Holdbacks on Real Estate Transactions

Sometimes I am asked by purchaser clients to hold back money from the seller on a real estate transaction. There seems to be a misunderstanding among some people that lawyers can impose holdbacks on the seller when the buyer requests one. Actually, holdbacks can only be put in place if both sides agree to it. If not, a lawyer has no ability to impose one. There are a few different types of holdbacks:

Builders' Lien Act Holdbacks

If the property being sold is new construction, then the buyer is required by law to hold back 10% of the contract price from the seller for 40 days after completion. That's because it is a requirement under The Builders' Lien Act in Saskatchewan. Determining the date of "completion" that the 40 days runs from is a bit too complex to write about in this article. Most often ... but not always ... the date of completion is considered to be the date that possession is granted to the buyer. There can be exceptions. For example, the house may have been completely finished a few months already and waiting for a buyer to take over. The 40 days may have already gone by before the closing date on the sale.

Whenever a holdback is required, the seller and their lawyer will want to know that the 10% is actually available. The seller will never agree to the holdback being held by the purchaser or their lawyer. The practise in Saskatchewan is that the entire purchase price must be paid over to the seller's lawyer. Then the seller's lawyer undertakes to hold back the 10% under the legislation. This holdback procedure is standard. It would be very rare to find a seller's lawyer who would not agree to this holdback. Sometimes a new builder is disappointed to learn that 10% will be held back for 40 days. However, after a few transactions they will understand that their lawyers are simply complying with the law.

Holdbacks for Incomplete Work

Sometimes a buyer takes possession of a new home while the weather is still cold in Saskatchewan. Because of the weather, it may not have been possible to finish pouring a driveway or apply stucco to the exterior of a home. Sometimes there are other non-weather realted matters that are not quite finished by the closing date. In these cases, the buyer and seller need to talk with each other ... either directly or through their realtors ... to agree on the value of the incomplete work. If they agree, the lawyers for the buyer and seller may agree on a holdback until the work is done. It is extremely rare that the builder will agree to anything more than their cost to do the work.

Sometimes the buyer wants a "hammer" and wants to impose a very large holdback as a penalty or incentive for the builder to finish their work . Most builders will not agree to this. Insisting on an unreasonable holdback amount, whether too high (buyer) or too low (seller), can cause a delay in possession and a lot of work to settle the issue. This is not something that the lawyers are expected to do for free as part of their work. I don't generally charge for going back and forth a bit about these issues but strictly speaking a lawyer can charge extra for this because it is extra work not normally part of a real estate transaction. Usually, both sides will come to a reasonable compromise but every once in a while, one side or the other can be unreasonable.

Lawyers are not construction experts. They may have a general idea about some construction costs but we don't have any training in valuations. Lawyers are not able to offer advice about the value of a holdback. If in doubt, the buyer should phone around to obtain an estimate of the costs for finishing the outstanding work.

When a holdback is agreed to in these situations, the lawyer cannot guarantee the work will actually be done to the buyer's satisfaction or when it will be done. When the work has been performed, the lawyer will not send anyone to look at the property and perform an inspection. The trust conditions agreed to between lawyers will normally allow the funds to be released on the builder's word that the work is done. For example, if money was held back to ensure that a driveway is poured, the holdback will be released when the builder advises it has been poured. If the buyer doesn't like something about the driveway after the work is done, the trust conditions will not provide a remedy. It's not feasible to draft a document that contemplates every possible problem, and the seller's lawyer is not going to agree to it anyway. This is unfortunately something that the buyer will have to take the seller to Small Claims Court over afterwards if it can't be resolved.

There is another type of risk for the buyer when holdbacks are agreed to. If the builder doesn't do the work, it may cost more than the holdback to find someone else to do that work. The holdback may not be sufficient. However, that is another risk of taking possession of a new home before the work is complete. These are risks that lawyers can only minimize, but not eliminate completely. If the buyer does not want to assume that element of risk, they should choose a possession date far enough away to allow all work to be 100% complete by closing. They should also select a reputable builder that they know they can count on.