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The Use of Holdbacks in Real Estate Transactions
Kormans LLP
February 6, 2020
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Holdbacks are tools used by real estate lawyers for their Buyer clients, whereby a portion of the closing proceeds is withheld from the Seller pending the completion of a condition or an undertaking in the Agreement of Purchase and Sale that could not be completed prior to the Closing Date. The Holdback funds may be held back by the lawyer of either party in trust, depending on what is agreed upon.
Holdbacks may be utilized in a number of scenarios; however, they are most commonly relied on when there are repairs to be done, or deficiencies to be corrected on the Property, which may extend beyond the Closing Date. Once the negotiated confirmation is received that the outstanding condition or undertaking has been met within the requisite time frame, the Holdback funds are released to the Seller. If the negotiated confirmation is not received or the outstanding condition or undertaking has not been met within the requisite time frame, the Holdback funds may be utilized to complete the condition or undertaking, or released back to the Buyer.
There are two ways by which a Holdback is implemented. Provision for a Holdback can be written into the Agreement of Purchase and Sale at the outset when the agents and parties to the Agreement of Purchase and Sale are already aware of issues before the Agreement of Purchase and Sale is firm. This is preferable, as the terms of the Holdback are agreed to and made clear early on. Alternatively, Holdbacks may be negotiated between the lawyers upon consultation with their clients prior to, or on the Closing Date. While this is an effective solution in many cases, problems may arise as the Seller does not have to agree to a negotiated Holdback which was not contemplated in the original Agreement of Purchase and Sale. Under Ontario law, a Holdback is not a right so the Holdback must be negotiated and agreed to. If no such negotiated Holdback is agreed to, a Buyer may be required to seek post-closing remedies.
It is prudent for Buyers to make their agents and lawyers aware of any issues that may require a Holdback as early as possible.
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