Rental Items Clause in the Agreement of Purchase and Sale
The issue of Rental Items has now become quite important in an Agreement of Purchase and Sale.
This is the Rental Clause in the standard form OREA Agreement of Purchase and Sale (2016 version):
6. RENTAL ITEMS (Including Lease, Lease to Own):
The following equipment is rented and not included in the Purchase Price. The Buyer agrees to assume the rental contract(s), if assumable: ..................................................................................................... The Buyer agrees to co-operate and execute such documentation as may be required to facilitate such assumption.
When it comes to chattels, this might not really come as much of a surprise. However when we are talking about the:
- Hot water tank
- Air purifier
- Central air-conditioning system, and
- Central alarm system,
you might be rather surprised to find that they are not part of the deal. They are fixtures, so if there was absolute silence, then the Seller would have to pay off the person with the encumbrance and provide these items “free and clear”.
In respect to fixtures, any liens MUST be registered against the title or they don’t apply. A registration against the items under the Personal Property Security Act would be lost if the items were attached and became part of the real estate. Then, the first mortgagee would have priority and these items cannot be removed.
First, you will find a notification. This is simply a statement that certain items are rental items. However, it doesn’t characterize them as either chattels or fixtures. Fixtures, as you know, are included unless:
- Excluded from the agreement, or
- Assumed by virtue of a rental agreement.
They are still, nevertheless, fixtures, and they don’t lose their characterization. The only issue is whether the Buyer is going to take over the Seller’s personal liability for the rental contract. The items actually go with the house anyways, because they are fixtures.
So, let’s assume that Bob the Buyer acquires the house and gives a first mortgage to ABC Bank. Bob owns the rental items. The Bank has first priority over the fixtures, which in this case include the rental items. The Seller used to have to make the rental payments. Now, Bob makes those payments. The Bank, never, ever, has to make those payments even if it sells pursuant to Power of Sale proceedings. The reason is that they remain fixtures. Bob’s liability arises by contract, not real estate law.
List of Rental Items
There needs to be a list. These items should be carefully specified; make and model would be helpful
Assume the Rental Contract
There is an agreement on the part of the Buyer to assume the rental contracts. This is based upon the assumption that they can be assumed. Sometimes, the rental contract Supplier/Vendor does not wish to permit assumption. He just wants his money back.
The clause goes on to say: “The Buyer agrees to co-operate and execute such documentation as may be required to facilitate such assumption.”
There’s not much room for anything else! What if the contract is unreasonable or contains penalties, or accelerated payments?
You will appreciate that it is completely unreasonable to ask a Buyer to blindly assume a contract without ever having seen it.
While this may be true, in the grand scheme of things, these rental contracts are usually not that large. So, they just get skipped and glossed over during negotiations.
Use a Schedule
The proper and correct manner to deal with this issue is for the Listing Agent to obtain the rental contracts well in advance of a transaction. Post them as a Schedule on the MLS listing. If a Buyer’s Agent wishes to submit an Offer, send copies of the rental contracts in their entirety. Ensure that the rental contracts are attached as a Schedule to the Agreement. At the very least, ensure that the Buyer acknowledges having seen and reviewed the rental contracts BEFORE the Offer is submitted.
A $3,000.00 furnace could escalate in cost very quickly. Assume that it was installed in June and never used. The choice was buy it for $3,000.00 or rent it. The rental option was selected. The property is sold in August and closes in September. At this point, the furnace is brand new and has never been used. What’s the pay out, following rental payments made in June, July, August and September? Would you be surprised if it were over $6,000.00? Don’t be, it can easily happen.
Right of Removal
What are the rights of the rental company? Can they show up one day and demand to remove their furnace?
Let’s get this straight.
It’s not their furnace!
When it sat on the delivery truck, it was their furnace. After it was installed and they left the building, it was a fixture and had become part of the real estate. Any interests they may have had continue in the form of a Construction Lien. They had 45 days to register that. If they didn’t, then they have no rights. The mortgagee has first priority, and the homeowner has second.
Personal Right of Payment as against Owner
The rental company may still pursue the homeowner, either for the monthly payments as they become due or the accelerated balance. It’s the personal obligation of the owner to pay, not the Buyer unless the Buyer were to agree to take over the rental contract.
Rental contracts can be tricky and quite expensive for real agents, if they make mistakes.
Brian Madigan LL.B., Broker