Reservations, preliminary contracts and deposits : what are common practices in the industry? How can you acquire the condo of your dreams without taking any useless risks? Experts have the answers to your questions.
Read: what is a preliminary contract?
There are no fixed rules concerning the advance payment to be paid when signing preliminary contracts to buy a condo or a home off plan. In the Québec civil code, it is stated that “Any amount paid on the occasion of a promise of sale is presumed to be a partial payment on account of the price unless otherwise stipulated in the contract.” In the agreement constituted by the preliminary contract, the buyer confirms their intention to purchase a real estate production and the seller confirms their intention to deliver it.
Condo, deposit, construction
In the Greater Montreal Area, a quick survey of major promoters allows us to observe that a similar policy is followed. A deposit is obligatory when signing the preliminary contract, followed by other payments. Generally speaking, this involves $5000 when signing the contract, followed by varying amounts for different statuses of advancement: once financial backing from the bank for the future homeowner is secured, at the beginning of construction and once again when the construction of the building’s exterior is finished, totaling roughly 20% of the condo’s value. Other businesses operate based on a predetermined calendar: first advance payment, payment when financing is secured, then three or six months later until 20% is paid – twelve months after signing the contract.
Negotiating the advance
This 20% can represented a hefty sum when a luxurious condo is at stake. According to Yves Joli-Coeur, lawyer and general secretary of the Regroupement des gestionnaires et copropriétaires du Québec (R.G.C.Q.), the monetary amount of any advance payment is negotiable: “Some promoters will be more flexible. Of course, your negotiation power depends on economic fluctuations and the condition of the real estate market at the time of making your decision.”
Before making an advance payment, it is advisable to verify if the promoter holds a license from the Régie du bâtiment du Québec. It is preferable to request that the sum be held in trust until the sale is completed, but the industry professionals questioned for this article claim this isn’t always possible. “Deposits are used to finance part of the construction. They act as a lever for the promoter,” says David PontBriand, associate promoter at KnightsBridge. “In our line of business, deposits are held in a trust by a notary until a certain amount of sales make the project viable enough for construction to start,” says Antonios Bekeridis, sales director for the Aquablu condo project. “That money is then used to finance the beginning of construction. Buyers are informed of this; it is mentioned in the preliminary contract.”
All deposits are not guaranteed, as Jean-François Brunet, real estate consultant at Brunt, Stratt & Gogh reminds us. “The Garantie de construction résidentielle plan (GCR) is obligatory for any building of four superimposed units or less, protects advance payments for up to $50,000. For buildings with five or more units, warranty plans are not obligatory.” Mr. Brunet advises buyers to follow up with the promoter to see if they subscribe to a warranty plan.
As with any contract, it is imperative that you read and understand each clause before signing it – even if it means consulting a professional, advises Yves Joli-Cœur. “The main causes of litigation – squate footage, delays, delivery dates – must be addressed in the contract. For more precaution, Joli-Coeur suggests using the preliminary contract example provided by the Garantie de construction résidentielle (GCR).
Contrary to the preliminary contract that represents a promise to buy and has a legal value, the idea of a “reservation” refers to a proprietary contract devised by the promoter and is usually paired with a reimbursable deposit of roughly $5000. At this step, a project is generally considered to be in embryonic stages and its actual existence is not confirmed. “Reservation – also known as presales – is a way for the customer to show interest before committing more formally,” says Laurence Vincent, co-president of Prével. “It can also serve to reserve a unit in a project that is attracting a lot of attention. More often than not, the buyer will change their mind more than once. They will then choose to go ahead with the preliminary contract, or choose to back out. Once they’ve signed a reservation contact, the buyer has a week or two to think it over before making a decision.” According to Ms. Vincent, the reservation process is too limited by time to necessitate the involvement of a notary. “The buyer changes their mind too often with regard to the chosen unit, making the process too complicated at such an early stage.”
What to do in case of delay
Preliminary contracts include a deadline in its buying conditions, after which date the promise of purchase can be abandoned if the project has not yet begun. It is good to keep in mind that it’s hard for promoters to predict the precise date on which construction will begin. “Between approval from the financial institution and the approval the project must obtain from the city and district, there are delays that simply can’t be predicted,” explains David PontBriad. “For smaller promoters, it’s often necessary to accumulate 50% of the building’s value before beginning construction.” Consultant Jean-François Brunet recommends that buyers be attentive to the dates written into the contract. He also suggests obtaining pre-approval from the bank before beginning to shop for a condo in order to limit the likelihood of delays. He also reminds buyers that any promise of purchase (or preliminary contract) benefits from a legally-mandated ten-day grace period within which the buyer can change their decision.