You’re about to make an offer to purchase property, but you keep hearing everyone refer to subjects. What are subjects? What does it mean to remove them? How important can they be, really?
Setting Subjects
Subjects are conditions that you write into your offer to let the other party know that you are committed to selling or buying the property as long as the said conditions check out by the specified subject removal date. Thus, you make your contract conditional or “subject to” conditions in order to allow yourself time to do due diligence and research related to those subjects. It is important to note that the subject removal date is established at the time the subject is set, ensuring that both the buyer and the seller agree upon the timeframe that is being allowed for this due diligence period.
Removing Subjects
For example, if a buyer writes her offer “subject to financing,” this allows the buyer time to submit her conditional contract to her lender (which usually requires a property appraisal and review of the accepted offer) and to obtain bank approval for the mortgage. Upon bank approval, the buyer becomes satisfied that she can pay for the property, allowing her to feel comfortable to remove the financing subject from the contract. Removing all subjects makes the contract legally binding and enforceable.
On the contrary, if the buyer cannot obtain bank approval for financing, the buyer would not want to remove the financing subject. In that case, the buyer would need to either:
(a) ask the seller for an extension of the subject removal date so she has more time to find an alternate source of financing. (Note: an extension would require consent of both the buyer and seller), or
(b) the buyer would not remove the subject and the conditional contract would collapse, becoming null and void.
Importance of Subject
You can see from the above example that subjects are very important. They give the buyer or seller a chance to be released from legal obligation to purchase or sell the property if something goes wrong and conditions can’t be met.
Note: in a fast-paced, “seller’s market” (where there are multiple competing offers to purchase the same property), buyers are often motivated to make their offer subject-free, which means that, if accepted by the seller, the contract becomes legal binding immediately. (Seller’s like this because there is no chance of a collapsed deal due to lack of subject removal). This is risky for a buyer because it means there is no due-diligence period and no legal out; if something goes wrong (ie: an inspection finds black mold), the buyer must still purchase the property or must breach the contract and be liable to lose her deposit and to be sued for damages.
Common Subjects
Both buyers and sellers can write subjects into the contract. Buyer conditions are commonly subject to:
- financing;
- inspection of the property;
- review of strata documents (including Form B Information Certificate and minutes);
- receiving legal advice on the contract;
- obtaining property insurance;
- the buyer having a firm contract (binding, no subjects) to sell the buyer’s own property
Seller conditions may be subject to:
- the seller being able to purchase another property (getting an accepted offer) by a certain date;
- when the seller is an executor of an estate, the seller’s receipt of the grant of probate.
Summary
- A conditional contract becomes legally binding when all the subjects are removed.
- If a buyer breaks or breaches a binding contract, there are serious legal repercussions. The buyer may forfeit her deposit and become subject to a lawsuit for “damages,” including the cost of Realtor commissions, the seller’s lost sale proceeds and legal fees.
- Subjects are important because they provide a due diligence period and give the owner of that subject (either a buyer or seller) an “out” if something goes wrong.
- All subjects must have a subject removal date. Failure to remove subjects by that date and to obtain an extension of the removal date renders the deal void.
- Writing an offer without subjects is risky.
