This is a frequent question we receive from first-time buyers, first-time sellers, and anyone else who might need a refresher on the exact procedures involved in closing your real estate transaction.
From the buyer’s perspective:
Assuming everything has gone according to plan, your down-payment funds should be in your lawyer’s trust account before dawn on closing day, and funds from your lender should arrive first-thing in the morning. Years ago, lenders would forward their funds the day before closing. This is not generally the case nowadays. Major banks almost always send mortgage funds to your lawyer at or before 9:00 a.m. on closing day. Credit unions and other corporate lenders tend to review documents last-minute, and may request corrections, which can sometimes mean your funds do not arrive until late morning or early afternoon.
Once all the funds needed to complete your transaction have been received in your lawyer’s trust account, your lawyer will prepare a transfer of certified funds to the seller’s lawyer. “Certified funds” means that employees of the lawyer’s bank have verified your funds are in the account, and there is no hold on those funds, before they send your funds to the seller’s lawyer’s trust account. This ensures the funds can be used right away to pay off any mortgages or liens on title.
Typically, your lawyer will send funds via a wire transfer, which requires actions to be taken on both sides of the funds transfer - by the sending bank and the recipient bank. The time required to complete a wire transfer can therefore vary, depending on how quickly the recipient bank confirms receipt of the funds and directs them to the appropriate account.
While your lawyer waits for the wire transfer to be processed, your lawyer provides the wire confirmation and your signed closing documents to the seller’s lawyer. Once the seller’s lawyer has received the wire confirmation, verified the funds are in their trust account, and has reviewed your signed closing documents, they should be prepared to sign the Transfer document on Teraview. The Transfer is the document that will be registered on title to the property to indicate you have acquired ownership from the sellers. Your lawyer will sign the Transfer as well, and then register the instrument.
It is not until the Transfer is registered that you actually legally own the property and can begin moving in. Please do not count on the registration occurring by specific time, and certainly do not begin moving into the new property until your lawyer has confirmed with you that the Transfer is registered.
If everything proceeds smoothly on closing day, your Transfer may be registered by late morning. In our experience however, there are often delays at several of the above-noted stages, which can result in an afternoon closing.
Once the purchase has closed, the seller’s lawyer will authorize the buyer’s lawyer to release the keys to the buyer. The buyer’s lawyer may have received the keys by mail, or the keys may be located in a lockbox on the property, to which the seller’s lawyer may provide the code. In any case, the buyer’s lawyer will call the buyer to let them know the transaction has closed, and where they can retrieve the keys.
If the property has any mortgages or liens registered on title, the seller’s lawyer will be required to pay them out from the sale proceeds. It is important to note that banks do not always discharge mortgages immediately. Most banks nowadays send mortgage payout funds to a central processing centre, where employees slowly work through a backlog of discharge requests. In some cases, a mortgage may not be discharged from title for several months, and the buyer’s lawyer may have to follow up with the seller’s lawyer to have them receive an update from the bank.
From the seller’s perspective:
Typically, the seller’s lawyer simply has to wait to receive funds and closing documents from the buyer’s lawyer, and then sign for release of the Transfer. Once the Transfer is registered, the seller’s lawyer releases the keys to the buyers or their lawyer.
The seller’s lawyer will typically check in with the buyer’s lawyer for updates if funds have not materialized by late morning or early afternoon.
Funding issues are the most common reason for a delay in closing, but other issues may arise as well. Some buyers will conduct a final inspection just before the closing date, and if they identify issues that the seller does not have time to resolve, the buyer’s lawyer may ask for an abatement of the purchase price - a reduction in the amount paid by the buyer to account for the costs of fixing the problem. Some buyers will wait until the last minute to raise an issue, in an effort to pressure the seller to agree to unfavourable terms.
If the problem identified by the buyers is one that was clearly apparent all along, the principle of caveat emptor (or, “let the buyer beware”) applies, and an abatement is not appropriate. There can be some dispute about whether a problem pre-existed the buyer’s final inspection, and in some cases a game of “chicken” can develop between the buyer and the seller.
When the Transfer is registered, the sellers legally no longer own the house, and the buyers will expect them to be completely moved out of it. In practice, sometimes the Transfer is registered before the sellers have fully vacated the premises. In these circumstances, as long as the seller is making their best efforts to move out of the property, the buyers will need to be understanding and work around them.
After the Transfer is registered, your lawyer will be able to use the funds to pay out any mortgages or liens on title, pay off any outstanding property taxes, pay your Realtor’s commission, pay themselves, and forward the remainder to you. Depending on how late in the day your sale closes, your lawyer may not be able to use your funds until the next business day, which may result in additional per diem interest becoming due.
What Happens if the Deal Cannot Close?
The typical Agreement of Purchase and Sale specifies that funds must be received by the seller’s lawyer before 6:00 p.m. on closing day. However, Teraview will not allow the Transfer to be registered on title any later than 5:00 p.m., and depending on the day of the week, many major banks will close before the 6:00 p.m. cut-off time as well.
If funds arrive after 5:00 p.m. but before 6:00 p.m., the parties may agree to close “in escrow.” The terms of an escrow closing must be negotiated between the parties, but generally, the buyer will agree to release funds to the seller, the seller will agree to release keys to the buyer, and the lawyers will agree to register the Transfer the next morning. There may be some concerns about insurance coverage since title has not changed, but many insurance providers offer gap coverage for these circumstances.
If funds have not arrived, or for any other reason the transaction cannot close before 6:00 p.m., the parties will have to discuss terms for extending the transaction. Typically, the innocent party will request that the breaching party cover the reasonable costs of the innocent party as a condition for granting the extension. If the seller is the innocent party, they will usually require the buyer to pay their mortgage per diem until the new closing date, additional legal costs, and any other financial damages. It is less common for the seller to be the breaching party, but if they are, they may be asked to cover costs for renting the buyer’s moving vehicle for an additional day, or for the buyer’s rental accommodations for the evening.
If one party or the other absolutely cannot close and will never be in a position where they will be able to close, the innocent party is required to take immediate action to minimize their damages. A seller will have to re-list their property, and a buyer will have to begin searching for a new property. If a seller has to sell to another buyer at a lower price, the original buyer will be liable for the difference in price. If a buyer can only purchase another similar property at a higher price, the seller will be liable for the additional cost. Once the damages have been ascertained, the innocent party will demand that the breaching party cover these damages. The innocent party may be required to initiate litigation if the breaching party refuses to pay their damages.
We will discuss litigation in another blog post.
Same-day Sale and Purchase
It is generally unwise to schedule your sale and purchase transactions for the same day, since issues on your sale transaction can create issues for your purchase transaction. If you have scheduled both of your transactions for the same day, you might consider amending the closing date of one transaction or the other, to alleviate the pressure and stress involved with back-to-back transactions.
Doormat is on a mission to ease the property closing experience. Real estate legal services no longer need to be troubling chores filled with confusing details. Reach out to us today to learn how you can experience the best property closing experience possible.