Reading the Fine Print on a Pre-Construction Assignment Deal

The situation

Paulo, a sales director, had spent eight months living out of a rented townhouse after his separation, trying to find a family home he could move into with his daughter before the next school year. New listings in his price range kept falling through or going over asking, so when his real estate agent mentioned an assignment sale, he was open to it.

An assignment sale is not the same as buying a resale home. Two years earlier, a couple named Ines and Camila had signed a pre-construction agreement of purchase and sale with a builder for a semi-detached home going up in a new development, paying a deposit in instalments as construction progressed. Ines, a construction project manager, had since been offered a posting on a project in another part of the province, and the couple needed to get out of the deal before the home was even built. Rather than wait for the builder to complete the sale and then resell, they were assigning their contract — selling their rights and obligations under the original agreement to a new buyer, before the builder's own closing ever happened.

For Paulo, it looked like a way to lock in a home at a price set two years earlier, in a market that had moved since. The underlying builder price was roughly $780,000. Ines and Camila were asking a premium of about $65,000 on top of that to assign their spot, putting Paulo's total cost at roughly $845,000. He had financing lined up and was ready to sign within the week. Before he did, he brought the paperwork to Treadstone Law.

What the original agreement hid

In an assignment sale, the buyer does not get a fresh contract. Paulo, as the assignee, would step directly into the shoes of Ines and Camila, the assignors, and become bound by every term the two of them had signed with the builder two years earlier — good or bad. Reviewing that original agreement, not just the one-page assignment document Paulo had been shown, was the only way to know what he was actually buying.

The original builder agreement ran to more than sixty pages once the standard form and the builder's own addenda were included, and one clause stood out. Like most pre-construction contracts, it made the purchaser responsible for paying the development charges — fees municipalities levy on new construction to fund infrastructure such as roads, sewers and schools — that applied at the time of final closing, as an adjustment added on top of the purchase price. What made this version risky was that the clause set no maximum. If the municipality's levies rose between the date the agreement was signed and the date the home was finally ready, the entire increase would land on whoever owned the contract at closing.

That mattered because the project had already been delayed once, and delays on pre-construction builds tend to push closings further into a period of rising municipal charges. Comparable uncapped clauses in other builder contracts in the area had produced adjustment bills in the tens of thousands of dollars when levies increased before closing. On this file, the same exposure could have added as much as $40,000 to Paulo's closing costs — money that would come due long after Ines and Camila had already been paid their premium and moved on, with no ability for Paulo to negotiate it away once he had signed.

Two smaller issues sat alongside it. The agreement required the builder's written consent to any assignment, along with an assignment fee, and it was not yet clear whether that consent had been obtained or who was expected to pay the fee. And the original contract's provisions for the HST New Housing Rebate — a rebate available when a newly built home will be the buyer's primary residence — assumed the original purchasers would be living in it, which was no longer true once the home was going to Paulo instead.

What we did

1. Reviewed the full original agreement before Paulo signed anything. The one-page assignment document circulating between the agents said almost nothing about the terms Paulo would actually be bound by. Pulling the full builder agreement and its addenda, before any signature, was what surfaced the uncapped development charge clause in the first place.
2. Flagged the adjustment risk in writing to Paulo before any deposit moved. He needed to understand, in plain terms, that this was not a fixed-price deal — the number on the assignment agreement was not necessarily his final cost, and the gap could run into the tens of thousands of dollars.
3. Requested a written cost update from the builder. Builders will generally provide a current estimate of applicable development charges and other closing adjustments on request from a purchaser's lawyer. This gave a real figure to negotiate around instead of an open-ended risk.
4. Negotiated a cap and a holdback with the assignors' lawyer. Rather than walk away from the deal, we proposed that Ines and Camila agree to a maximum figure for the development charge adjustment, with a portion of their assignment premium held back in trust until final closing to cover it if the actual charges came in higher than expected.
5. Confirmed the builder's written consent to the assignment. The original agreement made that consent a condition of any transfer, and closing without it in hand would have left the whole deal open to challenge. We confirmed the consent was on file and clarified that the assignment fee was for the assignors' account, not Paulo's.
6. Set up the HST rebate documentation correctly. Because Paulo intended to live in the home as his primary residence with his daughter, he remained eligible for the rebate, but the paperwork needed to reflect him as the end occupant rather than Ines and Camila. We prepared the required undertaking so the rebate was properly assigned along with the contract.

The outcome

Ines and Camila's lawyer agreed to the cap. The assignment agreement was amended to fix the development charge adjustment at $12,000, with $15,000 of their premium held back in trust until the builder's final statement of adjustments was issued at closing. If the actual charges came in under the cap, Paulo would get the difference back out of the holdback; if they came in over, the cap protected him regardless of what the municipality ultimately levied.

The deal closed on schedule. When the builder's final adjustment figures arrived, the development charges landed close to the capped amount, and the holdback was released back to the assignors with a small balance returned to Paulo. He moved into the finished home with his daughter in time for the school year, having paid roughly what he expected to pay from the day he signed — instead of finding out the real number only after it was too late to negotiate.

The deal worked because the risk was caught while there was still room to negotiate it away. Once an assignment agreement is signed and the deposit has changed hands, a buyer's leverage to renegotiate a term buried in someone else's two-year-old contract mostly disappears.

What you can learn from this