What Clauses Should be Included in
Real Estate Contracts?

This article is written from the perspective of a buyer. However, most real estate contracts will contain fairly standard clauses. So, whether you're a buyer or seller, read on. I'm sure you'll learn something.

Real estate contracts require very specific, and accurately drafted, clauses to address the myriad situations and requirements that arise in buying real property.

If you trust your REALTOR® (which you should by the time you get to the point of submitting a real estate offer), and they're competent, there's no need to read the entire standard real estate sale contract form. Unlike a builder's contract, which by necessity is heavily weighted in favour of the builder, resale real estate contracts are typically supplied by the local real estate board or association. Even though it's generic in nature, that is, it favours no particular party, to become familiar with the various real estate terms, of course, you're welcome to read the entire contract.

What really matters, though, is what's custom typed into the blanks and body of standard real estate contracts.

The various clauses are usually written in plain language, but your REALTOR® should be able to summarize all of them so you'll ...

Know What You're Signing

If you're unsure, it's your right to have your lawyer review your real estate offer before execution.

Aside from the normal items like party names, address and legal description of the subject property, your offer price and deposit amount, there are several other clauses that should be added. Depending upon the type of property and your particular situation, you may need a few conditions to protect yourself.

The deposit amount, by the way, should be as large as you can afford. It doesn't really cost you anything to offer a larger deposit with your offer, but the show of good faith certainly makes your offer more attractive to the seller. I once won a competition for a home buyer client with just a large deposit. It turned out that my buyer's offer was exactly the same price as the other buyer's offer, except that my client accepted my advice by including a generous deposit. That was the proverbial straw that tipped the scale in his favour.

Obviously, you must include the completion, requisition and irrevocable dates. For more details, see the page on real estate terminology. As well as declaring the present legal use of the property, you'll also need to state the balance of down payment to be paid upon completion.

In real estate contracts, it's fairly standard to request the seller to provide an existing survey or similar document. Your mortgage company may demand this. Or they may accept title insurance instead. Learn more about the benefits of title insurance by clicking here. A survey, or reasonable facsimile, though, will come in handy if you ever want to build an addition to your home, install a fence or swimming pool, or build a shed or detached garage.

There'll be the usual assortment of representations and warranties by the seller normally included in real estate contracts, wherein they state, for example, that all chattels and fixtures included will be in good working order upon completion.

Real estate contracts for condominiums have specialized blanks that must be completed, including the monthly common expense and what it includes. As well, the type and expense if any, for any parking facility and storage locker will be noted.

And finally, and certainly just as important, if not more so, are the various conditions normally added to a real estate sales contract that permit you time to perform your due diligence.

Conditions

For a normal freehold suburban or city home, your REALTOR® will recommend you include a condition allowing you to arrange a ...

Satisfactory Mortgage

After all, if you're unable to raise the funds necessary to buy the real estate, then you'll not be able to proceed with the purchase. If you fail to be approved, you'll be asked to sign a mutual release of the contract. In most circumstances, there's a provision in the condition for the return of your deposit without interest or deduction.

Another condition you'll seriously want to consider is one that permits you to receive a ...

Satisfactory Home Inspection

... report from a qualified home inspector. By having a thorough inspection of the premises, you'll know what you're buying.

Sellers are legally obligated to disclose any and all defects of their property. However, sometimes, they fail to do so, either deliberately or innocently.

Patent defects are clearly visible to the trained eye, and often to the untrained, but don't necessarily have to be disclosed for that reason. However, latent defects are another matter. Even the seller may be unaware of them, but a good home inspector will likely discover them during the two to three hours it'll take for him to inspect the entire structure.

Having said this, there are still limitations as to what an inspector can do. For example, they're not permitted to remove basement paneling to examine the foundation wall for cracks or water seepage. And if their moisture metre doesn't detect any moisture, then they must assume the foundation is in good condition.

Your REALTOR® may also recommend the inclusion of a condition on being able to arrange ...

Satisfactory Home Insurance

... particularly if the house is older. Insurance companies can be demanding when it comes to things such as electrical wiring, fireplaces and wood-stoves. They may demand a report by the local electrical safety authority ESA or a report from Wood Energy Technology Transfer WETT. So, make sure the home will be insurable because if you're unable to insure it, the bank will likely refuse to advance the funds necessary to close your real estate sale contract. Then, you're in trouble. With most homes, especially newer ones, this is not normally an issue.

The big condition is that pertaining to the ...

Sale of Your Present Home

usually, a buyer needs the sale proceeds from their old property in order to close on the new place. They'd prefer not to risk owning two homes. This type of clause is included in most such real estate contracts.

Unfortunately for you, though, some sellers refuse to accept them. Depending on what type of real estate market exists, sellers sometimes view this type of offer as not a real sale, but merely an option to purchase. What you're telling them is that you wish to buy their home, but only if you're able to first sell your own home. To learn more about the process of buying with this type of condition, click here.

If there's a swimming pool on the property, you may want to include a condition permitting you the opportunity to have a ...

Satisfactory Swimming Pool Inspection

... by a specialized pool technician. They'll pressure test the underground water pipes for leaks, examine the pump, filter and heater to ensure good condition and proper operation, and generally make sure everything's in order. Also, the inspector should be able to assure you that it complies with the local bylaws. Or if you feel comfortable, you could just accept the seller's warranty that it'll be in good working order on closing. Or on a future date if the pool was winterized when you inspected the home. Correct drafting of this clause is imperative to avoid potentially expensive repairs to the pool and equipment.

If you're ...

Buying a Condo

... a standard clause included in real estate contracts allows your lawyer the opportunity to examine specific condominium documents, thereby assuring you of a ...

Satisfactory Status Certificate

This will provide you with the comfort in knowing that you're buying into a legally and financially sound corporation. If you're ...

Buying Rural or Recreational Property

... besides possible environmental conditions, there are the more standard real estate terms included in real estate contracts. You (and your mortgage lender) will want the assurance of a ...

Well Water Potability Test

... confirming that the water is free of contamination. You'll also want to know that there is a sufficient supply of fresh water to satisfy normal family needs, and that the equipment is in good operating order.

If you're suspicious about the septic system, you may want to hire a septic technician to inspect the system and provide you with a ...

Satisfactory Septic System Report

You could go further by visiting the local municipal office to check the installation records. If it's an older system, I advise you to be particularly cautious. Click here for more information on rural living.

There are virtually as many types of conditions are there are situations for real estate contracts. If you plan to demolish the building, for example, you'll want a condition to ensure you can obtain a demolition permit. If you plan to run a home-based business, you may need to inquire if your proposed purpose will be allowed under the permitted uses of the current municipal zoning. Want horses or chickens? Check it out first.

If you're making a real estate offer, and you've entered into a conditional real estate sales contract for your old home, you would be wise to include a condition in your offer to purchase that your sale firms up. Or maybe even that you can coordinate the completion dates.

In addition to these more standard conditions, there are ...

Countless Other Situations

... that may require the expertise of a REALTOR® skilled in drafting real estate contracts. Depend on them, or consult your lawyer before committing yourself to real estate contracts. After all, what you're signing is potentially a legally binding agreement of purchase and sale. Don't treat it lightly.

Want to learn more about real estate contracts, click here.



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