Updated April 6, 2023 by Mike Stewart PREC
Buying Your First Home Safely in Vancouver with Subject Clauses in the Contract of Purchase and Sale!
In Episode 12, we discussed the expiry time and date of a real estate offer.
In this post we talk about one of the common ways to protect a buyers interests in an offer with subject clauses to.
When it comes to buying a first home, Safety Comes First!
Subject Clauses in a real estate offer coupled with detailed due diligence is the best ways to ensure that a first home isn’t a hassle, money pit, leaky condo, or worse.
What is a Subject Clause in a Real Estate Offer?
A subject clause in a real estate contract is sometimes referred to as an “Escape Clause“, which Wikipedia defines as follows:
“An escape clause is any clause, term or condition in a contract that allows a party to that contract to avoid having to perform the contract. If an agreement was drawn up for the sale of a house, for example, the purchaser could include some kind of escape clause in the contract, which will allow him to “escape” from the contract without being liable for breach of contract.”
Subject clauses are a way to protect buyers (and sometimes sellers) to allow for time for the buyers to do their due diligence on the purchase of a property. Typically, subject clauses (sometimes referred to as conditions) are added to a real estate purchase contract when the offer is written buy the buyers Realtor. Theses clauses typically are used to confirm financing or arranging a mortgage, getting a home inspection, an oil tank scan, or to review documents among others. In the Vancouver market, subject clauses are typically 7 days or 5 business days. Subject clauses in real estate purchase contracts effectively allows a buyer to tie up a property and stop other buyers from buying the property during the term in which the subject condition is in effect.
Subject clauses are sometimes referred to as condition precedent, but in the jargon of Vancouver and BC real estate we use the term “subject clause”.
For subject clauses to be legally enforceable they need to be clear and precise. All of these clause start with the term “Subject to” For the purposes of Vancouver & BC real estate, there are three types of subject clauses:
- Clear, precise, and objective clauses – This would mean that if if condition A occurs, the transaction goes forward. Here is an example Subject to Mary Smith being elected prime minister of Canada in the federal election on October 31, 2023. This subject is the for the sole benefit of the buyer. So what this means is that if Mary Smith is elected Prime Minister of Canada, the real estate transaction that has this subject clause will go forward and complete (ie buyers will give money and sellers will give ownership). The buyer or seller in this case do not need to take action as they do not control who gets elected Prime Minister of Canada. Furthermore, the buyer cannot stop the sale from occurring if Mary Smith is elected Prime Minister.
- Entirely subjective clauses – This would mean that if a buyer approves, likes, or is satisfied with something to do with the property, the real estate deal goes forward. Here is an example Subject to the buyer approving the colour of the second bedroom carpet on or before November 15, 2023. This subject is for the sole benefit of the buyer. In this case, if the buyer approves the colour of the carpet, the deal goes forward. If the buyer does not approve colour of the carpet, the real estate transaction dies. To make the transaction go forward once the buyer decides they like the colour of the carpet, they need to instruct their Realtor to prepare a subject removal document and the buyer needs to sign it. If the buyer does not sign the subject removal and this document is not sent to the sellers agent in a timely manner, ie before November 15, 2023, the deal will die and no property sale will occur.
- A mix of subjective and objective elements – This would be were the buyer is required to take action like getting a home inspection, but they has to approve it or be satisfied with it. An example of this would the following ” Subject to the buyer obtaining a satisfactory building inspection report on before May 5, 2024. This term is for the sole benefit of the buyer.” In this subject, the buyer would have to get a home inspection, an objective thing, that if they do no do the seller may have grounds to bring legal action. The second part of this subject is subjective based on the buyers opinion on whether or not the home inspection was satisfactory. If the buyer gets a home inspection and is not happy with it, the buyer can kill the deal. If the buyer is satisfied with the inspection, the deal can go forward and complete.
Why do Buyers Need Subject Clauses?
Buying a property is never a simple affair and there is risk at every turn. A Buyer finds a property they want to purchase. The Buyer knows nothing about properties or the issues that they may have. The Buyer needs time to get and digest professional advice on the following questions:
- Is it a Leaky Condo? (Home Inspector)
- Is the Strata Council is managing the annual Budget well? (Accountant)
- Once all the issues are uncovered, is the property worth what was offered? (Realtor)
- Can the Buyer get a mortgage on the property? (Mortgage Broker)
The Subject Clauses in the Contract of Purchase and Sale allow the Buyer to control the property (The Seller cannot sell the property under contract to another Buyer during the Subject Period) for the 7 day Subject Period to check the property over to make sure its to the Buyers liking. If the Buyers likes it, they can move forward, if not they can kill the deal.
How Do Subject To Clauses Work?
In the example below (Pages 5-7), the Subject Clauses are any sentence that starts with “Subject to the Buyer…”.
The Subject Clauses give the buyer seven days (this is the the standard time period in the Vancouver real estate market) to review the all the available information on the property and approve it.
If the Buyer does not approve of any of this information, they can walk away from the (ie kill the deal) deal during this 7 day period. If the Buyer gets an accepted offer and does nothing after that, the deal automatically dies. A Buyer has to take action and have documents prepared and then sign them to make the Contract of Purchase firm and binding.
These clauses make the offer subject to the Buyer receiving and approving a home inspection, the standard property documents, and legal and accounting advice, etc.
Important Points about Subject Clauses for Buyers
- The Buyer CAN KILL THE DEAL IF THEY WANT! – Yes, the Buyer can walk during the Subject To period if they are not happy with the accepted offer!
- Easy to Get Out Of the Offer – If the Buyer does nothing after getting an accepted offer on a property, the deal automatically dies at the end of the 7 day Subject Period.
- Customizable – Subjects can be customized to cover anything a Buyer can imagine. For example, I had some Buyers who wanted to stay over night at my listing to test the noise from a nearby railway track. The Buyers made their offer subject to the Buyers sleeping over and approving the noise levels.
- Sellers Can Use Them Too! – Sellers are able to and sometimes do insert subject clauses in their favour, but this is rare.
- Subject Offers Lock in the Seller, but NOT the Buyer! –If a Buyer has an accepted offer that is subject to in their favour, the Buyer can kill the deal, but the Seller cannot!
- Subject Offers are based on the Buyer State of Mind not Action! – Most subjects for Buyers (And all of MY standard clauses) are based on a Buyer approving or being satisfied with something (home inspection, legal advice, etc). If a Buyer receives an inspection report that says the building is the best in the world, they can still kill the deal if they are not satisfied or if they don’t approve of the report. Likewise, the inspection comes back saying the building is terrible, the Buyer can approve the inspection and go forward with the deal.
CHECK OUT First Time Home Buyers Guide 14 Where we discuss the Subject to Financing commonly found on the BC Contract of Purchase and Sale!
Looking for Advice on Pre Construction Properties? Check out How to Buy a Presale in Vancouver with Video!
Selling in Vancouver? Questions? Check out How to Sell a Condo in Vancouver with VIDEO!