5 THINGS TO KNOW ABOUT THE PRELIMINARY CONTRACT
As a new home buyer, there are 5 important things you should know about the preliminary contract.
Whether you are buying a new home or want to have one built, the preliminary contract is the first step you will have to take when talking to a developer or a builder.
As the name suggests, it is a legal document that creates rights and obligations for the parties who sign it. This is why it is important to know what’s involved before taking action.
1. What is the preliminary contract?
The preliminary contract is defined as the prior-contract (which precedes the sales contract itself) according to which the developer or the building constructor undertakes to sell to a person a new residential construction, whether already built or to be built. The preliminary contract also stipulates the conditions of the sale as well as the price.
A very important fact to remember is that the preliminary contract must contain a clause which allows the buyer to withdraw from the promise to purchase. This is called the right of withdrawal.
If it is a purchase based on plans, it is recommended that all the plans (site plan, certificate of location, building or house plans, estimates with the chosen materials and finishes, etc.) be attached to the contract.
There are two types of preliminary contracts which contain variations depending on the type of ownership:
Contract for a house or a building not held in common property
Contract for a residential divided co-ownership
In other words, there are a few differences between the contract for a single-family home and that for a condo.
2. The content of the preliminary contract
For your information, the Residential Construction Guarantee (GCR in French), which is a protection plan for new homes, has set up a mandatory form for off-plan sales.
Here is the information found in the mandatory form:
- Project name, unit number, cadastral number, dimensions, address
- All the information to identify the developer / builder
- All of the buyer’s information
- The breakdown of the sale price
- Right of withdrawal option by the buyer (10 days to withdraw)
- Delivery date
- Signatures of both parties
3. Is the preliminary contract binding?
The preliminary contract is binding. Indeed, article 1785 of the Civil Code of Quebec obliges the builder of a new home or building to enter into a prior-contract with the buyer, commonly known as a "preliminary contract".
If the building to be occupied is built on land owned by the assignee, then this is a business contract that the parties will need.
Conversely, if the land and the new or the to-be-built housing both belong to the builder, the parties will then have recourse to the preliminary contract.
4. How to withdraw from the purchase contract for a new building?
Unlike the promise to purchase for an existing home, the preliminary contract can be canceled. Indeed, the promise to purchase is binding since you cannot withdraw unless you have, for example, found a hidden defect before signing the deed of sale.
Under the preliminary contract, the law allows the purchaser of a new or to-be-built residential construction to withdraw from the sale. In fact, article 1786 of the Civil Code of Quebec gives the buyer a right of withdrawal. The latter may avail itself of this clause on condition of its being exercised within the strict 10-day deadline following the signing of the preliminary contract.
It should be noted that the seller may demand compensation following the buyer’s withdrawal provided, however, that this is clearly stipulated in the preliminary contract. This compensation is at most 0.5% of the sale price. Thus, if the sale price was $500,000, the compensation payable to the seller cannot exceed $2,500.
5. Why choose an Accredited Contractor (GCR)?
It is important to choose an accredited builder who is a member of a guarantee plan for new homes. In Quebec, since January 1, 2015, the GCR association has been managing the guarantee plan. By doing business with an accredited builder, the buyer can be compensated in the particular instance of late delivery of his dwelling, which is not always the case when the builder uses his own preliminary contract.
In fact, a builder who is not accredited under a guarantee plan for new homes can use his own preliminary contract. Consequently, the preliminary contract offered to the buyer by the builder may very well benefit the builder on aspects such as compensation to be offered to the buyer in the event of late delivery or even with regard to an increase in the sale price due to materials and labor increases. In this situation, consult a notary or specialist lawyer to be sure you are protected.
Because good business is backed by good documents, don’t hesitate to demand that everything be put down in writing so that the road leading to your future home turns into the best journey possible.
By Guy Baillargeon