If you’ve looked into purchasing pre-construction condos in Toronto you’ve come across the term “Assignment Sale”. Often Developers will offer allowing Assignment Sales as an added incentive for buyers. Or you’ll come across an agent or seller listing an assignment sale of a pre-construction condo.
The recent growth of the pre-construction condo market has seen a rise in this type of transaction, and so it’s important for buyers to understand how Assignment Sales work.
An “Assignment” is a real estate transaction where the original buyer (the “Assignor”) sells their buyer’s rights to another buyer (the “Assignee”). In Toronto, assignments are common in pre-construction condos.
Assignor: is the original buyer of the condo unit. The Assignor purchased the unit 3-5 years ago at the pre-construction sales phase directly from the builder. In an assignment transaction the assignor is the seller of this original agreement of purchase and sale.
Assignee: is the buyer of the Agreement of Purchase and Sale from the Assignor. In an assignment transaction the assignee is the new buyer of the assignor’s agreement of purchase and sale
Assignments take place before Closing – before the buyer actually has position or title of the condo. Which is why the buyer is technically selling “buyer rights” or just the contract at this stage.
Assignments can be a useful tool for buyers and sellers.
Original Buyers, the “Assignor” benefit by not having to close on their condo purchase. That means the Assignor is not responsible for paying any closing costs. If occupancy hasn’t taken place at the time of signing, then the Assignor does not have to pay any occupancy fees. Instead, the new buyer or Assignee takes over and closes on the purchase with the Developer. Given the long lead times for pre-construction condos between purchase and closing, original buyers find the ability to make an assignment sale reassuring and beneficial since they are not locked into a contract. More aggressive real estate investors looking for more immediate ROI use assignment sales to close out their position and reap the margins realized on pre-construction condos before closing.
New Buyers, the “Assignee” benefit by getting an advantage in price relative to other ready-built condo properties on the market. Assignees also get a new, unlived home. If the Assignment takes place before the selection of finishes, the Assignee gets to make final colour and finishes selections and customize to their liking. Assignees also close in a shorter time period when compared with buying at a pre-construction project at an earlier launch phase. Finally, and perhaps most importantly, Assignees have to reimburse the Assignor all deposits already paid. These deposit amounts are on the original purchase price on the contract and not at today’s market value.
For the New Buyers, the “Assignee” when you purchase an assignment you take on all the terms and conditions of the original Agreement of Purchase and Sale (APS) contract. So if the original Buyer did not get their Lawyer to review the agreement to make sure things such as levies were capped then those risks are passed on to you. Assignee can protect himself by making sure the Assignment agreement has a clause that makes offer conditional on your Lawyer reviewing the original APS.
Assignee is also responsible for all the costs associated with purchasing brand new: Tarion Warranty fees, Builder fees, Development Levies, Utility connection fees and contribution to Condo Board reserve fund.
For Original Buyers, the “Assignor” risks include responsibility for any assignment fees charge by the Builder. In the event that Assignee (Buyer) can’t close the transaction then Builder may request that Assignor closes as per the terms of the original APS.
Builder will also stop communicating with Assignor and deal exclusively with Assignee once they have agreed to and executed assignment agreement. This makes it difficult for Assignor to get important updates. It’s therefore important that Assignor Lawyer keeps in touch with both the Builder and Assignee Lawyer until Final Closing.
The assignment remains valid regardless of delays. The Assignee has taken on the agreement and all buyer’s rights and responsibilities.
Typically the Assignor is not released from closing and both the Assignor and Assignee will be liable. We advise consulting a real estate lawyer to understand the terms and conditions with regards to assignments in the original agreement of purchase and sale.
Developers typically charge an administration fee to process and approve assignment transactions. Both Assignors and Assignees are also strongly encouraged to involve a Lawyer, so there are legal fees to consider as well.
Typically the Assignee will pay any associated occupancy fees and any final closing costs unless negotiated otherwise in the assignment terms.
Payment terms vary by agreement and are negotiated between the Assignor and Assignee. Typically the Assignor gets paid (partial or full deposit amounts) when the contract is signed, or the Assignee closes and gets legal title, or when the Assignee moves in and occupies the unit.
The interest will likely be paid by the Developer to the Assignor, however this can be specified in the assignment terms.
Buyers and sellers are also encouraged to get advice from a tax accountant. There are tax implications (GST/HST) where it is determined that the Assignor’s primary intent was to flip the property for profit.
It is crucial to work with an experienced agent when dealing with assignment transactions. Real estate Assignments are legally-binding, and it’s important to understand what the clauses mean and how they directly affect you. Buyers and sellers are also encouraged to get legal advice.
1. Ensure original Agreement of Purchase and Sale includes an Assignment clause, and understand the terms and conditions imposed by the Developer on assignment transactions. For example, some Developers may include restrictions that prevent any assignment sale until a certain percentage of the building has been sold directly by the Developer, typically 90-100%. There may also be additional restrictions on advertising or listing your unit for an assignment sale. Each Developer and project is different. Typically, developers have to grant permission to allow the assignment of units.
2. Find a new buyer, the “Assignee” Finding a buyer can get tricky if a Developer prohibits listings and advertising. It is crucial to work with an agent that specializes in assignment sales to help you work around these restrictions to find a buyer.
3. Complete the required paperwork. Assignment sales involve a lot of paperwork and it is critical that the Assignment Agreement protects the interest of all parties involved. The diligence of an experienced agent and lawyer are crucial here due to the important points to be considered such as Developer’s Approval, Lawyer Reviews, responsibility for HST, Occupancy fees, Levies and closing costs etc. Additional factors to consider include, interest payments on deposits held by the Developer, and incentives per original agreement of purchase and sale to be credited by the Developer on final closing.
Assignments are great tools that offer value and benefits to both sides of the transaction, Assignors and Assignees. Due to the clauses and considerations involved, Assignments can often get complicated, making it extremely important to work with an experienced agent and real estate Lawyer to help mitigate risk.
Are you considering an assignment sale or interested in learning more? Drop me a line and let’s start talking!
