When a lawyer is presented with an unconditional but obviously defective agreement of purchase and sale by a client, does he or she have an obligation to try to negotiate an improvement to its terms?
That was the question for the court to decide in the case of Graham v. Diamond, released by the Ontario Superior Court of Justice in June.
In July, 2002, Patrick and Heather Graham entered into an agreement to purchase a house on Carrington Lane in Quinte West from George Diamond. The agreement was conditional until the end of the month on the Grahams arranging satisfactory financing, failing which the deal would die and the deposit money would be returned.
There was no condition for either an environmental assessment or a home inspection.
After the financing condition had been waived and the deal was firm, the Grahams retained Belleville lawyer Raymond Kaufman to represent them in the transaction.
Prior to closing, Kaufman confirmed with the city of Quinte West that there were no outstanding work orders on file against the property. The transaction closed August 16, 2002.
Three years later, the buyers sued the sellers, their real estate agents, their lawyer, and others claiming damages for “serious and permanent injuries” resulting from apparent contamination of either the land or the building itself.
Among other things they claimed that Kaufman failed, neglected or refused to ensure that a proper environmental site assessment was performed at the property, and that it was a customary practice to have a home inspection performed on the property before the closing of the purchase.
In response to the law suit, counsel for Kaufman brought an application in the Superior Court of Justice in Belleville in May asking the court to dismiss the action against him on the basis that there was no genuine issue for trial.
Kaufman’s position in court was that he accepted the retainer from the Grahams after all the conditions in the agreement had been waived by them, that he completed all the standard title and other searches and had certified title in accordance with standard solicitor’s practice.
On June 4, Justice Michael Quigley released his decision dismissing the claim against Kaufman without the need to have a trial.
“There is no law,” wrote the judge, “to suggest that the Grahams were entitled to either a home inspection or environmental assessment unless there was a condition in the agreement to that effect.”
“Even if (Kaufman) had been alerted to such potential problems, I am not convinced that Kaufmann’s retainer to close the transaction could be extended to include an obligation on his part to examine the possibility of the existence of such problems. Once Kaufmann had completed the title search and found the property free and clear of any encumbrances and/or title problems . . . the Grahams were then obligated to close.”
In his decision, the judge asked, “Did Kaufmann have any obligation to negotiate a ‘better’ deal than the one negotiated by the Grahams themselves?”
Answering his own question, the judge wrote, “Firstly, he was never instructed to do so, and secondly, had he been so instructed, the Grahams were not entitled to a ‘better’ deal by virtue of their signed agreement of purchase and sale. In effect, the Grahams are asking the court to find that Mr. Kaufmann should have closed the barn door some days after the horse had bolted the stable.”
Several lessons emerge from the case of Graham v. Diamond:
• Lawyers should be consulted before an offer is signed, or at the very least, during the conditional period. Getting legal advice after the conditions have been waived is very risky.
• Buyers who sign agreements that are not conditional on home inspections are risking years of aggravation and huge expenses to remediate a defective house.
• Trying to renegotiate any part of a firm transaction is frequently a waste of time and effort.
• And finally, there is no such thing as a “simple” real estate deal which doesn’t require legal advice in advance. Even the most straightforward transaction can blow up, resulting in years of expensive litigation.
Bob Aaron is a Toronto real estate lawyer and board member of the Tarion Warranty Corp.
Friday, August 27, 2010
Fixed vs.Variable Rate Mortgages: How to choose
The good news in the housing market these days isn’t just low interest rates.
Experts say that whether you choose a variable rate mortgage or a fixed rate for a set period of time, the difference over the long run is likely to be minimal.
“Rates have never been this low so Canadians are increasingly looking for advice when it comes to mortgages. The question of fixed versus variable takes on greater importance when you consider where rates are and the possibility that rates will start to increase towards the end of this year,” said Collette Delaney, senior vice-president of mortgages and lending at the Canadian Imperial Bank of Commerce.
Experts typically say that a fixed-rate might bring more peace of mind to first-time home owners, and that those who are further into their mortgage payments may like to try a variable rate to save some money.
But that may not be right for everyone.
“There is really no generic answer,” Delaney said. “What’s right for me may not be right for you or someone else because we’re all at different stages in terms of financial planning and lifestyle.”
The big advantage of fixed rate mortgages is that they offer a high level of stability. When you lock in a mortgage at a fixed rate, you’re locking in for the term of your mortgage so you will know, for each monthly mortgage payment, exactly how much is going to the interest and how much is going to the principal.
“You’ll know at the end of your term how much of your amortization you’ve paid off. The downside is that you can’t take advantage of lower interest rates. If rates do drop, you won’t have the ability to have more of your payment go towards the principle and less to interest,” said Bernice Dunsby, director of home equity financing at the Royal Bank of Canada.
With a variable rate mortgage, your monthly payments don’t change. What may fluctuate is your interest rate. That means when rates go down, an increased amount of your payment will actually go to your principal, and less to interest. That means when rates go down, you’re paying off your mortgage faster.
But when interest rates increase, so does the portion of your payment that goes to interest. With less going to cover the principal, it’s possible that your amortization period could be extended.
Research by Canadian economic experts shows that variable rate mortgages hold more benefits to consumers the vast majority of the time.
Moshe Milevsky, associate professor of finance at York University, studied mortgage rate data from 1950 to 2007 and found that choosing a variable rate mortgage would have saved Canadians $20,000 in interest payments over 15 years, based on a $100,000 mortgage.
He also found that Canadians would have been better off with a variable rate mortgage compared to a five-year fixed rate 89 per cent of the time.
The question is whether this other 11 per cent of the time when it is advantageous, is right now, said Benjamin Tal, senior economist with the CIBC World Markets.
“This is one of the few examples of times when it really doesn’t make much of a difference. If you take variable and I take fixed now and we meet five years from now, you would probably be able to buy me lunch, but it would be a cheap lunch.”
That’s largely because interest rates are so low right now. Economists are expecting rates to increase by about half a percentage point or more beginning in June, with further rate hikes to come in 2011.
Right now, variable rate mortgages tend to be about 1.75 percentage points cheaper than fixed rates. But interest rates will probably rise by more than that overall in the next couple of years.
“This will probably take variable rates, more or less to where fixed rates are now, maybe a bit higher. If you do the math, you would find the difference would not be very significant,” Tal said.
If you’re looking for peace of mind, he added, take the fixed rate.
“If you have a large mortgage vis-à-vis your income, I would go fixed and just relax about it. Learn the market, pay as much equity as possible but go fixed because you don’t want the volatility,” Tal said. “However, if you have been in the mortgage for a while and your mortgage is not as large relative to your income, pay with the variable and you will do better over five years from now but not significantly.”
Many banks have an array of mortgage products that combine the fixed and variable rates mortgages. These typically allow homeowners to combine the security of the fixed rates with the ability to take advantage of any interest rate declines.
But experts say that even if a variable rate mortgage could save you money in the long run, you still need to think about the risk.
“If a fluctuating interest rate is going to keep you up at night because you’re not sure how much is going to principle and interest, then maybe a variable rate mortgage is not right for you,” Dunsby said.
It’s also important to consider your stage of life. If you’re counting on having your mortgage paid off in five years because you want to retire, then the possibility of your amortization period being extended probably isn’t for you.
Don’t forget to take your other debt obligations and savings goals into account.
“For some people locking into a payment actually gives them flexibility to working to other savings goals or paying other debts,” Delaney said.
“It’s very tempting to look at low rates today but we encourage people to look beyond where rates are today and consider what mortgage is right for them in the medium and long term.”
MADHAVI ACHARYA-TOM YEW
Experts say that whether you choose a variable rate mortgage or a fixed rate for a set period of time, the difference over the long run is likely to be minimal.
“Rates have never been this low so Canadians are increasingly looking for advice when it comes to mortgages. The question of fixed versus variable takes on greater importance when you consider where rates are and the possibility that rates will start to increase towards the end of this year,” said Collette Delaney, senior vice-president of mortgages and lending at the Canadian Imperial Bank of Commerce.
Experts typically say that a fixed-rate might bring more peace of mind to first-time home owners, and that those who are further into their mortgage payments may like to try a variable rate to save some money.
But that may not be right for everyone.
“There is really no generic answer,” Delaney said. “What’s right for me may not be right for you or someone else because we’re all at different stages in terms of financial planning and lifestyle.”
The big advantage of fixed rate mortgages is that they offer a high level of stability. When you lock in a mortgage at a fixed rate, you’re locking in for the term of your mortgage so you will know, for each monthly mortgage payment, exactly how much is going to the interest and how much is going to the principal.
“You’ll know at the end of your term how much of your amortization you’ve paid off. The downside is that you can’t take advantage of lower interest rates. If rates do drop, you won’t have the ability to have more of your payment go towards the principle and less to interest,” said Bernice Dunsby, director of home equity financing at the Royal Bank of Canada.
With a variable rate mortgage, your monthly payments don’t change. What may fluctuate is your interest rate. That means when rates go down, an increased amount of your payment will actually go to your principal, and less to interest. That means when rates go down, you’re paying off your mortgage faster.
But when interest rates increase, so does the portion of your payment that goes to interest. With less going to cover the principal, it’s possible that your amortization period could be extended.
Research by Canadian economic experts shows that variable rate mortgages hold more benefits to consumers the vast majority of the time.
Moshe Milevsky, associate professor of finance at York University, studied mortgage rate data from 1950 to 2007 and found that choosing a variable rate mortgage would have saved Canadians $20,000 in interest payments over 15 years, based on a $100,000 mortgage.
He also found that Canadians would have been better off with a variable rate mortgage compared to a five-year fixed rate 89 per cent of the time.
The question is whether this other 11 per cent of the time when it is advantageous, is right now, said Benjamin Tal, senior economist with the CIBC World Markets.
“This is one of the few examples of times when it really doesn’t make much of a difference. If you take variable and I take fixed now and we meet five years from now, you would probably be able to buy me lunch, but it would be a cheap lunch.”
That’s largely because interest rates are so low right now. Economists are expecting rates to increase by about half a percentage point or more beginning in June, with further rate hikes to come in 2011.
Right now, variable rate mortgages tend to be about 1.75 percentage points cheaper than fixed rates. But interest rates will probably rise by more than that overall in the next couple of years.
“This will probably take variable rates, more or less to where fixed rates are now, maybe a bit higher. If you do the math, you would find the difference would not be very significant,” Tal said.
If you’re looking for peace of mind, he added, take the fixed rate.
“If you have a large mortgage vis-à-vis your income, I would go fixed and just relax about it. Learn the market, pay as much equity as possible but go fixed because you don’t want the volatility,” Tal said. “However, if you have been in the mortgage for a while and your mortgage is not as large relative to your income, pay with the variable and you will do better over five years from now but not significantly.”
Many banks have an array of mortgage products that combine the fixed and variable rates mortgages. These typically allow homeowners to combine the security of the fixed rates with the ability to take advantage of any interest rate declines.
But experts say that even if a variable rate mortgage could save you money in the long run, you still need to think about the risk.
“If a fluctuating interest rate is going to keep you up at night because you’re not sure how much is going to principle and interest, then maybe a variable rate mortgage is not right for you,” Dunsby said.
It’s also important to consider your stage of life. If you’re counting on having your mortgage paid off in five years because you want to retire, then the possibility of your amortization period being extended probably isn’t for you.
Don’t forget to take your other debt obligations and savings goals into account.
“For some people locking into a payment actually gives them flexibility to working to other savings goals or paying other debts,” Delaney said.
“It’s very tempting to look at low rates today but we encourage people to look beyond where rates are today and consider what mortgage is right for them in the medium and long term.”
MADHAVI ACHARYA-TOM YEW
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