There is something about “new” that makes us excited. Maybe the new car smell, the look of pristine new shoes, or for my fellow bibliophiles smelling the pages of that new book.
The new house may ride in a higher category than most simply because of the cost, but the shiny and new can overwhelm us to stop thinking clearly and that is where a REALTOR® needs to step in as the objective party helping the buyer cover their blind spots.
One of these blind spots is knowing the facts around who holds the title and what that means for closing so let’s think through this common concern.
Setting The Stage
A beautiful new construction property sits in a cute new neighborhood in Anytown Alberta. The builder, Bildgud Homes is reputable and the build quality seems quite excellent so a buyer represented by a REALTOR® tours the property and wants to write an offer. The REALTOR® helps the buyer prepare the offer document and as part of that process pulls a current copy of the land title for the home only to discover that Bildgud Homes is not named on the title as the registered owner, but rather Changeland Developments is the owner. Concerned, the buyer asks the REALTOR® if the builder even has the right to sell the home, and how they can guarantee they will even be able to close on the property.
Who is the seller on the contract and how can the buyer get certainty and ease their anxiety?
Legal Rights
It should be understood at the outset that this situation is very common and shouldn’t cause anyone to run for the hills screaming with their hands in the air.
The way these neighborhood developments work is that the developer buys the land, subdivides it into lots, grades it and adds utilities, roads, fences, sidewalks, etc.
The builder subsequently makes an agreement with the developer that they will build homes on a certain number of lots in the neighborhood but rather than buying the lot and tying up valuable capital needed to build, the builder will build the home on the lot, get it under a firm contract with a buyer, and then pay the developer for the land at closing when the developer subsequently transfers the land to the buyers directly. There are times, although less common where the builder will register a caveat on the land to secure their interest in the lot, but it is an extra expense and hassle few builders will undertake since their agreement with the developer already secures their interest in the lot.
Simple Seller
In this common scenario, who is the seller to be named on the contract? Normally the answer is to use the entity named on the title, but as a rare exception, it would be the builder who is named on the contract as the seller.
Wow, I just heard the bells and whistles going off in your mind when you read that, but in the AREA purchase contracts, the seller makes a representation to the buyer that they have the legal right to sell the property which does offer some protection to the buyer. But is that enough to ensure the right seller is selling the property and that no issues will be raised at closing?
Additional protection
The best practice in these situations to provide additional assurance to the buyer as well as their brokerage, is through the use of a condition that allows the buyer an opportunity to seek confirmation that the developer will indeed transfer the title to the buyer.
A simple condition could be added to the Additional Buyer’s Conditions section such as “Subject to the seller providing, and the buyer’s satisfaction with, a letter of confirmation from [Changeland developments] that title will transfer to the buyer upon completion day of this contract on or before…”.
This condition, or a similar one provided by the buyer’s lawyer perhaps helps the buyer to be assured that the developer is on notice about the sale and that the builder does in fact have the legal right to sell the land with the home.
Although every builder and developer is different and their processes may also be different from one another, drawing a line between the buyer buying, the builder building, and the developer on the title for the land by use of a buyer's condition is prudent. As always, buyers should seek legal advice for their specific transaction requirements.