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Don't Make the Waiver Mistake!

Posted May 10th, 2012 under pitfalls, say what?, smart buying, smart selling.

Do you know the difference between a Waiver and a Notice of Fulfillment? If not, you could be risking tens of thousands of dollars when you sell! Read on to learn more.

Conditions: What and Why

A standard Agreement of Purchase and Sale will usually include several conditions. A condition is something one of the parties may or must do before the agreement becomes firm.

For example, there is a common condition that allows the buyer to nullify the deal if they are unable to arrange a mortgage. This is known as “conditional on financing”.

Another common condition calls for a home inspection, and allows the buyer to nullify the deal if the inspection reveals any flaws that the buyer is not willing to accept.

Waiver vs. Notice of Fulfillment

A condition can either be fulfilled or waived, and the difference is crucial!

When someone fulfills a condition, they provide the other party with a Notice of Fulfillment. This is a legal document that, in layman's terms, says “I have done the thing we agreed on, so our deal can go ahead”.

When you provide a Notice of Fulfillment, you are legally declaring that the condition has been fulfilled.

Sometimes, you are also given the option to waive a condition instead of fulfilling it. To do this, you sign a waiver.

In layman's terms, a waiver says “I give up my right to nullify the deal as a result of this particular condition not being fulfilled”.

The Purpose of a Waiver

Why would you sign a waiver rather than giving a Notice of Fulfillment?

One example would be if you did not have enough time to arrange a home inspection, but did not want to lose the deal. You cannot fulfill the condition without the inspection, so you waive it instead and accept the house as-is.

When Waivers Are Dangerous

As a seller, you need to be careful about the wording of your conditions. It's important to not allow waivers for certain conditions.

Conditional on Financing

For example, earlier I mentioned a condition on financing, which means that the buyer must arrange a mortgage for the deal to be firm.

The purpose of this condition is to make sure the buyer has the necessary money to actually purchase the house on closing day.

As a seller, if you give the buyer the ability to waive this condition, you could lose your sale! The buyer could waive the condition and fail to arrange a mortgage, then come closing day they could walk away from the deal and demand their deposit back!

Meanwhile, if you receive a Notice of Fulfillment (the buyer confirms they have arranged a mortgage), but come closing day the buyer walks away, you are entitled to keep the deposit and sue the buyer for any damages.

Assuming Mortgages

Sometimes, to avoid a discharge fee, the seller will ask the buyer to assume an existing mortgage, and this will be added to the agreement as a condition.

If the buyer gives a Notice of Fulfillment, this means they have made an agreement with the lender to assume your mortgage. However, if you allow the buyer to give a waiver, you have no guarantee the buyer will assume the mortgage, and you may end up paying a hefty discharge penalty!

For example, with BMO's five-year 2.99% closed mortgage, if there are four years remaining, the discharge penalty is almost $11,000 for every $100,000 of principle. For many sellers this would be $30,000 or more, and all because they allowed a waiver!

Don't make this mistake, require a Notice of Fulfillment if you want the buyer to assume your mortgage.

When Waivers are Helpful

If a condition does not materially affect you as a seller, then it is wise to allow a waiver, as this increases the likelihood of the deal closing.

For example, if the deal is conditional on inspection, it doesn't hurt you to allow the buyer to waive the condition. Why would you scuttle the entire deal just because they were unable to arrange an inspection in time?

Summary

As a general rule, if a condition affects you materially, never allow a waiver. If it doesn't affect you materially, always allow a waiver.

Of course, you should always discuss your individual deal with your agent as exceptions do come up. The important thing is to make the right decision for each condition!

Want to know more about conditions, fulfillment, or waivers? Just ask me, I'll be happy to help.

--Peter

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