Assignment agreements with condos a tricky business
By Paul Russell, AdvocateDaily.com Contributor
Assigning or “flipping” a condo unit is risky for both parties, so be sure to get legal advice from someone well-versed in this area of law, says Toronto condominium lawyer Warren Kleiner.
“Agreements of purchase and sale signed with developers are some of the most complicated contracts that you’re going to see. They are long, come with disclosure statements, are invariably heavily weighted in favour of the vendor, and many are entered into years before the unit is actually ready,” says Kleiner, partner with Shibley Righton LLP.
Assignment agreements arise when people buy a condo unit in a building yet to be constructed, then sell it before the complex is built, he tells AdvocateDaily.com.
“There is nothing physically for them to sell, so people assign their interest in an agreement of purchase and sale to the new purchaser, or assignee,” Kleiner says.
He advises that these agreements should only be done by experienced real estate lawyers who understand the many risks involved for both the assignee and the assignor.
“One thing that I find that is left out in a lot of these agreements is any consideration of the profit the assignor is entitled to,” Kleiner says.
He gives the example of a unit purchased for $1 million, then assigned a few years later to another party, when its value has increased to $1.1 million. The assignment contract should stipulate when the original owner is entitled to that difference, whether at the time of entering into the assignment agreement or upon closing, with consideration also given to the fact that the original purchaser put down a deposit on the unit, Kleiner says.
“Some of these assignment agreements are entered into with deposits that are substantially less than the deposit being held by the vendor. The person buying the unit should reimburse the original purchaser for the deposit, so it is their money being held by the developer, and not the original buyer’s, but I see many of these assignment agreements that neglect to deal with the idea of the deposit,” he says.
In some cases, the developer will close directly with the assignee, Kleiner says.
“In other cases, it is more complicated and we end up with a form of three-way closing as the vendor wants to deal with the original purchaser and not the assignee," he says. So now documents are coming multiple ways, which can be very complicated, as there are a number of issues about how the closing is going to work, and when monies are paid to which party."
Some agreements of purchase and sale will explicitly state that the original purchaser is on the hook for liability, notwithstanding any assignment agreement they sign later, he warns.
“So ultimately, if the person you’re assigning to doesn’t close the deal properly, you’re held liable by the vendor,” Kleiner says.
Other vendor contracts prohibit assignment agreements altogether unless the vendor has given consent, he says.
“Developers don’t want unit holders competing with them when they still have condos for sale, so they often won’t let you assign a unit until all their units are sold,” Kleiner says.
Another wrinkle is the original contract could stipulate that a fee, which could reach up to $15,000, will be charged for obtaining the vendor’s consent, Kleiner says.
When any condo unit is first sold, he says the original purchaser receives a disclosure statement, giving detailed information about the building, such as how many units it will have, what the structure will look like, if it will share facilities with adjoining buildings and how much visitor parking there will be.
Buyers have 10 days to review the agreement and back out of the deal if they want, Kleiner says.
“The assignee should also have the chance to review these documents, so they know what they are buying into,” he says. “If I’m going to be taking an assignment of a new condo, I don’t want to later find out that three rental buildings are going to be sharing our pool, which I will not know unless I have a chance to look at the disclosure.”
Considering the complexity of assignment agreements, Kleiner says it is not surprising that some real estate lawyers refuse to handle them.
“There are all these different things that you really have to be careful about,” he says. “However, if the agreement is done properly, with the unit going to the right person and the assignor getting the money he or she is entitled to, then everyone will be happy.”