Legal Brief for September, 2024

Holdbacks on Real Estate Transactions

If you are involved in a purchase or sale transaction you may find that there are some "loose ends" that haven't been resolved yet when the closing date arrives.  On a purchase there may be some repair items that the seller had promised to complete but have not been finished.  The concern that arises in a situation like this is that if your lawyer pays the full closing funds, then there is a chance that the seller may not bother to complete the repairs and is nowhere to be found to answer for them.  The purchaser then ends up having to pay for something over and above the purchase price that the seller was supposed to look after.

The way that a purchaser can be protected in a situation like this is for their lawyer to require the seller's lawyer to keep a small portion of the sale funds in their trust account until the items have been completed.  This is known as a "holdback".  If the seller does not comply with the requirements to complete them, then the funds would be released to the purchaser to be used for the cost of doing what the seller failed to do.

The amounts in a holdback fund are set based on what appears at the time to be an amount equal more or less to what it would cost the purchaser to complete the work that the seller has agreed to do, plus a bit more as a margin of safety.  Another purpose of a holdback fund is that it gives the seller an incentive to get the work items completed.  If the holdback is $5,000.00 there aren't too many people who would simply walk away from an amount like that.

One of the ways that a lawyer can be of assistance in working on their client's transaction is to identify situations in advance that might create the need for a holdback fund, and then work to try and get the matters resolved prior to closing on a timely basis, in order to avoid having to set up a holdback.

In addition to arriving at an appropriate figure for the holdback fund, it is also prudent to agree on a date by which the items in question have to be completed.  This can be a great motivator for a seller who is slow on getting the matters dealt with post-closing.

Once a seller advises their lawyer that "we have completed the work", the lawyer cannot automatically release the holdback funds to them.  The seller's lawyer will still need to check with the purchaser's lawyer to confirm that they are authorized to release the funds.  This is because the purchaser may be dissatisfied with the quality or quantity of the repair work allegedly completed by the seller, and they may feel that the release of the funds would be premature.

If your lawyer contacts you the day before closing and says "there's a small hiccup and we will need to establish a holdback", you can rest assured that this is a common feature of real estate closings and that there are well established legal procedures in place to deal with them in an orderly and timely manner.