What is a preliminary contract?
Published on April 12, 2024
Any purchase of a new build or a property to be built starts with signing a preliminary contract. In addition to defining the mutual commitments made by the buying party and the real estate developer, it indicates the purchase price, the payment terms and the property’s characteristics.
Here’s everything you need to know about the preliminary real estate purchase contract.
Summary:
- What is a preliminary purchase contract?
- The 10 pieces of information that must be included in the preliminary contract
- Optional information
- Cancellation of a preliminary contract
- Sample preliminary contracts
What is a preliminary purchase contract?
The sale of a residential property, whether newly built or under construction (when bought off plan), must be preceded by a preliminary contract. Section 1785 of the Civil Code of Québec (CCQ) requires the builder or developer to enter into this agreement, which precedes the final sales contract, with the buying party. Article 1793 of the CCQ states that if the sale is not preceded by a preliminary contract or memorandum, the buyer may, if they suffered prejudice, request to have the sale annulled and claim damages.
If the buying party decides to keep the sales contract in force, they can request a reduction of their obligation equivalent to the damages they could have claimed. This action must be brought either within 90 days of the sale or within 90 days of the special meeting provided for in article 1104 of the Code.
Legally, a preliminary contract is an offer to purchase that binds the two parties, therefore a bilateral contract. It formalizes the promise the parties are making to sell/buy the building. By signing this document, the buying party commits to acquiring the property designated in the preliminary contract and to pay the agreed price. In return, the builder or developer has the obligation to deliver the building within the set timeframe, according to the agreed upon terms, and to transfer the title deed(s) to the buying party.
Objectives of a preliminary contract
The preliminary contract for the purchase of a new build sets the basis for the transaction, defining the mutual commitments made by the buying party and the real estate developer. It indicates the purchase price, the payment terms and the property’s characteristics.
This legal document binds the parties preliminarily, often with a security deposit, and may include conditions precedent. The main objective is to secure the sale, providing a clear and detailed legal framework before the final contract is signed, thus ensuring a mutual understanding of the terms of the transaction.
The 2 types of preliminary contract
There are two types of preliminary contracts depending on the type of property being purchased: one for a house or building not held as a divided co-ownership and one for a residential divided co-ownership (condo). For a residential divided co-ownership, the preliminary contract notably contains information about the co-owned portion, the parking space and the storage locker.
The 10 pieces of information that must be included in the preliminary contract
A preliminary contract for the purchase of a new build or a property under construction must include various essential information in accordance with the Civil Code of Québec. Here are the elements that must be included:
1. Identification of the parties
The names, addresses and full contact information of the buyer and the seller (the developer).
2. Description of the property
The property’s full address and a detailed description of the characteristics of the building under construction, including the materials used and the dimensions.
3. Price and payment terms
The total price of the property and the payment terms, including the amount of the initial deposit and the payment schedule.
4. Conditions precedent
Any condition that the parties deem necessary. For example: obtaining financing, obtaining approval from the local authorities, etc.
5. Right of withdrawal
This is a clause indicating the buyer’s right to withdraw from the preliminary contract (also called a release clause), generally within 10 days of receiving the contract. If the preliminary contract provides for compensation in the event the right of withdrawal is exercised, it must not exceed 0.5% of the selling price indicated in the document.
6. Set schedule
The dates set for different steps of the process, such as the start and end of construction, the signing of the final contract, the closing date and the occupancy date.
7. Guarantees
The guarantee plan provided by the real estate developer, according to the Regulation Respecting the Guarantee Plan for New Residential Buildings.
8. Deposit
The details concerning the amount of the deposit, if used, and the terms for reimbursement in the event the contract is terminated.
9. Price revision
If the preliminary contract provides for the price to be revised, it must also specify the terms and conditions for doing so.
10. Review and termination terms
The circumstances under which the contract can be revised or terminated by either party, as well as the consequences of the termination.
Optional information
Although the essential elements mentioned above must be included in the preliminary purchase contract, additional information can be added, depending on what is negotiated between the parties. Here is some of the information that could be included:
- Options and customizations If the buying party can choose options or customize certain aspects of their future home, these details must be included in the contract.
- Inclusions and exclusions A precise list of the items that are included in the sale (appliances, specific equipment) and the items that are excluded.
- Repairs and maintenance Details of the real estate developer’s responsibilities with regard to repairs and maintenance for a certain period after delivery.
- Visiting rights The terms allowing the buying party to visit the property during construction to check the progress of the work.
- Revision of the plans Provisions granting minor revisions to the plans or features of the property, with specific conditions.
Cancellation of a preliminary contract
As mentioned earlier, the preliminary contract must contain a stipulation by which the buying party can withdraw their promise within 10 days of the contract’s signature.
When a memorandum needs to be submitted (when the sale concerns a fraction of a divided co-ownership or an undivided share of a residential building), the preliminary contract must also include a stipulation by which the buying party can, if the selling party fails to submit this memorandum upon the contract’s signing, withdraw their promise until they have received the memorandum or within 10 days of its receipt. During this period, the buying party can cancel the contract without having to give a specific reason.
To cancel the contract within the withdrawal period, the acquiring party must generally send written notice to the selling party. This notice must be sent by registered mail with acknowledgment of receipt to have proof of the date it was sent.
In the event of cancellation within the withdrawal period, the buying party is entitled to a full refund of the sums paid, including the deposit. The reimbursement procedure should be specified in the preliminary contract. As covered earlier, when the preliminary contract prescribes compensation in the event the right of withdrawal is exercised, it cannot exceed 0.5% of the agreed selling price.
Examples of preliminary contracts
Sample preliminary contract forms are available on the Garantie de construction résidentielle (GCR) website. They let buyers of new builds become familiar with the document.
- Sample for a house or building not held as a divided co-ownership
- Sample for a residential divided co-ownership (condo)
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