Podcast Episode 118: “Big Changes To The Standard AREA Contract.”

September 2016 (with mild tweaks in July of 2017) brought numerous and meaningful changes to the existing 2014 residential purchase documentation approved by the Alberta Real Estate Association (AREA). These changes affected both the Residential Purchase Contract used for all homes and houses and the Residential Resale Condominium Property Purchase Contract, used for condominiums. Existing wording has been modified and new wording added. As we go through our commentary, we will refer to the contracts as the 2014 contract and the 2017 contract. This podcast and the accompanying text explain the changes and what they mean for buyers, sellers, realtors, and lawyers dealing with real estate in Alberta.

Download the audio file HERE.

Download the handout HERE.

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20 years ago, the standard real estate purchases contract was one page and completely inadequate. AREA, with the help of the Multiple Listing Service, started a consultation process and spent a ton of money completely revamping the standard contract. Since that time regular revisions have been made, always with a view to making the contract better. Overall, we believe the changes are improvements in a continual improvement process that AREA has driven for near 20 years.

The results are improved contracts, schedules, addenda and notices. Buyers, sellers and realtors are all served well by this ongoing consultation process, which aims at better disclosure and plainer English for contracts that produce a clearer, more precise buying and selling experience. While I don’t expect you to be a lawyer, I do encourage you to read every scrap of legal paper that is put in front of you. Yes, it’s the standard contract, but the versions of the contract before this version were also the standard contract and things have changed. Read your documentation two or three times. Ask questions.

Our most successful clients never sign anything blindly; they know what’s in their contracts. Your best bet is to read this Tale along with copies of the 2014 and 2017 contracts. Ask your realtor for a copy. If you can’t get the 2014 contract, then at least read this handout along with the 2017 contract.

Alright, let’s get on to commenting on changes to the contract documentation. We’ll start with the Residential Purchase Contract for homes/houses. Separate comments will be made for condominiums. Some changes are of more interest to buyers and some more to sellers. Some should interest buyers and sellers equally. As we go through the changes, we will make supplementary comments on what is more important for whom.

1. 
   

   Purchase Price Details: 2.1

   
   

   The new 2017 AREA purchase contract replaces the old 2014 financial details clause that talked about deposits, assumption of mortgage, new financing, seller financing, and other value. The new clause 2.1 shows purchase price only. Clauses 4.3 and 4.4 deal with the initial deposit and additional deposits. Everything regarding new financing, assuming mortgages, seller financing, and other value has disappeared. According to AREA, the rationale for this change is that the portions regarding assuming mortgages, seller financing, and other value were rarely used. A buyer getting new financing is common but that required the buyer to insert principal amounts, interest rates, and other mortgage details that they weren’t sure about or that changed. This was a confusing clause.

   
   

   Now, if buyers are getting new financing, it’s up to them to get their own new financing. The contract deals with their deposit(s) and the purchase price and the rest of the money is up to the buyer. This change is not a big deal but it changes the look of 20 years of previous contracts.

   
   

   Should one of those rare situations show up where there is consideration of assuming a mortgage or seller financing or other value, then use the new financing schedule to provide details.

   
   

   Vacant Possession: 2.3
   
   The 2014 contract said that the seller would give the buyer vacant possession, “subject to the rights of existing tenants, if any.” The seller’s obligation in 2017 is to provide vacant possession to the buyer. If there are tenants and the buyer is accepting the tenants, then the contract should be amended to show that the buyer will be taking over the existing tenancy or tenancies.

   
   

   If the buyer is accepting a tenant or tenants, there is a brand-new tenancy schedule where the seller discloses the details of the to-be-assumed tenancies. If the seller promises vacant possession but there is a tenant at the time of possession, then the seller attracts liability for his failure to provide the buyer what he promised.

   
   

   Seller and buyer should work together to ensure that the appropriate notice has been given to the tenant with sufficient time pursuant to the Residential Tenancies Act and or the lease(s) that are in effect. Buyers might want to require the seller as a term of the contract to provide a copy of the Notice to Tenant.

   
   

   Buyers might further want to speak with the tenants to make sure they have the notice and that they intend to leave. Yes, if a tenant doesn’t leave when they are supposed to, the seller has liability but that might require court action which is always time-consuming, stressful, and potentially expensive for both parties. Better to work on the practicalities of making sure the appropriate notice documentation has been given which the tenant acknowledges. Watch for any signs that they might be thinking of staying on when they should be leaving.

   
   

   State of Property: 2.4
   
   “The seller represents and warrants that on Completion Day, the Property will be in substantially the same condition as when this contract was accepted and the attached and unattached goods will be in normal working order.”

   
   

   Comments: the additional words make it clear that the seller is representing and warranting the state of the property and the attached and unattached goods. This is a big change; previously the attached and unattached goods were not mentioned at all and the seller’s statements were not an enforceable representation and warranty that survives the closing. See s.6 for other seller representations and warranties.

1. 
   

   General Terms: 1(a-m)

   
   

   Usually the kinds of things dealt with in this clause are what people referred to as “boilerplate” clauses and found at the end of contracts. 2017 emphasizes the importance of these things by moving them to the first page of the contract. This is an extensive clause.

   
   

   Specifically:

   
   

   1(d) clarifies the definition of ‘Business Day’ and specifically notes that Business Day includes all hours of the day.

   
   

   1(f) strengthens the seller’s obligation to disclose ‘Material Latent Defects’. 2014 read, “except as otherwise disclosed, the Seller is not aware of any defects that are not visible and that may render the Property dangerous or potentially dangerous to occupants or unfit for habitation.”

   
   

   Contrast this with 2017 3.1 (f) which reads, “the seller will disclose known Material Latent Defects. Material Latent Defect means a defect in the Property that is not discoverable through a reasonable inspection and that will affect the use or value of the Property.” There are at least three major changes in this changed clause.

   
   

   Firstly, the word “defects” in 2014 is replaced by “Material Latent Defect” which is more precise and reflective of how courts look at this issue.

   
   

   Secondly, “… Defects that are not visible…” in 2014 is replaced by “… A defect in the Property that is not discoverable through a reasonable inspection…”

   
   

   Thirdly, the words “… may render the Property dangerous or potentially dangerous to occupants or unfit for habitation.” are replaced by “… that will affect the use or value of the Property.” Using the words “dangerous or potentially dangerous” in 2014 and adding that extra portion regarding “unfit for habitation” was too restrictive and subjective. It allowed sellers to make their own judgment about the meaning of “dangerous.” A defect that affects the use or value of the property is more encompassing and less subjective. Sellers should think carefully about agreeing to this general term.

   
   

   1 (g) for 2017 states, “the seller and buyer are each responsible for completing their own diligence and will assume all risks if they do not.” While