The preliminary contract is the first step in the purchase of a new property. It is a critical legal document similar to the promise of purchase which precedes the purchase of a property from a previous owner, but it possesses particular characteristics and specifications that it is essential to know before embarking on the adventure of buying a new home.
Here are 5 questions and answers to help you understand the preliminary contract.
1. What is a preliminary contract?
As the first step in the purchase of a new home or one under construction, the preliminary contract binds the promisor-buyer and the vendor. By signing it, the promisor-buyer commits to buying the property designated by the preliminary contract and to pay the agreed upon price. The builder promises to build the home according to the specifications outlined in the preliminary contract, to hand it over to the promisor-buyer, and to transfer legal title of the property to the promisor-buyer.
2. What information does it contain?
The following are contained in the preliminary contract:
- The name and address of the promising promisor-buyer and the vendor
- The address and lot number of the property, the dimensions of the building and those of the lot
- The date the property is to be delivered by the vendor
- The detailed sale price including method of payment
- Description of work to be completed by the vendor
- The obligations of both the promisor-buyer and the vendor
- The deadline to finalize the contract
- The signatures of both parties
3. Is it mandatory?
Yes. The Civil code of Québec stipulates that when a builder sells a home that is new or under construction to a promisor-buyer who intends to live in it, the transaction must be preceded by a preliminary contract.
The preliminary contract only applies when the building and the lot both belong to the vendor. When a home is built on a lot that belongs to the promisor-buyer, the transaction is then preceded by a contract of enterprise.
4. Can the contract be rescinded?
The purchase of an existing property is preceded by the signing of the purchase offer. When this document has been signed by the two parties, it is legally binding for both the promisor-buyer and vendor, and prevents them from backing off from the sale. This is not the case with the preliminary contract. The Québec civil code allows a 10-day cancellation period for the promisor-buyer who has signed a preliminary contract. The vendor, in this case, may require an indemnity equal to 0.5% of the sale price if the promisor-buyer exercises this right. For example, if the sale price is $200,000, the promisor-buyer who backs off from the sale in the 10 day period would be required to pay an indemnity of $1,000 to the vendor.
Caution: to be applicable, this clause must be included in the preliminary contract.
5. What should I watch out for?
Before committing to the purchase of a new property, the promisor-buyer should verify that the builder is accredited by a program of guarantee for new homes. There are two possible accreditations in Quebec: the APCHQ Abritat guarantee (you will find the list of accredited builders here) and the Qualité Habitation guarantee which also provides a list of builders. A guarantee carries the advantage, among other things, of being reimbursed in the case of a delay in the delivery of the project.
It is important to be wary of home-made preliminary contracts, that is, contracts drawn up by the builder, because these can be designed to favour the builder. They often leave the promisor-buyer at the mercy of the developer when it comes to important clauses such as: penalty in case of delay, increase in sale price during construction without limit, etc.
The promisor-buyer is therefore strongly advised to ensure that the preliminary contract is endorsed by the APCHQ or the ACQ. If not, it is important to read the document carefully, ideally with the support of a real estate professional.
The experts at goMaison.com also recommend asking that detailed plans and descriptive documents of the work in progress be annexed to the contract. The implementation plan that describes the orientation and situation of the building, the construction plan and the descriptive plan where the finishing materials, colours, exact dimensions of finished rooms etc. are detailed, should all be included with the contract.
And finally, remember to never rely on a verbal agreement. Get everything in writing to ensure a clear understanding and predictable outcome!