Regardless of whether you are buying your first property or investing in a new property, embarking on a real estate journey in Alberta can be both thrilling and overwhelming. From the initial excitement of finding the perfect property to the meticulous details of closing the transaction, every step in the process requires careful consideration by all parties involved. One of the nuances that often leaves buyers and sellers scratching their heads is the concept of holdbacks. These terms play a pivotal role in shaping the financial aspects of a deal and ensuring that both parties meet their obligations. 

This blog will provide an overview of the purpose and significance of holdbacks in real estate transactions. 

Understanding Holdbacks in Real Estate Transactions

Holdbacks are a tool used in real estate transactions when an offer to purchase is accepted. They operate to protect the buyer as they allow for easier resolution of issues between the parties. A holdback clause is a contractual term that can be used in order to ensure that a seller fulfills their commitments at closing time. 

Holdbacks can be used in several scenarios. However, they are most commonly used when defects or damages are found on the property. If this occurs, the buyer will request a cost estimate to make the necessary repairs, and the seller will be requested to remedy such issues. As such, if the seller agrees to fix such damages or defects, a portion of the sale proceeds will be withheld by either party’s lawyer in trust based on the estimated repair cost. After the work has been completed, this holdback amount will be released to the seller. If the seller’s undertaking to resolve the issue is not completed within the requisite time frame, the holdback funds may be released back to the buyer or may be utilized to make the repairs. 

Key Elements of a Holdback Clause

Parties might negotiate a holdback in two scenarios. It may be written into the purchase and sale contract as a provision following negotiation between the parties if issues are identified before the contract has been entered into. In these cases, the terms of such holdback can be clearly outlined and agreed upon early on in the transaction. In other cases, a holdback may be negotiated between the parties’ lawyers before or on the closing date. 

A holdback clause can help ensure that the seller takes care of a property’s deficiencies and repairs before closing. However, the language of this clause in a purchase contract must be very specific to be effective and protect the parties. As such, there are several key elements that a holdback clause requires, which are outlined below:

 Description of the seller’s obligation

The holdback provision must clearly describe the scope of the repair or task that requires completion and the work’s expected quality to avoid future disputes. Further, attaching a detailed quote can provide the parties with clarity as to the exact expectation of the work to be completed. This also allows the seller sufficient time and instruction to fulfill their obligations. 

Timeframe for completion

The contract must set a firm timeline that is reasonable to both parties. When determining the time frame, parties should factor in unfavourable weather conditions and material delays that may interrupt the repairs. 

The holdback value

The holdback amount is relative to the task or repair that needs completion, as the seller may not agree to make such repairs if the amount is substantial. For example, a seller may determine it makes more financial sense to forfeit the holdback instead of meeting their obligations and completing the repair, which often results in complications and litigation. 

Determining completion of the seller’s obligation 

Determining when a seller has completed their obligation to repair the deficiencies will depend on the parties and the circumstances of the transaction. For example, in some cases, getting a receipt for the work is sufficient, while in other instances, a trigger to release funds from a third party may be required. Alternatively, the parties may determine that a statutory declaration from the seller declaring that the work has been completed satisfies this requirement. 

Holdback release and consequence for non-completion

Including exact provisions for how and when holdback funds will be released to a buyer is important to ensure the parties understand how the funds will be released to the appropriate party. If the seller fails to complete the repairs or fulfil their obligations, depending on the nature of the breach or failed obligation, the buyer may rectify the defect at their own expense and seek damages from the seller in small claims court. 

As an additional layer of protection, a holdback clause should also outline who will cover any additional costs if the repair costs exceed the amount of holdback funds held in trust. 

Minimizing Risk When Using Holdbacks 

Holdbacks function to resolve unexpected situations and defects in real estate transactions. Accordingly, ensuring that a holdback clause is comprehensive and contemplating various scenarios is key to ensuring both parties understand their rights and obligations in resolving the issue. If a holdback clause is poorly drafted, it may complicate the real estate transaction further. 

While holdback clauses can be beneficial in some cases, parties should be mindful that they may not always be relied upon. As such, it is important to consult with an experienced real estate lawyer to ensure that a holdback clause is properly drafted to protect you and your financial investments. 

Contact the Real Estate Lawyers at Getz Collins and Associates for Pragmatic Real Estate Solutions

The trusted real estate lawyers Getz Collins and Associates regularly work with clients in residential and commercial real estate transactions. We understand that real estate transactions are substantial investments, so we work closely with our clients to help them navigate the uncertainties that can arise during the transaction. Whether you need assistance reviewing your purchase and sale agreement, are refinancing, or are involved in a real estate dispute, our team is ready to help. 

Getz Collins and Associates has offices conveniently located in Calgary and Strathmore and proudly represents clients throughout Alberta. To speak with a team member and learn how we can help you, contact us at 587-391-5600or online.