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December 4th, 2013

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Up to my neck in hot water: The rental assumption clause

 

We all know that when it comes to contracts, we’re supposed to read the fine print… But what about the MINUTE print? If you’ve ever been part of a real estate transaction, you are probably all too familiar with the dozens of ‘Standard Clauses’ that exist on an Agreement of Purchase and Sale. There are clauses about residency and notice and chattels and fixtures and of course, clauses about the assumption of ‘Rental Equipment’ within the home.

Now if you’re unfamiliar with the clause, I’m here to enlighten you. It goes a little something like this:

“RENTAL ITEMS: The following equipment is rented and not included in the Purchase Price. The Buyer agrees to assume the rental. _______________________________”

With a little space for you to list out all the items that fall within the said category.

Now, the idea here, for a piece of equipment like a hot water tank, is that the seller isn’t going to be taking the hot water tank with them. It is rented, and it is likely that the buyer will also require a means to heat water. For that reason, it is indicated that the contract held by the seller with the provider of the rental equipment is to be assumed by the new buyer…I’m going to spell this out here: the buyer will take over the contract and be responsible for all future payments and dealings with said ‘hot water tank rental company’.

So that’s all fine and dandy. A lot of buyers DO, indeed, need to rent a water heater. But what if that same hot water rental contract is fixed for, say, a 10 year period?  What if the buyer purchases the home and then decides they don’t want to rent a hot water heater anymore? Unfortunately these companies are charging hundreds (even thousands) of dollars to holders of assumed contracts who want out!

Now, for many of my readers, this may seem simple. Like a cell phone contract, if you want out of your 3-year contract early, you have to pay or ‘buy out of it’. Well, when it comes to rental equipment within a sold property, unfortunately the length of the contract is not always disclosed to the buyer when an agreement of purchase and sale is accepted. ‘Buying out’ of the contract can open up a ton of financial and legal issues for the buyer that were never anticipated.

 

After discussing with the Ontario Real Estate Association and the Real Estate Council of Ontario they acknowledged that in recent years a plethora of buyers in the province have experienced the terrible surprise of being locked into these agreements. The question has come up: Should the Standard Agreement of Purchase and Sale revise this particular clause? Perhaps it should say that if any rental equipment in the home is to be assumed, the seller is to provide full disclosure on the length and terms of that contract. If the buyer is not prepared to assume such a lengthy rental contract once reviewing it in detail, it should be the seller’s responsibility to front the cost of any penalties associated with the agreement’s cancellation. The local real estate board is under the belief that if the standard clause was revised, it would result in less deals being done…in other words, in a multiple offer situation, an offer without the rental assumption clause would be less attractive to a seller than the one with the assumption clause. Perhaps they are right, but is this really any different than an offer that has an inspection clause over one that doesn’t? An agreement that includes a financing condition versus one that doesn’t? 

And while hot water tanks might be the most common piece of ‘rental equipment’ to fall under this discussion, buyers need to be aware that this category could include anything from furnaces, central air conditioners, security/alarm systems, general utility contracts and much more.

So what do we do about it? Should we remove the rental assumption clause all together? That might not be necessary. If you're putting an offer on a home with an assumable rental contract, your Realtor needs to ask for a copy of that contract, READ it, and then negotiate accordingly depending on what it states when it comes to penalities for the buyer. I have recently developped a few custom clauses for the Agreement of Purchase and Sale specifically for situations like this, in an effort to protect my buyer clients.

Now, what, you might ask, is the moral of this story? I use this as an example of yet another way of ensuring your Realtor is working for YOU! Sure, your Agent might be able to sit down and explain the meaning of all the clauses to you, but will they do the research required to get you the minute print in order to make the best decision? I sure hope so!

Cheers to hot water!

– Trish

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