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Holdbacks: Pre-owned Homes

The best way to avoid disappointment with the condition of a home when you buy pre-owned real estate is to complete a pre-possession inspection of the property.

This is true of all transactions involving developed or improved land and applies equally to condominiums and houses. It is critical for the purchase of new homes as well, but the issues are quite different and I will address them another time.

The inspection will involve a detailed comparison of the property as identified in the purchase contract which is often completed weeks or months earlier, with the condition of the property as it exists on the possession date. This process is necessarily simplified if the buyer has completed a professional home inspection as either a condition or term of purchase near the time that the contract was executed.

The pre-possession inspection should also be used to test and inspect all additional chattels included in the contract like appliances, window-coverings and garage door openers and to verify the working condition of fixtures including plumbing, electrical outlets, lighting, windows, doors, furnace, water heater, water-softener, security system and any other special features of the home.

In most cases it will be completed with your realtor’s assistance and expertise. It often takes at least an hour. To be of value it must take place before the release of keys and exchange of possession, ideally at about 10:30 a.m. on your possession date. In most pre-owned residential real estate contracts in Alberta, the risk and obligation of repair and maintenance of real property is the seller’s until noon on the date of possession. As such, any defects not disclosed at the time of the execution of the contract that are identified prior to the release of keys are legally the responsibility of the seller.

Disclosure of the defect before possession changes hands is critical because if the seller refuses to rectify the defect, any lawsuit for the repair or replacement is far less likely to succeed if the problem isn’t disclosed until days or weeks after the exchange of possession, and after risk has shifted to the buyer. In cases where a purchaser identifies a defect after taking possession, the seller may successfully blame the defect on the buyer. Any lawsuit is more likely to fail and the opportunity for a “holdback” is lost.

In unusual cases of disaster: major floods, explosions or fire for example, the pre-possession inspection critically gives a buyer the opportunity to stop the purchase from closing if, prior to the risk of ownership passing, the subject of the contract is substantially compromised or lost.

If the buyer fails to inspect the property before the lawyer releases money, the opportunity to stop the transaction would be lost and recourse may involve the complex and time consuming recovery of monies through the courts or insurance. With respect to more minor defects discovered upon the pre-occupancy inspection of pre-owned residential properties, it may be possible to negotiate what is commonly referred to as a “holdback”.

A holdback is an agreement wherein a portion of the sale price is withheld, pending the resolution of a problem or defect by the seller. A buyer cannot impose contrary to popular opinion holdbacks unilaterally. Some sellers and their lawyer’s will not entertain hold-backs at all. Others take a more flexible approach. If upon a pre-occupancy inspection it is determined that the water heater leaks for example, the buyer cannot simply advise his lawyer to hold back monies at closing. As an included fixture the water heater would in most contracts be required to be in good working condition at the moment of possession. The process of curing the defect involves requesting that monies be withheld from the closing.

The buyer’s lawyer might request that $ 500 be withheld from the sale proceeds by the seller’s lawyer until the water heater is fixed or replaced. The seller might agree or disagree with the proposal, but no money could be withheld until an agreement is reached, otherwise the buyer and his lawyer have likely breached their obligations under the contract and the conveyancing transmittal letter. Without such an agreement the buyer must close and release the full adjusted sale price in all but the most unusual of circumstances, like the flood or fire examples discussed above.

In a case of a minor defect when the seller refuses to agree to a hold-back or adjustment as to the price, a buyer is left with two options: firstly, in many cases the most economic solution is for the buyer to rectify the defect at his or her own expense and swallow the cost. Secondly, in cases of a more substantial nature, but which still fail to meet the requirements of the fundamental breach of contract, like a situation where the water heater leaks, small claims court remains the only viable option for recovery in Alberta. The reason once again that the pre-occupancy inspection is so critical is because a law suit has little chance of success if the problem isn’t identified and disclosed to the seller or seller’s lawyer before the risk of ownership shifts.

Any questions regarding this or any other issue, please contact us.