Key Considerations for Agreements of Purchase and Sale – Multi-Unit Rental Properties

If you are buying or selling a multi-unit residential property, it is critical that all pertinent matters relating to the purchase of the property are included in the Agreement of Purchase and Sale (the “Agreement” or the “APS”). If an issue comes up prior to closing and the Agreement is silent on that matter, the parties are left to determine how to address the issue in a way that keeps the deal alive (in some cases, without a legal obligation to do so) – sometimes these are straightforward matters that are relatively easy to address. In other cases, it can be a complex issue for which the parties may not come to an agreement before closing and may derail the transaction altogether.

This article will address important terms that should be considered and included in an APS during the negotiation stage to avoid any hiccups during the closing process. The buyer and seller (and their respective agents if the Agreement is being prepared by the brokers) tend to focus on the business terms when negotiating the Agreement, such as the purchase price, deposit amounts, financing and inspection conditions, and the closing date.

However, there are many “legal provisions” that are often missed in the APS and as mentioned above, may cause issues before or even after closing. Below are some examples of provisions that the parties should consider when putting the Agreement together – this is a non-exhaustive list and there may be other points to consider depending on the type of property or other arrangements between the parties.

1. Rent Arrears: in a perfect world, all tenants would pay their rent on time every month. Unfortunately, this is not always the case and when a buyer is assuming the tenancies, the buyer and seller should decide from the outset how any rents that are in arrears will be dealt with on closing. One way would be for the seller to provide a credit to the buyer for their pro-rated share of the monthly rent as if all rents were paid for the month and the seller can continue to pursue the rent arrears from the tenant after closing. Alternatively, the right to collect the arrears can be assigned to the buyer. There can also be a hybrid of the two as buyers generally do not like to take on the responsibility of collecting aged receivables.

2. Closing Date: Since the purchase price will be adjusted based on the monthly rent amounts on closing, we typically suggest setting a closing date that is around the middle of the month. This gives the seller a chance to collect the rents at the beginning of the month. Meanwhile, there is more turnaround time for the buyer before the start of the next month to notify tenants of the change in ownership and provide the tenants with details on how and where to send rent payments moving forward.

3. Number of Units and Status of Vacancies: Firstly, when specifying the type of property (i.e. residential, commercial, or mixed-use), the Agreement should also specify the exact number of units located in the building. Secondly, the Agreement should speak to what happens in the event a unit becomes vacant between the time the Agreement is signed and the closing date. The buyer may want the seller to use best efforts to fill that vacancy before closing. Alternatively, the buyer may prefer that the unit remain vacant so that they can renovate the unit before renting it out. Also, the buyer requires limited vacancies to satisfy its lender. Often, Agreements are silent on this.

4. Property Management, Employees, and Service Contracts: Before closing, the parties will need to determine whether the buyer will be taking over any property management or service agreements or taking on any employees of the building. It is best to address this at the time of drafting the Agreement (which can be by way of a conditional period during which these details are addressed) so it will be clear to all parties at the outset which contracts will need to be terminated or assigned on closing.

5. Vendor Take-Back Mortgages (“VTB”): VTB mortgages have become a bit more common in recent transactions and the Agreement should include all material terms for the VTB, like a loan agreement between a lender and borrower. If you are selling a property and will be taking back a VTB, it is critical to include any terms and conditions of the loan that you will require for closing. For example, if the buyer is a corporation and you want the principal of that corporation to provide a personal guarantee, this should be put in the Agreement. Further, the seller can add a list of security or other documents they will require as part of the VTB and other conditions, such as insurance requirements, payment mechanics, and so on.

6. Assignment Clauses: Another common trend is for buyers to put the Agreement in their name “in trust for a company to be formed”. If you are the buyer, you will want to make sure there is an assignment clause in the Agreement that allows you to Assign the APS to another related person or entity if the assignee assumes the obligations of the buyer under the APS. If you are the seller in this situation, you will want that clause to confirm that the original buyer remains bound and liable under the APS, especially where the assignee is a newly incorporated corporation.

7. HST: If the property is purely a used-residential complex, then the transaction is likely not subject to HST. However, if any portion of the property is used for a commercial purpose (i.e. ground floor retail tenants), then HST will apply to that commercial portion of the property. The standard commercial OREA form (Form 500) states that HST is in addition to the purchase price. As such, the buyer will need to pay particular attention to the use of the property and account for the possibility of HST being paid on top of the purchase price. If you are not using the OREA Form 500, then make sure there is a section in the APS that clearly addresses HST and, if it is applicable, whether the buyer will need to self-assess and remit HST after closing (rather than the seller on whom the HST obligations typically fall).

The above is a non-exhaustive list of provisions you may want to consider including in your Agreement when purchasing a multi-unit residential property. There may be other items that are more specific to the property itself or the arrangements between the parties to consider including in the Agreement. The Agreement forms the entire fabric of your purchase and sale transaction, as such, we highly recommend having the lawyers and brokers involved in the transaction collaborate to not only ensure all important terms and conditions are set out in the APS but also to help streamline the closing process.