5. Method of payment
While the price offered by the buyer may seem to be the most important item in the promise to purchase, the breakdown of the amount according to the buyer’s sources of the funds is equally important.
The Promise to purchase form provides that the purchase price can be covered by any combination of five different payment methods: deposit, additional sum, new mortgage loan, assumption of an existing mortgage loan, and balance of the sale price from the seller. Each of these payment methods may have specific terms and conditions that must be met and can be the subject of negotiations.
The sum of these amounts must correspond to the purchase price indicated in clause 4.1 of the promise to purchase.
Additional sum
The additional sum represents the portion of the purchase price that will be paid in cash by the buyer and that is added to the deposit mentioned in clause 5.1, if such a deposit is made. This sum must be paid to the acting notary, in trust, within the period set by the latter. The notary may require that this amount be paid to him several days before the signing of the deed of sale, given the clearing periods of financial institutions.
In the event of a cash sale, if there is a deposit, the broker must enter the amount corresponding to the difference between the purchase price and the deposit. If there is no deposit, the amount entered should be the purchase price. The broker should always recommend that a deposit be paid in a cash sale. The seller could reasonably request a larger down payment than in the case of a purchase with a new loan.
If the buyer plans to take out a mortgage loan, the amount of the additional sum entered may be the difference between the purchase price and the sum of the deposit plus the new loan, with any variation being possible.
In the case of a cash purchase or if a substantial sum is to be paid in addition to a mortgage, the broker must complete Annex F – Financing and check clause F2.1 so that the buyer can demonstrate that he has the necessary funds to cover the purchase price.
For more information: Certain precautions are required for a cash purchase
New loan
When the buyer needs to take out a loan, in addition to his deposit and cash down, the amount of the new loan must be entered in clause 5.3. This is a loan secured by hypothec, the obtaining of which by the buyer is most often an essential condition for the conclusion of the transaction. It is rare that buyers have the financial resources not to need this. The money obtained in this way must be paid to the notary within the period set by him, as in the case of the additional sum.
The terms and conditions for obtaining the mortgage loan are specified in clause 6.1. The hypothec is not the loan, but rather the lien that the lender takes on a property, movable or immovable, which is assigned as security against the buyer’s obligation to repay his debt. In the event of default by the buyer, the lender is then entitled to repossess the immovable, sell it or have it sold and have priority to recover the proceeds of the sale corresponding to what it is owed. This priority is established according to the rank of the hypothec and the date of its registration in the Land Register.
It is common, and even desirable, for the buyer to already have a pre-approval from a mortgage lender indicating the maximum amount that the lender is willing to lend for the purchase of an immovable. Such a pre-approval may even include an interest rate guarantee for a certain period. Ideally, the buyer should obtain this document at the beginning of the process. This document helps to guide the buyer’s search and confirms the analysis of his financial capacity. It can also help during negotiations, reassuring the seller about the buyer’s seriousness and capacity to pay. Some sellers even make it a requirement upon receipt of any promise to purchase.
The pre-approval document may be general in nature or may relate to a specific property. It does not, however, constitute proof of the lender’s undertaking (real and unconditional) to grant a new mortgage loan, which undertaking must be made in accordance with the provisions of clause 6 of the Promise to Purchase form.
Loan not secured by hypothec
A loan can also be a traditional one, i.e. not secured by hypothec. The word “hypothecary” in clause 5.3 must then be crossed out and initialed by the buyer and the seller. The same will apply to the provisions of clause 6.
Existing loan
When the buyer undertakes to assume an existing mortgage, the broker must record the approximate overall balance on the mortgage, which will be adjusted at the time of signing the deed of sale. There may be more than one mortgage.
It is possible that such an assumption is a requirement of the seller and that this is already mentioned in the description sheet. If not, the broker must validate with the seller (if unrepresented) or his broker the feasibility of this assumption and the basic terms of loan(s) (balance, mortgage rank, identity of the lender, interest rate, payments, term and amortization, etc.). The broker must verify the type of mortgage, whether a mortgage line of credit is attached to it or whether it is a subsidiary mortgage by which the financial institution has taken a guarantee equal to or even higher than the value of the property and not limited to the sole value of the loan.
With this information in hand, the buyer will be able to judge the suitability of the scenario and make it part of his promise to purchase. The terms of the assumption should be entered in clause F2.3 of the mandatory form Schedule F – Financing, and the buyer should be instructed to initiate the mortgage process and provide the seller with proof of the lenders’ consent to the assumption of the mortgage within a certain time period. If the buyer does not provide this consent within the specified deadline because it has been refused or because he has not received a response, the seller then has five days to elect to take the steps himself on behalf of the buyer or to render the promise to purchase null and void by notifying the buyer in writing. If the seller chooses to take the action himself, he has five days to obtain the lender’s consent. If the seller obtains the lender’s consent, this condition is met; if not, the promise to purchase becomes null and void.
Balance of the sale price
The final source of funds is where the seller, in order to cover a shortfall, lends the money to the buyer corresponding to the balance of the sale price. There are three reasons why it may be attractive for the seller to participate in the financing:
- earn interest income;
- diversify his investments;
- bring about the sale even if the buyer does not have all the resources required at that moment.
Less used in a very active market favouring sellers, the balance of the sale price can become a very useful tool in a market favouring buyers. It all depends on the respective situations of the buyer and the seller. A seller who is considering buying another property at a higher price than the one he is selling will not want to consider this option since he needs his money. However, if the property is debt free and he is buying a smaller property or not buying at all, he may see this as a good opportunity.
It is best to check with the seller or the seller’s broker beforehand to see if this is an option and under what conditions. If the buyer requests a balance of the sale price, the broker must complete Section F2.4 of mandatory form Annex F – Financing, which includes the relevant clauses regarding the terms of the loan, guarantee, rank preference and transferability.
The balance of the sale price provision also includes a statement that the deed of sale will contain a resolutory clause, allowing the seller to request resolution of the sale if the buyer defaults on payments. Such a right can only be exercised within five years following the sale. Consequently, the broker must not indicate a term that exceeds five years if he wants to ensure that the seller keeps the same guarantees throughout the agreement.
The first paragraph of clause F2.4.2. Guarantee and prior claim also provides that the seller consents to give up priority of rank should a new hypothec be created, renewed or replaced with a prior claim of rank, provided that the balance of the other loans is not increased and that the buyer is not in default of fulfilling his obligations.
The last two paragraphs of F2.4.2 are intended to protect the seller’s guarantee, in the event that the seller gives up his priority of rank pursuant to the first paragraph, and thus avoid the seller being obliged to give up his rank for an indefinite period of time and being at the mercy of the buyer, who could, through new borrowings, reduce the value of his guarantee.
The buyer’s first ranking hypothec must be with a “fixed amortization” and without a clause allowing him to re-borrow from capital. Furthermore, the hypothec can only secure one term debt, excluding all future debts and credit lines. In addition, if the seller must consent to give up his priority of rank, in the context of a refinancing of the property, he will not be required to do so if the refinancing is for a capital amount greater than the outstanding balance on the current first rank hypothec.
Finally, clause F2.4.3 – Transferability states that the balance of the sale price shall not be transferred without the prior written consent of the seller, so that the seller may know and qualify the person for whom he will act as lender.
Total price
The broker must ensure that the total price is actually the sum of the amounts in clauses 5.1 to 5.5 and that it corresponds to the purchase price entered in clause 4.1.
Change during the negotiation process
It is likely that the negotiation that follows the presentation of the promise to purchase to the seller will result in changes to the purchase price. In this case, in addition to amending the price in clause 4.1, the broker must modify the method of payment information.
The form Counter-proposal to a promise to purchase must include the changes made to sections 5 (Method of payment) and 6 (New hypothecary loan) of the Promise to purchase form. If necessary, the broker can complete a new Annex F – Financing and attach it to the counter-proposal.
