Real estate purchases can fail to complete for all kinds of reasons.  A buyer might not be able to get a mortgage.  A Seller might not be able to find a new place and not be able to move out.  One of the more confusing is the subject of this article: a Seller who cannot discharge all his debts.

In order to understand this situation, you need to understand how a transaction proceeds, and how it fits within the title system.  When you make an agreement to purchase a property there are a series of standard provisions in the purchase contract, and one of those give your solicitor the right to do what are called ‘title searches’.  The title register is a list of all the rights anyone has ever had in the property you are buying.  A title search is review of the rights registered against the property, such as ownership, but also things such as mortgages which are registered against title as debts.  The purpose of this is to determine what is registered that you, as the new owner, are going to want removed, because you are entitled to receive good title to the property, free from the debts of the previous owner.

This is where problems can arise, because you may have the legal right to demand that any debts registered against the property be removed, but what happens if the Seller doesn’t have the money to pay them?  The first thing to understand is that because issues like this ‘go to the root of title’, as lawyers say, it means that if the Seller cannot discharge all his debts you have the right to claim a breach of contract, and therefore refuse to complete the purchase, claiming back your deposit.  This would mean losing all the time and money which had gone into preparing to purchase the property, and may also leave you in an awkward position if this happens right before the expected completion, because you may have given notice to your landlord, or already sold your property and be prepared to move.

What tends to happen in these situations is a game of chicken right down to the last minute.  All of the players involved, the buyer, the lenders, the realtors and the lawyers, agree to either pay more or accept less, going back and forth to see who is most willing to let the deal fail, until the lenders, realtors and lawyers, have accepted enough less and the buyer to pay enough more that the debts can all be discharged.

This begs two questions: first, how to avoid this, and second, why does it happen in the first place?  As to why this happens, it’s because this isn’t something that realtors ever check.  Realtors are concerned with ‘getting a deal’, and so don’t look for pesky details that would make a buyer keep looking.  They also tend to blithely say that things to do with title are things the lawyer will do, and just refuse to engage with them, regardless of how much trouble and expense it may cause later, which could be avoided if handled sooner.

As to how to avoid it, that’s relatively easy, if a bit unconventional.  First, get a lawyer when you start LOOKING for properties, not when you have an agreement.  The biggest contract of your life should be the purview of a lawyer, not a salesman.  Second, have a condition in your agreement which says that the agreement is conditional upon your review of title, and the Seller being able to produce a lawyer’s ledger and undertaking (a personal promise from the lawyer) to discharge all the debts.  When your offer is conditionally accepted, have your lawyer do a title search, and provide the Seller with copies of the registered charges, saying they must now provide you with discharge statements for all the debts and writs registered against the property and the Seller, a ledger showing how they’re going to be paid off, and a lawyer’s undertaking that they will be paid off on the completion date.  If they can’t or won’t do this, walk away.

Using a condition to accomplish this isn’t strictly legally necessary, as you may have noticed from my earlier commentary on how issues like this go to the root of title and how the Seller’s failure to provide good title would be breach.  Using a condition isn’t the suggested course for legal reasons, but for administrative ease in dealing with realtors.  Realtors don’t understand issues like ‘root of title’ and consider anything to do with title to be the lawyer’s problem.  In their minds, once a deal is ‘firm’, they are off the hook and will try to do as little as possible.  Using a condition in a contract is more an exercise in keeping the agreement in the provisional stage to keep them engaged and understanding that nothing is certain, and to allow you to resolve the issue of the Seller being able to actually provide good title as early as possible, so you don’t need to wait until they fail later on before you can get out of the contract and start looking for something else.