new home or a resale?
A final issue to be negotiated is who is paying the commission with respect to the Assignment Agreement transaction. This includes consideration of the specific commission rate, the price the commission is based on together with the details on how and when the commission gets paid.
While an Assignment Agreement can be beneficial to both the original and the Assignee – and even to the Builder (in extra fees) there are many issues to be considered, addressed, and negotiated.
As an agent, whether acting for the Assignor of the Assignee, make sure your client obtains proper legal advice prior to finalizing any Agreement to assign the original Agreement of Purchase and Sale.
“Be careful… be aware… and think!”