Is it good practice to use and/or nominee in a purchase contract?

Many reasons and variables surround the idea that a party to a contract would choose to nominate or assign their interest in a residential real estate purchase contract to another person. The concept is familiar, but in real estate, there are some crucial things to consider before deploying this term in a contract. Let’s take a few moments to think this issue through.

Assignment in Alberta

In Alberta, all contracts are assignable. Assignment in a real estate context is where a buyer with a contract to purchase a property from a seller elects to assign their rights to another consumer. Typically this involves an exchange of funds between the first and second buyer but excludes the seller from any additional proceeds. In Alberta, this is generally legal as long as the seller has disclosed the assignment has taken place, but the seller’s consent is not required.

And/or Nominee

Although the option for assignment exists for nearly every buyer in every transaction in Alberta, when the buyer contemplates the potential of an assignment, they will often add “And/or Nominee” to the contract after their name or on a second buyer line. Although it is transparent that the buyer is considering this option, it introduces instability to the contract. What I mean by this is that as a matter of “competent service” required by the Real Estate Act Rules, licensees under the act should ensure their seller client knows who they are dealing with as much as is within their control during the trade.

Possible uses

The use of And/or Nominee should generally be considered not best practice and should not be a standard of regular practice even when it seems harmless. For example, if one spouse finds the perfect house just when the other spouse is mid-air on a flight to Shanghai, it may seem right to have one spouse tie up the property by contract and insert an “And/or Nominee” to be able to add the other spouse after. This would be a valid possible use. However, the better and more transparent method would be to add the term “The buyer and seller agree that the seller will not refuse the addition of the buyer’s spouse to the contract by way of an amendment at the buyer’s sole discretion.” If I were the seller’s REALTOR^® and received an offer including an “And/or Nominee,” I would clarify with the buyer their intent, inform the seller, and then suggest this correction to the contract. This ensures clarity between the parties and the certainty of the parties transacting to the best of my ability in the trade. Should the buyer subsequently decide to assign the contract, they maintain that right, but I have done all I can as the seller’s representative. Suppose buyers were insistent about using the And/or Nominee in the contract. In that case, the seller should be consulted and a term inserted to ensure the buyer agrees to name the nominee or remove “And/or nominee” before removing conditions. It’s not a perfect solution, but it shows your intent to attempt transparency with the parties transacting together.

Wrong uses

The use of And/or Nominee in a purchase contract should never be used to knowingly disguise the identity of the true purchaser when if known to the seller would provoke animosity or introduce conflict. In family situations where an ex-spouse intentionally misleads the seller by using a friendly buyer to secure the contract with And/or Nominee only to sub in the hostile ex-spouse once the transaction is secured is one example of misleading use. By way of professional conduct, a licensee must never knowingly participate in a misleading activity and always try to avoid such conflicts.

Seller Advice

As mentioned, there are potentially beneficial uses of the And/or Nominee option, although it is not best practice, and other options provide better transparency and mitigation of liability. More commonly, however, where a clear explanation of the requirement to use such a clause on behalf of the buyer is lacking, it should be understood by the seller that there is a potential that the buyer may attempt to assign the contract for more money before the closing. Such a situation should prompt licensees to reevaluate the property’s value to ensure the seller gets a fair price before proceeding. Additionally, some schemes have been reported using And/or Nominee where the buyer seeks to tie up the property, neglects to deliver a deposit, and tries to sell their interest before they need to close on it. If unsuccessful, they simply refuse to close and no deposit is held as security against the default. Such possibilities should be discussed with sellers, especially with the combination of “And/or nominee” and a failure to deliver the deposit on time, where they may choose to exercise the void option in the purchase contract.

Buyer Advice

In every seller’s market to wash over Alberta, we see an enormous uptick in speculative buyers. This is because when Alberta swings in price, it usually swings high and fast. Because of this, buyers from parts unknown believe that they can secure contracts on several new construction properties while providing only deposits. They include And/or Nominee, thinking this will protect them in being able to assign the agreement from the builder to a new buyer at a higher price and walk away with a tidy profit. Although this has worked in the past, most builder contracts include terms now requiring approval for assignment with a significant assignment fee attached or prohibiting assignment altogether, forcing the buyer to close or default and lose their deposits. Many buyers have felt the sting of not receiving proper guidance from a REALTOR^® or lawyer knowledgeable in new construction contracts.

Although legal, you can see how the little And/or nominee addition to a contract can bring clarity and issues. The main point is if the buyer is contemplating assigning the contract before the closing, have them seek legal counsel about the best way to do it rather than adding and/or nominee. REALTORS^® should try as much as possible to ensure the parties know who they are transacting with while in their care and find ways to make the true nature of the arrangement clear and transparent rather than unnecessarily ambiguous