You’re about to make an offer to purchase property, but you keep hearing everyone refer to subjects. What are real estate subjects to contracts? What does it mean to remove real estate subjects to contracts? How important can subjects 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 the real estate agreement 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 to the real estate agreement. Removing all real estate subjects to the contract 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 to the real estate agreement. 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 to the real estate agreement 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 tempted to make their offer subject-free, which means that, if accepted by the seller, the contract becomes legal binding immediately. Sellers like subject-free offers because there is no chance of a collapsed deal due to lack of subject removal; a firm (no subject offer) means the parties must complete pursuant to the contract. Although going subject-free may seem to offer a competitive edge in a tough market, subject-free offers are not ideal; they are risky for buyers because there is no due-diligence period and almost* no legal out. So, 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.
(*Note: in 2023 the BC Government brought in the “Cooling Off Period” also known as “Rescission Rules” in order to try to remedy buyer’s remorse often resulting from hasty subject-free offers).
Common Subjects
Both buyers and sellers can write subjects into real estate agreements.
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.
“Subjects” in Real Estate Deals Summary
- A conditional contract becomes legally binding when all the subjects to a real estate agreement 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. The same is true if a seller breaches a binding contract and refuses to complete.
- Real estate subjects to contracts 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 real estate subjects to contracts 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 to a real estate agreement is risky.
