What Your Lawyer Does in a Residential Real Estate Purchase
The Agreement and Purchase Of Sale
The initial involvement of a lawyer in a purchase or sale often involves reviewing an agreement of purchase and sale after it has been signed by the parties. Most lawyers would recommend examining an offer to purchase before it becomes an agreement with a lawyer. Most will do so without charging a client provided he or she represents the client in a subsequent purchase or sale. The lawyer can frequently identify potential problems in the agreement before it is signed making his or her job easier down the road.
Most lawyers look to the agreement of purchase and sale to form their basic "instructions" in opening and completing the work for the file.
If we were able to advise clients with respect to provision in a standard form agreement of purchase and sale we would suggest that the following items be noted in the drafting of the agreement:
- The closing date should never be less than a month and a half, as this leaves open the possibility that some searches that might reveal problems with the property might not be completed.
- The requisition date, being the date the lawyer has to complete his title search and put your objections to the vendor's lawyer should be set at about one month after the agreement is signed. This allows time for all the replies to letter search inquiries to come in and allow the purchaser to voice their objections and hopefully the vendor to rectify any problems with the property.
- It is vital that the agreement of purchase and sale make provision for a current survey which shows the location of all the existing buildings and structures, including garages, decks, pools and additions to and the main building. The survey should be delivered shortly after signing the agreement of purchase and sale. See my comments below with respect to surveys. In fact if the purchaser is going to accept an existing survey it should be inspected before it is agreed to be accepted.
- Provision in the agreement should be made for the vendor's lawyer to hold back $500.00 to $1,000.00 after completion until the purchaser's lawyer is able to ensure that all final utilities have been paid. This is particularly so with if the vendors are a couple who are separating as the cost of pursuing the vendor's for unpaid utilities often exceeds the cost of the unpaid accounts.
- When the purchasers ability to purchase the home is dependant on circumstances beyond their control such as obtaining financing and/or selling their home such conditions should be put in the agreement.
- A home inspection is always recommended in order to pick up the defects that are not readily evident or have been concealed by a vendor.
- If a rural property is being purchased which includes wells and septics special care and advice is necessary in drafting these agreements. Further, care should be taken when purchasing homes heated with oil or, having unused underground oil tanks.
Among the first items reviewed by your lawyer will be the survey. The land ownership records are kept and registered at the Land Registry Office. The records of this office set out the boundaries of the land which is being sold. However, rarely do the Land Registry Office records identify if or where, a building is on the land being purchased or sold. Therefore the only assurance you have that the home your are buying is on the lot you are buying is the Plan of Survey prepared by a Registered Ontario Land Surveyor. The survey performs several fundamental function necessary for the lawyer to complete the sale:
- It is the only evidence that the building being purchased is in fact on the land being purchased.
- It establishes that no buildings belonging to adjoining owners are on the property being purchased.
- It is the only method of determining if the buildings comply with the current zoning by-laws. Typically zoning by-laws restrict the size of buildings and the locations relating to the lot lines, known as the set-backs.
Typically, the mortgage company will not mortgage property without a survey and the lawyer's certification that he has confirmed that the property complies with all the zoning by-laws. It is not possible to determine compliance with zoning by-laws without a survey. An encroachment onto adjoining property or a serious infringement of the zoning by-laws could necessitate the removal of part of a building if a less destructive solution is not available. On occasion, a purchaser decides to purchase instructing the lawyer not to worry about the absence of a survey. This becomes a problem that the purchaser has to deal with as a vendor later on. The most common problem revealed by a survey is that the building does not comply with the requirements of the current zoning by-laws. The explanation is usually that the building is a legal non-conforming use, meaning that it is protected from the by-law because it was built legally before the zoning regulations came into use. This is an important fact because
if a property has a legal nonconforming use then the purchaser's lawyer must take steps to preserve evidence of this in the form of statutory declaration in order to assist his or her purchaser in the later sale of the property. Where it cannot be esblished that the buildings are legal nonconforming uses, a minor variance is usually required at an average cost of $1,500.00 to the at a later date if they sell not having had the issue resolved.
Municipal and Utility Search Letters
The next step for the lawyer in conducting the purchase of Real Estate is to send out letter search inquiries to the local municipality and utilities.
Letters are written to the local municipality to confirm that the property being purchased complies with the local zoning by-laws in terms of structures and permitted uses. For this the survey is sent and the municipality returns a confirmatory letter based on the information disclosed in the survey. A letter is also sent to the tax department of the local municipality requesting that the taxes be changed over to the new owner on the closing date and that a tax certificate be issued indicating there are any outstanding taxes. If taxes are unpaid they form a lien on the property and it will be sold. The purpose of the inquiry is to ensure that the vendor has paid all the taxes they are responsible to pay and that the purchaser will not be forced by threat of sale of the property to pay the vendor's taxes.
If the home is a new or relatively new home subject to a subdivision agreement an additional letter is required to ensure the subdivision agreement is in place. When a purchaser purchases a home subject to a subdivision agreement he or she becomes responsible for the developers obligations to complete the infrastructure and servicing in the subdivision, namely, installation of water, sewer, roads, lights etc.... However, the municipalities in that same agreement require the developer to post sufficient security for the municipality to hire someone else to complete the public works should the developer fail to do so. The purpose of this search is to ensure that the obligations of the developer are either fully completed, or that the security is still in place. This protects the purchaser from what otherwise would be a financial disaster if the developer was unable to finish. In addition, in the case of new homes, the Lawyer ensures the New Home Warranties is in place as the combination of the New Ho me Warranties and Subdivision Agreement usually combine to provide a purchaser with protection in the purchase of a new home without regard to the financial stability of the builder and developer.
Utility search letters are sent to all the utilities that generally service a property and vary depending on the property. The utilities typically searched include, gas, electricity, water and sewer. In some cases not all are searched as some properties are not serviced by all, for example, some houses do not have gas, while some condos carry the gas and water charges as part of common expenses and some don't. Also rural properties often don't have water or sewer charges, however, issues concerning potability and the conditions of septic beds must be addressed in those cases. These letters request the change over of the utilities to the new owner, that final readings be done on the day of closing, and inquire as to whether there are any utility arrears. Utility areas like taxes can form a lien on the home and force it's sale at a later date, or the payment of the areas by the new owner. Further, with gas an electrical utilities an additional inquiry as to whether the utility owns any equipment or h olds any leases of the furnaces and hot water tanks etc..., is made.
Typically it takes about one month to get a response for the municipal and utility inquiries and if not submitted in time one cannot insist that deficiencies in the zoning be rectified or that hold backs etc..., be made for delinquent utility accounts.
The Title Search
The main search done by a lawyer or a clerk hired by a lawyer is the title search which is a review of the records of the local Land Registry Office to ensure that the vendor can sell the property with clear title to the purchaser.
There are two systems of land ownership currently running in the Province of Ontario. The consist of the Land Titles and Land Registry systems. The costs and method of searching both are different.
The Land Titles System
In the Land Titles System, the Government guarantees the title of the property. In simple terms the Government says who the owner of the property is. The ownership of the land is still however subject to restrictions on title such as easements, or any mortgages. Searching a land Titles property is easy as the lawyer only need examine the last deed to determine the owner of the property and all other title problems are recorded on the title pages.
Most homes built in subdivisions since about 1980, as well as most condominiums are in the Land Titles System. However most older homes and undeveloped land are held in the Land Registry System.
The Land Registry System
The Land Registry System is the original system of recording land ownership in the Province of Ontario. In this system ownership is determined by the opinion of the lawyer examining the title to the property. The Land Registry Office in this case simply acts as an agency who holds on deposit and records all instruments that report to effect the property. Determining the validity of ownership is a matter for the lawyers who examine the title documents for 40 years to establish clear title to the property. In doing this the lawyers must examine each deed or other instrument within 40 years for mistakes and proper transmission of the property. This also makes the search much more expensive particularly as executions must be searched for each owner during the last 20 years at a cost of $11.00 a name. (See step 3 below)
Steps in a title search:
- The first step in any title search is for the lawyer to look at the abstract pages in a the abstract book containing the information about that lot. The abstract book is simply and index to all the documents on file at the Registry Office that effect that land. This documents are indexed by a Registration Number.
The second step is to then obtain the documents from the registry office and copy then and review them for completeness and errors. The lawyer is generally looking for the following:
- The person transferring property in a deed is the same person as the one who received it in the prior deed.
- The document is properly signed and dated and witnessed where appropriate.
- The document is in the proper form containing the proper language.
- The person transferring the property was of age of majority and if married that their spouse consented to the transfer.
- That the taxes on the property were paid.
- The legal description of the property is correct
In the case of Land Titles only the last deed is examined as the ownership is guaranteed by the province, with Registry however the deeds must be examined for a period of 40 years for correctness.
- After determining that the deeds appear to have given good title to the vendors the lawyer then searches executions. Executions are judgments registered in the land registry office, which if outstanding at the time a person owned the property form a lien on the land and that person cannot or could not convey good title to the property. In Land Titles executions are cleared up with each transfer and a search need only be made of the current owners of the property. In Land Registry the same process does not apply and the lawyer must search all the owners for the last 20 years. The cost for each name searched is $11.00 a name. The bad new is that the executions are indexed by name and if you have a common name or an evil twin executions will show up against you because of the other person.
- The last aspect of the title search is to ensure that the land was not illegally severed (subdivided). If the initial review of the abstract does not reveal that a consent was obtained to the creation of this separate lot, then the lawyer must search to the properties immediately adjoining the land being purchased to see if there was consent or wether the severance predates the forgiveness period.
The lawyer then takes the information obtained by him or the clerk to determine if there are any defects in the title documents, any executions effecting the property, lien's, mortgages or other problems effecting the property. The lawyer then examines these problems to determine the seriousness of the problem, the most appropriate way to fix the problems and uses this as his basis for requisitions to the other lawyer.
The Requisition Letter
The lawyer review the responses to the utility and municipal inquiries along with the results of the title search. The problems that need be solved and how the purchasers lawyer thinks they should be fixed are then formally put to the vendors lawyer for correction. At this the purchaser's lawyer also submits the document that he or she wishes to have completed by the vendor. Such as documents concerning urea formaldehyde insulation, the vendors residential tax status, the ownership of the household chattels, and documents that establish uninterrupted possession of the property or that answer any issues such as legal nonconforming uses.
The Response to Requisitions
The Vendors lawyer then reviews the requisition letter from the purchasers lawyer and formally responds to the requests for correcting items. He or she then prepares the deeds statement of adjustments, and any other documents.
On closing the lawyers or their agents physically meet at the local Land Registry Office. There they exchange the documents, deeds, money and keys previously agreed to. The lawyer for the vendor then promises to remain at the office holding the money until the lawyer for the purchaser confirms that he has registered his client's title. The purchaser's lawyer then does what is called a subsearch, which is an updating of the previous search by way of checking the abstract book for new registrations and searching executions against the purchasers and vendors. If all the items are clear than the lawyer registers the deeds and the transaction is closed.
A special note should be made of mortgages. In acting for a client a lawyer also usually acts for the bank holding or giving a mortgage. The lawyer then also has to follow the banks instructions. The banks usually do not provide the lawyer with a discharge for the mortgage on closing. Accordingly, the deal usually closes with a mortgage on title. The closing is accomplished because the rules of the Law Society in effect render the Lawyers something akin to being bonded. The lawyer for the vendor will obtain a commitment from the bank to discharge the mortgage upon the delivery of the funds to the bank. That lawyer in return will promise the other lawyer personally by way of a written promise on pain of professional sanction to have the mortgage removed by taking the funds directly to the bank after closing. Accordingly the transaction is able to close.
In explaining to clients what is involved in a real estate file most people are unaware of how much work in involved. The laywer usually spends an average of 3 hours on the file reviewing the title search and any problems from the letter search inquiries, the survey, the agreement of purchase and sale, the requisition letter, reviewing the final documents attending to signing and reviewing and signnig the requisition letter. The Real Estate secretary usually spends a approximately 10 hours on the file from sending out the intial letters to preparing all the documents and making the closing arrangments. In addition, the lawyer or a law clerk usually spends 3 hours to a day doing a title search and another 1 or 2 closing the file at the registry office. In other words the lawyer is charging less in a Real Estate Deal than the garage that fixes your car.