- Friday, 24 March 2023
Purchasing a house is a significant decision and investment, especially for first-time buyers. Unfortunately, along with the excitement at ownership, homebuyers in Canada may face some legal issues.
A financing or home inspection condition in a purchase offer is standard when you’re the only buyer. Suppose you don’t proceed with the purchase. In that case, a financing condition protects you from losing your deposit and being sued by the seller. Meanwhile, a home inspection condition protects you from unknown defects in the home.
However, buyers may be willing to forgo those standard conditions in competitive housing markets like Toronto and Vancouver. This is because sellers typically consider a no-conditions offer more desirable, particularly in multiple-bid situations.
Making an offer with no conditions seems an excellent idea to get your dream home. But it can be incredibly risky with serious consequences. In Ottawa, Canada, buyers who purchased their homes with no-conditions offers ended up seeking legal action when they discovered issues after moving in.
With the caveat emptor or buyer beware principle, many Canadian home buyers were stuck with a damaged home. The rule means the seller isn’t responsible for disclosing readily discoverable defects and necessary repairs.
Instead, it’s up to you to inspect the property and understand all defects. Unless there are misrepresentations and fraudulent concealment of issues in the property, there may be little to no legal recourse available.
These are just a few of the complex legal situations associated with buying a home. Avoid them by working with a real estate lawyer who understands the underlying laws, procedures and legal documents.
Are you buying a home for the first time in Canada? Read on to learn why home buyers need real estate lawyers throughout the process.
Real Estate Law Basics for Homebuyers in Canada
Buying and selling homes are Canada’s most common real estate transactions. The Canadian Constitution defers to provinces regarding property and real estate laws.
For that reason, Canadian real estate laws are governed at the provincial and municipal levels. Nevertheless, some basic real estate principles apply to homebuyers in Canada.
Non-residents of Canada may not enjoy the same rights and protections in real estate matters as Canadian residents. This is because there are some legal restrictions on real estate ownership for foreign individuals and entities.
Some provinces don’t have prohibitions. However, they may impose taxes, registration or reporting requirements on real estate bought or owned by non-Canadians. For instance, British Columbia imposed a 15% land transfer tax on non-residents that purchase residential property.
Recently, the Government of Canada passed a law banning non-Canadians from acquiring any residential property in Canada for two years. The Prohibition on the Purchase of Residential Property by Non-Canadians Act went into effect on January 1, 2023.
An individual or corporation defined as non-Canadian can’t purchase property directly or through a trust, partnership, or other legal entity. Violating this prohibition can result in significant penalties. It can include a fine of not more than $10,000 and a court-ordered sale of a contravening property.
To avoid potential liability, anyone involved in the home purchase and sale must be familiar with these legal restrictions. That’s why seeking legal advice from a real estate lawyer is critical before entering any purchase agreement.
All provinces maintain a public land registration system where you can verify ownership. Its purpose is to inform the public about the parties’ different interests in land.
Each province administers its system for the ownership and registration of any interest in real estate. But generally, Canada uses two approaches for property registration.
The basis of this method is on public ownership records and other instruments affecting real property. Provincial governments still maintain the records. However, under the registry system, they don’t guarantee the status of titles.
Instead, you’ll need a real estate lawyer to validate the title by examining and reviewing historical documents. Prince Edward Island and Newfoundland and Labrador are the provinces that continue to use a registry system.
This system is dependent on the government’s registration of titles on real estate. But unlike the registry system, provincial governments guarantee the validity and security of information in all registered land titles. Because some land title systems in Canada are in digital form, it’s easier for lawyers to determine ownership and status of the title.
The provincial government has legal responsibility for the accuracy of all titles. Suppose significant issues arise, such as an error on the title or a fraudulent transaction. In that case, an assurance fund compensates you for the losses.
Ontario uses both the registry and land titles systems. But along with Nova Scotia and New Brunswick, it’s in various stages of transitioning to land title systems.
Real estate purchases in Canada may be subject to several taxes. Each province and municipality in Canada has a different tax regime. But typically, the basis of a tax is the home’s purchase price and other factors. Buyers in Canada may expect to pay the following taxes in their home purchase.
All provinces in Canada, except Alberta and Saskatchewan, impose a land transfer tax when you buy a residential property. Alberta and Saskatchewan levy special property registration fees instead.
In most Canadian jurisdictions, the payment of land transfer tax is the buyer’s responsibility. Note that these taxes come due as soon as you take possession of the property.
The rate of land transfer taxes varies across Canada. But currently, the highest rate is 5% on certain residential purchases in Toronto. You may be entitled to a rebate for part of the cost if you’re a first-time buyer.
New home purchases in Canada are also subject to Goods and Services Tax (GST) or Harmonized Sales Tax (HST). The rate of the GST/HST varies depending on the location of the real property. If you pay these taxes, you may qualify for a new housing rebate. However, it doesn’t apply if you don’t intend to live in the home.
Canadians selling real estate in the country can be subject to income taxation. The government usually charges income taxes against 50% of the gains earned from the home sale. In a property lease, the income tax is against 100% of the earned profit.
Suppose a non-resident sells you a Canadian property. In that case, they must provide you with a clearance certificate before the completion of the sale. The seller’s unpaid taxes will be deducted from the sale proceeds and paid directly to the Canada Revenue Agency.
In the absence of a certificate, you must withhold a portion of the purchase price to satisfy the seller’s tax liability. This is a complex matter, so getting legal advice from a real estate lawyer is critical for every transaction.
What can a real estate lawyer do for homebuyers?
A real estate lawyer is familiar with every legal aspect of the home purchase process. They know how to prepare and review legal documents and contracts related to home sales and purchases. Real estate lawyers may represent buyers, sellers or lenders.
As a first-time home buyer, you might wonder what role these lawyers play in your transaction. Here’s why real estate lawyers are essential when purchasing a property and what they can do for you as a home buyer.
Assess your financial standing
Understanding your financial situation is vital in the home-buying process. Remember that purchasing and owning a home come with many ongoing costs.
Many first-time home buyers must apply for mortgages to finance their dream homes. Knowing what kind of home and how much mortgage you can afford is essential. A real estate lawyer will come in handy when assessing your financial standing.
Besides being up-to-date on the mortgage rules in Canada, a real estate lawyer can facilitate your financial transactions. They can help you negotiate mortgage funds needed from your lender and hold them until you close the deal.
Some mortgage companies require home buyers to work with real estate lawyers before they provide financing. This is to ensure that there are no errors in the purchase contract and you file all the necessary papers.
A real estate lawyer plays a significant role in protecting your legal interests in a mortgage transaction. They will ensure that the mortgage agreement is airtight and you obtain the proper security over the loan. They will also create a statement of adjustments to determine how much you owe to complete the real estate transaction.
Review the agreement of purchase
The purchase agreement is the most critical document, which outlines what you’re entitled to in a real estate transaction. Without it, you may lose your legal rights. A real estate lawyer knows how to prepare and review documents related to the purchase agreement.
They will ensure that the contract includes specific provisions that protect your interests and are in compliance with relevant laws. If there are misunderstandings or issues, a real estate lawyer can also help address them, ensuring you’re correctly informed.
Having a real estate lawyer will help you avoid potential problems during the home sale process. They may also check a survey of the property to ensure an accurate description of it in the agreement. This way, you can be confident that your purchase agreement is to your specifications and that there are no unwanted surprises.
Remember that an agreement of purchase is a legally binding contract with consequences if you do not meet specified conditions. Thus, you’ll want to have a real estate lawyer who will do the following before you sign the contract:
- Communicate with the bank to clarify the terms of your potential mortgage
- Discuss with you the tax consequences that may arise from the transaction
- Help you fully understand all the elements of the contract
- Review all papers you sign during the home-buying process
Perform title searches
A clear title is crucial for any real estate transaction. A thorough search through local property records is mandatory before a home purchase. Mortgage lenders often require a title search before providing funds for the loan.
That is to ensure the seller is the undisputed legal owner of the property and that no other party can make any legal claim. Performing a title search typically involves accessing different types of official records, which may include:
- Property tax records
- Tax liens on the federal and provincial level
- Past surveys of the property
- Bankruptcy records
- A historical record of ownership transfer
- Any relevant wills and lawsuits that involve the property
Although these are public records, performing a title search yourself is not advisable. You can easily miss critical details that indicate any issue that may hinder the transfer of the deed. The title search may not reveal all the problems connected to a particular property.
Note that mortgage liens and other debts follow the property, not the owner. They may become your responsibility if you don’t perform a thorough title search.
Luckily, an experienced real estate lawyer knows how to conduct a proper title search for the home you’re interested in buying. They can also help you understand the impact of easements, agreements, or restrictions placed by a previous owner.
Guide you on title insurance needs
If you’re buying a new home, having title insurance is crucial to you from any legal problems related to the property’s title. Even after performing a thorough title search, you’ll still want to protect your ownership from potential issues.
For instance, there may be a claim against your rights of ownership. An insurance company will cover the cost and fees related to defending against the title claim in this case. Without title insurance, you may face significant legal fees and expenses. You may even lose all or a portion of your dream home.
However, like all policies, title insurance has exclusions to coverage. It’s critical to read the policy thoroughly and know what is not insured. When obtaining title insurance, a real estate lawyer can guide you and ensure that it will provide coverage for your real estate needs.
After conducting a title search, a real estate lawyer can contact underwriters to issue an insurance policy to protect you when other problems arise. Typically, there are two main types of policies available for title insurance:
Mortgage lenders may require you to obtain a lender’s policy. Since your loan uses your property as security, any title defect can affect the lender. A lender’s policy often only covers the amount of the property’s mortgage. This means the value of this policy also decreases as you pay back the loan.
An owner’s policy is typically optional. But this will protect you from numerous title-related losses covered in the insurance policy for as long as you own the home. When purchasing this title insurance, you must disclose any known issues or defects concerning the property’s title. It’s also essential to understand the covered risks.
Assist you with the closing process
Closing days is the final stage in the home-buying process when you pay the money, and the official transfer of title happens. This is the most critical part of the real estate transaction, as you will receive the keys and sign the final papers.
But the closing process also involves many parts, such as title insurance, mortgage, and final inspection. You’ll need a real estate lawyer to oversee this last phase and ensure you fully understand what you agree to do and pay.
Final closing costs can be substantial and often come as a surprise for many home buyers. This is because it’s easy to get focused on saving for the down payment and securing your mortgage loan. However, there are other costs that you need to consider.
Besides reviewing, preparing and updating closing agreements, a real estate lawyer will ensure your closing costs are fair and reasonable. They will see that the fees specified are appropriate, so you don’t overpay on the closing day. They also help you reduce out-of-pocket closing costs and find your best opportunities for negotiating better terms.
Help you deal with property taxes
Once you own any real estate in Canada, you must pay property taxes directly to the municipal government. It’s worth noting how often you have to pay property taxes will differ by municipality.
Knowing how much you’ll likely be paying in property taxes is as vital as learning your monthly mortgage payments. A real estate lawyer can advise you on the tax obligations associated with purchasing a property. They will ensure that the attached property taxes to your dream home are up-to-date.
Checking that you’re only paying for the number of days you own the property rather than the entire year is also part of their responsibility. Additionally, a real estate lawyer can work out the adjustments of various costs, including the property taxes of your new home.
Provide overall legal representation
Legal conflicts are common in a real estate transaction, whether you’re the buyer or seller. These may include a chain of title disputes, breach of contract, or foreclosures. A real estate lawyer will try and negotiate settlement agreements.
But while you can settle some real estate disputes out of court, others end up in a trial. A real estate lawyer will file a lawsuit and defend you in court when that happens. They will draft legal pleadings, participate in hearings and trials, and file appeals on your behalf if necessary.
The Risks of Not Having a Real Estate Lawyer When Purchasing a Home
When purchasing a home, many buyers consider hiring a real estate agent. An experienced real estate agent can give you comprehensive support at every stage of the home-buying process.
They can provide invaluable advice for market listings, hiring home inspectors and finding the right mortgage loan broker. However, they’re not equipped and licensed to offer you legal advice.
Most home buyers prefer to employ a real estate agent because they’re cheaper to hire than a lawyer. But real estate transactions require a lot of legal paperwork and processes. If you opt to buy your home without a real estate lawyer, you may be at risk of the following:
Improper transfer of deeds
It’s possible to prepare real estate deeds without a lawyer. But any mistakes on the deed can lead to costly taxes later. Even the most minor thing, such as a misspelled name, can affect the chain of title. You may also end up using the wrong type of deed.
Have a real estate lawyer go through the deed process to ensure you’re on the right track and comply with state regulations. Note that you must record a deed in the country where your home is to protect your ownership from previous owners.
Failure to file the appropriate documents
There are many real estate documents that you need to file when purchasing a home. Taking care of the legal paperwork at every stage of the real estate transaction can be overwhelming.
That may cause you to file inappropriate documents, resulting in terrible consequences. A real estate lawyer knows every paperwork involved in the home-buying process. These include every document you need, from making an offer to closing the deal.
Signing away fundamental rights by mistake
Without a real estate lawyer, you may not fully understand everything you agreed to in the contract. You may mistakenly sign away your fundamental rights, and a contract is a legally binding document.
Thus, knowing all the implications of the agreement you’re signing can save you money and the deal itself.
A real estate lawyer will ensure the protection of your rights. They can spot any potential issues in the document and transaction. They may also inform you of all the potential risks and liabilities associated with your dream home.
You must sign several legal documents on closing day and pay any outstanding fees and costs. Review all documents carefully and ensure that you fully understand your obligations and rights.
You must sign several legal documents on closing day and pay any outstanding fees and costs. Review all documents carefully and ensure that you fully understand your obligations and rights.
Planning to Buy a Home? Talk to a Real Estate Lawyer
Buying a property may look like a simple purchase. However, even if you have the means to finance your dream home, the legal side of this transaction can be quite complex. That’s why some localities require home buyers to hire a lawyer, particularly during the closing process.
Although optional, having a real estate lawyer is still beneficial for every stage of your real estate deal. You can be confident that you have covered all your legal bases and that the process will go smoothly.
Work with a reputable real estate lawyer from Diamond & Diamond to give you peace of mind. Schedule your consultation and discover how we can effectively advocate for your rights.