Annex F – Financing
The mandatory Promise to purchase form contains provisions regarding the purchase price and the method of payment. Since a deposit and a new hypothecary loan are the most frequent terms, the promise to purchase already contains conditions regarding these items. However, if the purchase includes other payment methods (e.g. cash purchase, assumption of an existing loan or a balance of the sale price from the seller), these need to be spelled out so that the conditions of performance and any consequences are clear to both the buyer and the seller. The form Annex F – Financing helps to clarify these conditions and consequences and its use is mandatory if required by the transaction.
F1. Reference to the principal form
As with any annex, the document to which it refers must be identified by entering the number of the promise to purchase in the boxes, i.e. the abbreviation of the form name and its number, regardless of the type of residential property. The forms referenced can be the following mandatory forms:
- Promise to purchase – Chiefly residential immovable containing less than 5 dwellings excluding co-ownership;
- Promise to purchase – Divided co-ownership – Fraction of a chiefly residential immovable held in divided co-ownership;
- Promise to purchase – Undivided co-ownership – Share of a chiefly residential immovable held in undivided co-ownership.
It can also be the recommended form Promise to purchase – Immovable.
The address of the immovable concerned by the promise to purchase must then be entered in the appropriate field.
In section F2. Optional conditions, the broker must check and complete only those clauses which apply.
F2. Optional conditions
Proof of availability of funds or equity in case of cash purchase
In cases where the buyer intends to pay cash, without a mortgage, or where the amount paid in cash is substantial, the broker should recommend to the buyer to make a substantial deposit, or to the seller to require a substantial deposit. More than a token of the buyer’s good faith, the deposit should testify to the buyer’s financial capacity.
Remember that a deposit received by a broker can only be deposited in a licensee's trust account. This means that licensees who do not have a trust account under recent regulatory relief cannot receive a deposit under any circumstances.1 For more details, read this article.
The broker’s advice should also take into account the particular context of the transaction and the person the broker is representing. For example, if the cash for the purchase of the property comes from the sale of another immovable, the situation can be more risky. The broker could advise the buyer to obtain a new loan (bridge) for a short period, which can be repaid once his property is sold.
This advice also applies when the broker is representing the buyer. Before making a transaction proposal, the buyer should be aware that the seller will require similar provisions in the agreement and will ask for them if they are not initially included. It is up to the broker to explain and advise the buyer that this is the best way to proceed if he wants to bring his purchase to fruition.
The seller assumes the risk of a cash real estate transaction and must ultimately declare himself satisfied with the proof of availability of funds which, as required by clause F2.1, must be submitted by the buyer. For example, this could be a letter from a financial institution confirming solvency, proof of a bank account balance or an investment. In the case of donations of money from family members, it is strongly advisable to obtain a letter or written confirmation from the donors.
The broker’s duty to inform and advise comes into play, particularly with respect to the time frame to enter for the buyer to provide the seller with proof of availability of funds. As with all financing clauses, and those requiring third party intervention, the parties should be given a reasonable time period to obtain the required documents and forward them, with a few days as a safety margin. It is a matter of good judgment. The broker’s expertise is also of primary importance when it becomes necessary to change the scenario of the transaction along the way, to harmonize the deadlines and the effects of the various conditions, and to find solutions to the obstacles that arise.
For more information: Certain precautions are required for a cash purchase
1 Section 43 of the Regulation respecting brokerage requirements, professional conduct of brokers and advertising (C-73.2, r. 1); Section 24 of the Regulation respecting records, books and registers, trust accounting and inspection of brokers and agencies (c. C-73.2, r. 4).
Penalty and liquidated damages
There may be circumstances in a transaction where the seller wishes to take additional precautions in the event that the buyer defaults on his promise to purchase and prevents the signing of the deed of sale. If this happens, the seller could suffer a loss because he will not receive the money he needed for another purpose, such as the purchase of another immovable, an investment, etc. This can happen with a cash purchase – where the promise to purchase seems precarious and the seller decides to go ahead anyway, albeit with protection – or where the buyer is abroad and it could be very difficult for the seller to exercise a possible action in title transfer if the sale does not go through.
Based on his judgment and his view of the situation, the broker could advise his selling client to protect himself by providing for a penalty that the buyer could be forced to pay.
The use of clause F2.2 Penalty makes it possible to withhold an amount in the broker’s or agency’s trust account to be used as a penalty if the buyer voluntarily prevents the signing of the deed of sale. The seller who avails himself of this option would then be able to obtain a predetermined amount in damages, without having to prove the prejudice suffered.
First, the number of the provision in the promise to purchase providing for a deposit must be entered (clause 4.3 in the case of the promise to purchase for a residential immovable containing less than 5 dwellings). The date on which the signing of the deed of sale is scheduled to take place must then be entered, failing which the amount of the penalty will be paid to the seller. This date may be the same as the date set out in clause 11.1 for the signing of the deed of sale or it may be a later date, to allow time for unforeseen circumstances that would delay this event by a few days. The amount entered may be the same as the amount already stated in clause 4.3, or it may be lower or higher. Where the amount is in fact higher, which could be the case in a transaction where there is no deposit but the parties provide for a penalty, the buyer must accompany his promise to purchase with a cheque for the required amount made out to the broker or the agency in trust. The name of the broker or agency trustee must be entered in the clause.
This approach, which departs from the usual practice of a deposit refundable to the buyer, should not be used routinely, but rather in very special cases. The seller who uses this clause should be aware that he will not be able to sue the buyer for title transfer if the transaction does not come to fruition through the buyer’s fault. One should also keep in mind that it would not be up to the broker or agency to decide and disburse the funds if the failed transaction were disputed. This would be the responsibility of a court, which could well reduce the penalty if it found it to be abusive.
For more information: When a party does not show up for its appointment with the notary
Earnest money agreement2
An alternative to the use of the penalty clause is to provide that the deposit paid against the sale price constitutes earnest money, i.e. an advance of funds, but also the penalty to be paid by the party (buyer or seller) who would cancel the promise to purchase. The earnest money clause provides that if the buyer withdraws, he will forfeit the amount paid; if the seller withdraws, the buyer will be entitled to a refund of the amount paid and the seller will have to pay him an equivalent amount, so that the buyer would receive double the amount he paid as earnest money.
This clause should be used if the parties agree that each can unilaterally withdraw from the promise to purchase in exchange for payment of the agreed penalty. Like the penalty clause, it should only be used in exceptional circumstances. In the vast majority of transactions, the payment of a simple deposit remains the preferred procedure.
The use of the earnest money clause, unlike clause F2.2 in Annex F – Financing, requires that the deposit clause in the promise to purchase forms (clause 4.3 in the mandatory promise to purchase forms) be replaced. It will be entered in the section Other declarations and conditions of the appropriate promise to purchase form or, if space is insufficient, in an Annex G – General or even in clause F3.1 Additional terms and conditions of an Annex F – Financing, and the deposit clause will be crossed out. The seller and buyer must initial the change.
For more information: Trust account: refund of sums received as deposits or earnest money
2 Refer to standard clause 3.1 in the article Standard clauses - 3 - Promise to Purchase.
Assumption of an existing loan
In addition to a cash purchase or a purchase financed by a new hypothecary loan, it is possible that the purchase can be paid for by assuming a mortgage already taken out by the seller.
This assumption could be a requirement of the seller, in which case the feasibility should have been verified with the lender and mentioned in the description sheet. If this is not the case, the broker must validate with the seller’s broker, or with the seller if he is not represented, whether the possibility can be considered and, in particular, what are the basic terms of such loans, the balance, rank, identity of the lender, interest rate, amount involved, or whether it is a subsidiary mortgage by which the financial institution has taken a guarantee equal to or greater than the value of the property and not limited to the value of the loan. The broker must consult the Land Register to gather the required information.
With this information in hand, the buyer will be able to judge the relevance of making it an element of his promise to purchase.
IMPORTANT: The assumption of a mortgage implies that the buyer benefits from the interest rate obtained by the seller.
This solution represents a risk for the seller, as he is not released from the debt and remains liable to his financial institution for the mortgage loan, even if the property is subsequently resold. It is therefore a transaction that is most likely to take place in the context of a purchase – sale between members of the same family, sale from parents to children, for example. It would be risky for the seller to undertake to assume his mortgage loan when the promisor-buyer is an unknown person.
Before completing clause F2.3 of Annex F, the broker must provide all necessary explanations to the parties and, if necessary, refer them to an expert (a legal or financial advisor) given the complexity and risks associated with the assumption of the mortgage loan.3
If the parties wish to opt for the assumption of the mortgage loan, the broker must describe the terms of the assumption in clause F2.3 of the mandatory form Annex F – Financing. The approximate overall balance, as already noted in clause 5.4 Existing loan of the Promise to purchase form, must be indicated. This amount will be adjusted at the time of signing the deed of sale. The terms of the loan must also be indicated.
Clause F2.3 provides space for two different loans to be described, as there may be situations where the seller has more than one mortgage, with different lenders, ranks and interest rates. If this is the case, both loans should be described. If there are three loans, which is rare, use an Annex G – General. When there are multiple loans available for assumption, the buyer may propose to assume only one of them.
The buyer must take the necessary steps with the mortgage lenders and provide the seller, within the deadline indicated in the form, with proof of the lenders’ approval of the assumption of the mortgage.
If the buyer does not provide this consent within the specified deadline, either because it was refused or because he did not receive a response, the seller will have five days to either take the action himself on behalf of the buyer or render the promise to purchase null and void by notifying the buyer in writing. If the seller chooses to take the action himself, he will have five days to obtain the lender’s consent. If he obtains it, this condition is met; if not, the promise to purchase becomes null and void. If the seller does not avail himself of either option, the promise to purchase becomes null and void. The five-day period provided for in clause F2.3.3, which is complementary to the period stated in clause F2.3.2, is mandatory since the consequence of its non-fulfilment is the cancellation of the promise to purchase. The deposit paid by the buyer will then have to be returned.
3 Section 80 of the Regulation respecting brokerage requirements, professional conduct of brokers and advertising (C-73.2, r. 1).
F2.4 Balance of the sale price
The seller may grant a balance of the sale price to the buyer, which means that the seller agrees to extend credit to the buyer and that the buyer does not have to pay the full purchase price at the time of signing the deed of sale. The buyer is therefore contracting a loan from the seller, the terms and conditions of which must be stipulated in the promise to purchase. Since such a balance is secured by an immovable hypothec, it is necessary to specify, in addition to the amount of the balance already indicated in clause 5.5 of the promise to purchase, the interest rate and its due date, the rank of this hypothec and the fact that it will be subsequent to one or more hypothecs securing one or more loans, which is frequently the case. It is also necessary to specify the terms of repayment, i.e. the minimum amount that can be paid, when it can be paid and whether it can be paid without penalty.
In addition, when a balance of sale is part of a promise to purchase, the broker must ensure that the deed of sale includes a resolutory clause as well as the usual guarantees for the repayment of a mortgage loan provided for in the Civil Code. The seller will have to give up his rank preference if the buyer takes out another loan without increasing the total balance of his mortgage loan. It is also necessary to specify the limitations to the buyer’s first-ranking mortgage and what can happen to the seller’s rank preference in refinancing cases. Finally, the conditions for the transfer of the balance of sale should be specified.
Clause F2.4 Balance of the sale price must be checked and completed with the required information.
F3. Additional terms and conditions
If the agreement between the seller and the buyer includes additional terms and conditions, such as proof of availability of funds, a penalty, assumption of an existing mortgage, balance of the sale price, or any other aspect, they must be added under section F3. Additional terms and conditions.
For example, this could include further clarification of the nature of the document required to prove the availability of funds or, in the case of a balance of sale, whether partial or full repayment cannot be made before a certain date.
F4. Initials
All copies must be initialed by all the parties to the transaction, or their representatives. A witness, if used, should also initial the document. Failure to initial where required could invalidate the provisions and therefore the agreement in the event of a dispute.
