1. What is an Assignment of Contract of Purchase & Sale?
It is the transfer of an interest in the contract from either the original Vendor or Purchaser [the "Assignor"] to a third party [the "Assignee"].
In the present real estate market the Assignor will usually be the original Purchaser under the contract. The Assignee will be the new purchaser [who is going to become liable to purchase under the Assignor's original contract].
2. Are all contracts assignable?
Generally speaking all contracts are assignable unless specifically prohibited by law or by the terms of the contract itself. The contract may prohibit assignments or permit them on specified conditions i.e. approval of the assignee by the developer or payment of a fee to the developer.
3. Who must execute the Assignment?
The Assignor [seller] and the Assignee [buyer] have to execute the assignment to prevent problems on closing.
4. Who has to consent to the assignment?
Generally speaking, as long as the Assignor and the Assignee have executed the Assignment, no one else has to consent unless the contract provides otherwise.
5. Does the Assignor remain liable to complete?
If the Assignee fails to complete the Assignor is legally required to complete the purchase unless the Assignment agreement released the Assignor from this liability. In such a case the Assignee would be liable to both the Vendor and the Assignor for damages and he would likely forfeit the Assignment Price for failure to complete.
6. Who must be served with a copy of the Assignment?
The original Vendor has to be served with an executed copy of the Assignment, failing which he is under no obligation to close the transaction with the Assignee.
7. What is the assignment price?
The assignment price normally consists of three components
- The profit to the Assignor;
- The existing deposit or deposits under the original contract;
- The accrued interest on the deposit or deposits under the original contract.
The profit to the Assignor is the represents the increase in value of the subject property over the original contract price.
Typically, the Assignor will have paid one or more deposits to the developer under the original contract and these deposits will be reimbursed to the Assignor.
If interest has been accruing under the original contract, the Assignment contract will add that in as well.
8. When is the assignment price paid?
Normally the assignment price is paid at the time specified in the assignment itself [the "completion date"]. That date is usually some time BEFORE the completion date in the original contract of purchase. It is in the Assignee's interest to close with the Assignor at the same time as the original purchase closes or even preferably, one day later.
9. Is Goods & Services Tax payable on payment under an assignment?
Sometimes. GST liability is specific to the transaction, so it always has to be considered before entering into an assignment agreement. Generally speaking, GST will be payable on execution of the assignment if the Assignor is a "builder" within the meaning of the Excise Tax Act, if he made the purchase with the intent to flip the contract or if sale of the contract is part of his business.
To cover this issue, the assignment should indicate which party is responsible to pay GST if applicable.
10. Is Property Transfer Tax ["PTT"] payable on an assignment?
The Assignee will have to pay PTT on the current market value [which will be the profit portion of the assignment price plus the original contract price]. PTT is payable when the transfer is filed at the land titles office.
11. What are the main advantages to a Vendor ["Assignor"] of selling by way of Assignment?
The Assignor does not have to pay Property Transfer Tax to acquire the property prior to assigning the purchase contract to and he usually does not have to wait until the completion date under purchase contract receive the assignment price. He may also avoid paying any GST on the assignment price and hence, keeps his costs to a minimum. The profit he makes will normally be taxed as a capital gain, unless he is making a business out of flipping contracts [in which case it may be treated as income].
12. What are the main risks to a Purchaser ["Assignee"] buying under an assignment?
The biggest risk is that the original contract will NOT complete at all and hence the purchaser will have paid the assignment price for nothing. Thus, an assignment should contain a clause requiring the Assignor to refund the profit portion of the assignment price to the Assignee if the sale under the original contract does not complete due to no fault of the Assignee. Even with such a clause, the Assignor maybe nowhere to be found, may have spent the money or it may be necessary to sue him to recover it.
The second biggest risk is that the original contract of purchase contains provisions that the assignee does not find acceptable. Such contracts must be read very carefully by the assignee's realtor before agreeing to purchase under an assignment. The provisions of the original contract of purchase are custom drafted by the developer's lawyers in a completely one-sided manner in favor of the developer. They do not even remotely resemble the standard CBA Residential Contract of Purchase and Sale, which is in use for most real estate transactions. Developers contracts may provide that the vendor:
- Unilaterally extend the completion dates numerous times without penalty,
- Provide a unit up to 5% smaller than represented without any reduction of the price and if more than 5% with a commensurate price reduction without giving the purchaser the option to terminate the contract;
- Simply refund the buyers deposit if the vendor fails to complete for any reason without further recourse by the buyer [however the reverse is certainly NOT true, as the vendor may keep the purchasers deposit[s] and sue the purchaser for further damages if the purchaser fails to complete];
- Provide short notice [as little as 5 days] to the purchaser to complete;
- Refuse to process GST rebates for purchasers upon completion [thus the purchaser must pay the full GST and apply for the rebate after the completion];
- Refuse to permit any assignment of contract OR charge an assignment fee [up to 2% or more of the original purchase price (liability to pay the assignment price must be dealt with in the assignment document)];
- Make changes to the proposed plan of the common property [which can on occasion be to the detriment of a purchaser];
Thus, it is advisable to have the assignment reviewed by the assignee's realtor and lawyer BEFORE the assignment becomes fully binding on the assignee.
13. What are some terms and subject conditions to consider for an Assignee?
- Term: Assignment Completion date to be one day after completion date under original contract;
- Term: Profit portion of the Assignment Price to be held in trust by Assignee or Assignor's solicitor until the original contract completes;
- Term: If neither of the above are able to be negotiated, minimally require the Assignor to refund in full the profit portion of the Assignment Price if the original contract fails to complete due to no fault of the Assignee;
- Subject condition: Review of the Assignment contract by the Assignee's lawyer;
- Subject condition: Obtaining GST advice by the Assignee;
- Subject condition: Review of the original contract by the Assignee's realtor;
- Subject condition: Review of the original Disclosure Statement by Assignee's realtor