Things to Consider in Assignment Purchases and Sales in Real Estate

Buyers and investors often purchase properties preconstruction from builders years before the completion of the transaction and things may change during that time. Investors may no longer want to invest in that property anymore and home buyers may experience a change in circumstances that make the property no longer suitable for them. This is where an assignment sale comes in.

An assignment sale is when the original buyer in a preconstruction agreement of purchase and sale (the “Builder Agreement”) transfers their rights and obligations under the Builder Agreement to a new buyer before the transaction is completed with the builder. The new buyer then completes the transaction with the builder directly. An assignment sale is advantageous to both parties. The original buyer can get out of buying a property that is no longer suitable for them. The new buyer will have the opportunity to purchase a property in a sold-out preconstruction project.

There are a few caveats to assignments, which are much more complicated than a regular real estate closing. Below are a few items to consider before buying and selling real estate on assignment.

Can You Assign your Builder Agreement in the First Place?

In Builder Agreements, there are often restrictions and conditions on when or how a Builder Agreement can be assigned. Some agreements do not allow assignments, and many impose strict conditions that must be met before an assignment can take place. Many Builder Agreements will also not allow any listing or advertising the property for assignment sale on MLS or any other advertising method.

If you are thinking of selling your preconstruction property on assignment, it is crucial that you retain a real estate lawyer to review and explain to you what assignment rights you have in your specific Builder Agreement and what steps need to be taken to assign the agreement before you look for a buyer.

Tax Considerations on Assignment Purchases and Sales

Generally, assignment purchases and sales are done at a profit to the seller. If you are selling your property on assignment, it may be prudent to first speak to your accountant on the taxes to be paid on the profits of your assignment sale. Special consideration must also be given to Harmonized Sales Tax (“HST”) as an assignment is also a taxable supply of new property under the Excise Tax Act. HST Rebate eligibility is another issue to be considered before entering an assignment transaction.

The Assignment Agreement of Purchase and Sale between the Original Buyer and the New Buyer

The original buyer and new buyer will need to enter into Assignment Agreement of Purchase and Sale (the “Assignment Agreement”) that sets out the purchase price and the other terms of the assignment sale. The negotiation of the Assignment Agreement is complex and an evolving area of real estate law. Both the original buyer and the new buyer will have to negotiate on many key points, including but not limited to:

  • What is the purchase price and how and when the same will be paid?
  • What amount of deposit is required and when the same will be released?
  • How the Original buyer will be reimbursed for deposits they already paid to the builder?
  • How HST and HST Rebates will be dealt with?
  • When will the closing date occur and if the closing will be done in stages?
  • and much more…

When entering into an Assignment Agreement, it is an absolute necessity to have lawyer review conditions for both original buyer and new buyer, so that terms of the Assignment Agreement can be negotiated. Whether you are selling or buying on assignment, it is important to retain a real estate lawyer to review and negotiate the terms of your Assignment Agreement.

If you are buying on assignment, it is also important to have the Builder Agreement reviewed by a real estate lawyer to understand what terms and conditions you will be bound by in the Builder Agreement.  

Obtaining Builder’s Consent for Assignment

In all assignment transactions, the builder’s written consent to the assignment must be obtained by the original buyer’s lawyer for the assignment transaction to proceed. The Assignment Agreement may also be conditional on builder consent, lawyer review, financing, and any other conditions required by the parties. Before requesting for the builder’s written consent, all other conditions save for the condition for builder consent must be fulfilled and/or waived.

When the builder consents, it is usually in the builder’s form of an Assignment and Consent Agreement, entered into and signed by the original buyer, the new buyer, and the builder. There are often non-negotiable terms and conditions in the Assignment and Consent Agreement, that have a substantial impact on your assignment purchase and sale. A few common examples of terms include but are not limited to:

  • a term that removes caps on adjustments in the Builder Agreement
  • a term that removes purchase incentives in the Builder Agreement
  • a term that removes the HST New Housing Rebate requiring a large adjustment for the same to be paid by the buyer on final closing
  • and much more…

A real estate lawyer must be retained to review the Assignment and Consent Agreement carefully before a buyer or seller in an assignment signs the agreement in order to protect their interests and avoid nasty surprises on the day of final closing.

Closing the Assignment Transaction

The closing of an assignment transaction is more complicated than a regular real estate transaction as there would be three parties involved, the buyer (new buyer), the seller (original buyer), and the builder.

Retaining the right real estate lawyer with experience in negotiating and closing assignment transactions is crucial to completing your transaction smoothly and making sure your investment is protected. Kung, Lo & Jia LLP is experienced in negotiating and closing assignment real estate transactions and can guide you through the nuances of closing your assignment deal. Contact us today.