16 Dec 2011Blog

Agreements for the sale of real estate in Barbados: Avoiding common pitfalls for Vendors & Purchasers

by Miss Nicole McKetney, Associate, Clarke Gittens Farmer

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The agreement for sale regulates the relationship between the vendor and the purchaser, their obligations towards each other and their rights over the property. It governs, among other things, the nature and extent of the property being sold, the purchase price, the deadline for the completion of the sale of the property and the matters that must be attended to before the sale can be completed.

This article outlines some precautionary measures to be taken to protect each party’s interest and avoid some common traps that can lead to great emotional and financial distress in the future.

Informal contracts

While formal contracts prepared by an attorney-at-law are the usual means by which people agree to purchase real property, a valid and enforceable agreement for sale can inadvertently arise in other ways, such as by correspondence between the parties, or the payment of a deposit and the issue by a vendor or his agent of a signed receipt for it. This commonly occurs where one party is anxious to secure a commitment to the purchase from the other.

While the informal contract may temporarily provide a party with peace of mind, it can also be very problematic later on. Informal contracts often arise before the parties’ attorneys have checked the property’s title, before the parties have fully negotiated the terms of the sale or even before the purchaser has obtained finance for the purchase. Once the informal contract is in existence, the parties are bound by its terms and may be forced to proceed with the purchase or sale on terms unsatisfactory to them or risk loss of their deposit or being sued for damages.

To avoid this, each item of correspondence sent before the agreement is signed should say that it is “subject to contract”. An attorney-at-law experienced in real estate transactions should draft or vet any correspondence between the parties or their agents. No money should change hands until the attorney advises it is safe to do so.

Reservation Agreements and fees

An agreement for sale should be distinguished from a reservation agreement, by which the vendor agrees not to enter into negotiations with other prospective purchasers for a particular period.

When signing the reservation agreement (which should be expressed to be “subject to contract”), the purchaser usually pays a reservation fee to the vendor or his realtor. Before paying over any fee, the purchaser should consult his attorney who will advise him on the implications of paying a reservation fee before the agreement for sale.

The purchaser should also have his attorney review the reservation agreement to determine if the fee will be refunded should the purchaser decide not to purchase the property or, if the purchaser agrees to buy the property, whether the fee will be applied towards the purchase price.

Financing problems

Before entering into an agreement for sale, a purchaser should determine whether he has the means to finance the purchase. He should ask his attorney for an estimate of the total legal fees and Government expenses for the proposed purchase so that he has an idea of the cost of the transaction. If a purchaser is seeking finance from a lender, he should get an offer letter signed by the lender confirming that it has agreed to finance the purchase.

Deposits

A purchaser usually pays a 10% deposit towards the purchase price when signing the agreement for sale. The deposit is intended to both show that the purchaser is serious about the purchase and motivate him to complete it, since his deposit can be forfeited by the vendor if the purchaser does not complete the purchase on time.

The purchaser should consider whether the deposit may be paid directly to the vendor, to an agent of the vendor or to someone acting as stakeholder who will be the agent of both the vendor and the purchaser.

If the deposit is paid to someone as the vendor’s agent, the vendor can demand that the agent pay the deposit to him or otherwise according to his instructions at any time, and he can use the deposit before the completion of the sale. The same is true if the deposit is paid directly to the vendor. If the agreement falls through due to the vendor’s default, the vendor or his agent should return the deposit to the purchaser. However, if this does not happen, the purchaser must sue the vendor and not the vendor’s agent to recover it. This may cause problems in recovering the deposit if the vendor is insolvent or cannot be found. This is a particularly great risk if the vendor is a company formed for the sole purpose of carrying out a land development and the company is insolvent, as there will be no money available to refund the deposit, and the assets of the development company’s shareholders cannot be accessed for this purpose.

The more prudent course for a purchaser is to pay the deposit to a stakeholder (an auctioneer or a party expressed in the agreement for sale to hold as stakeholder). In Barbados, the common practice is for the vendor’s attorney to hold the deposit as stakeholder. Generally, a stakeholder must hold the deposit on behalf of both the vendor and the purchaser until the sale is completed, which is when he can pay it to the vendor. If the agreement falls through due to the vendor’s default, the stakeholder should return the deposit to the purchaser. If it falls through because of the purchaser’s default, the stakeholder should pay the deposit to the vendor. If the stakeholder improperly deals with the deposit, he can be sued by the injured party.

Each party should also consider whether he wants the right to interest on the deposit. Unless otherwise stipulated in the agreement for sale, if the deposit holder is the vendor’s agent, the agent must account to the vendor for interest. However, if the deposit holder is a stakeholder, he is entitled to keep the interest for himself unless the agreement stipulates otherwise.

Plans & boundary certificates

It is recommended that before agreeing to sell property, the vendor get a licensed land surveyor to issue a boundary certificate for the property. This will reveal whether there are any encroachments affecting the property. It may also show if the property appears to be in breach of any Town Planning regulations and if there are any paths over the property that may suggest that third parties have a right to use the property. The certificate will also reveal if the current plan of the property is still accurate and if a new plan of the property is needed. Armed with this information, the vendor’s attorney can then draft the agreement to properly address any issues raised by the certificate.

If this is not done, the purchaser’s surveyor or the purchaser’s lender’s surveyor may discover problems with the property after the agreement is signed and there may then be further negotiations, delay and uncertainty regarding the steps to be taken to rectify the problems and who should bear those expenses. If the agreement did not specifically deal with those problems, the vendor will usually have to bear these expenses if the problems are serious enough to prevent his being able to give the purchaser a marketable title to the property.

The purchaser should consider the age of the plan being offered by the vendor before signing the agreement for sale. If the plan is very old, the purchaser’s lender may not accept it, and unless the agreement for sale provides for a new plan, the purchaser will then have to bear the cost of obtaining a new plan to satisfy his lender.

Line marks

Agreements for sale should stipulate that the line marks of the property be pointed out to the purchaser by a licensed land surveyor at the vendor’s expense before the sale is completed. It is in the best interests of the purchaser that a land surveyor, who is trained to recognise boundary issues, point out the line marks so that there will be no confusion as to the boundaries of the property. When private persons do this, the result is often cases of mistaken boundary marks or marks that have been moved, which can cost the purchaser thousands of dollars when he later builds using the wrong boundary references.

Inspection

Generally, the vendor is not obliged to disclose to the purchaser defects affecting the physical quality of the property. The purchaser must have the property thoroughly inspected by all necessary professionals (at minimum, a land surveyor, and if there is a building on the land, an electrician, a civil engineer and a plumber) before the agreement for sale is signed, so that he can discover whether there are any problems affecting the property such as encroachments, or structural, electrical or plumbing problems. In this way, the purchaser can determine whether he wants to purchase the property in its current condition before he is committed, or whether he wants to negotiate a lower price, or pull out of the purchase entirely.

The purchaser should also inspect the property himself to ensure that he is satisfied with the property’s appearance and condition.

Electrical connection

Where a building is being sold, the purchaser should find out from the vendor whether the electricity supply to the property has been disconnected, and if so, the agreement for sale should stipulate the deadline for re-connection and who will be responsible. If this is not done, the completion of the sale may be delayed while the vendor attends to the re-connection or the purchaser may himself have to attend to the re-connection.

Getting the electricity supply re-connected after it has been disconnected for more than six months can be both costly and lengthy. A licensed electrician must apply to have the property inspected by the Government Electrical Engineering Department (GEED) and an inspection fee must be paid. When GEED is satisfied that the supply can be re-connected (and GEED may require that the entire building be re-wired first if it thinks fit), the Chief Electrical Officer will issue an Installation Certificate of Approval. This certificate, the details of the meter number and the requisite re-connection fee must be submitted to the Barbados Light & Power Company Ltd., which, upon request, will re-connect the supply to the property.

Even if the supply has not been disconnected before the agreement for sale is concluded, the purchaser may still encounter problems if the supply is subsequently disconnected. To avoid such problems, the agreement for sale should require that, if the supply is disconnected after the agreement is signed, the vendor must have the supply re-connected at his expense before completion.

Restrictive covenants & conditions affecting use of the property

There may be existing restrictions that affect how the property can be used or new restrictions that the vendor wants to impose. These may consist of restrictive covenants mentioned in the title deeds to the property or conditions attached to Town and Country Development Planning office permissions. The restrictions should be referenced in the agreement for sale and the purchaser should be provided with a full list of the restrictions before the agreement is signed so that he knows early on whether his plans for the property are legally feasible or financially viable. The procedures for modifying or discharging these restrictions can be lengthy and costly. Breach of the restrictions can result in lawsuits from neighbours or enforcement notices from the Chief Town Planner, so checking the restrictions early is critical.

If the property has been marketed as being sold with permission to carry out a specific development, which the purchaser plans to carry out after completing the purchase, the purchaser should ensure that the permission is still valid.

Insurance

On signing an agreement for sale, the purchaser becomes liable for any risk or damage to the property, unless the loss or damage was caused by the vendor’s fault or neglect, and must still proceed to complete the purchase.

To protect his interest in the property, a purchaser should insure the property himself immediately before signing the agreement for sale. Alternatively, the purchaser may be entitled to the proceeds of the vendor’s insurance policy (unless the agreement or the policy states otherwise) if he arranges with the vendor to pay the insurance premium from the date of the agreement for sale. However, this option may not always be available or desirable. Generally, there is no obligation on a vendor to insure. Moreover, even if the vendor has a policy in effect, the purchaser may find that the amount and terms of the policy are unsatisfactory to him or that the vendor may cancel the policy unless asked not to.

Possession before completion

While the purchaser gains an interest and certain rights over the property upon signing the agreement for sale, the vendor is entitled to remain in possession of the property until the sale is completed, and must maintain the property and treat it as a prudent owner would. However, from time to time, the purchaser is anxious to move in and start making the property his own. The agreement for sale can be varied to allow the purchaser to occupy the property before completion, or the parties may settle a separate tenancy or licence agreement to facilitate pre-completion occupation.

However, before the vendor of residential property enters into this type of arrangement, he should bear in mind that when the purchaser is already living in the property, he may have less incentive to complete in a timely manner. If the sale falls through and the purchaser does not readily leave the property, the vendor will likely have to go to Court to evict the purchaser.

The purchaser should also be cautious about entering into possession before completion. If he made improvements to the property and the sale falls through due to the vendor’s fault, he may not be able to recover the money he spent. However, the vendor may be able to recover compensation from the purchaser to make the property habitable if the purchaser defaults and leaves the property with incomplete alterations. The purchaser should also note that, unless the agreement stipulates otherwise, by entering into possession and making structural alterations or doing other acts of ownership, he may be deemed to have accepted the vendor’s title and consequently be barred from raising objections to the title.

Parties should consult with their attorneys and ensure that the agreement for sale clearly sets out who is responsible for what costs while the purchaser is in possession prior to completion and which costs can be recovered from the other party if the sale is not completed.

Delay in completion

Probably one of the most frustrating aspects of the sale process for the parties is delay resulting in the sale being completed after the completion date stipulated in the contract. Unfortunately, agreements for sale in Barbados tend to favour the vendor in this regard. The usual clause in the agreement for sale requires that the sale be completed on or before a particular date and if that date passes due to the purchaser’s default, the vendor is entitled to interest (usually at the rate of 10% per annum) on the balance of the purchase price, or the vendor can serve a notice on the purchaser to complete within a particular time period (usually 28 days). If the purchaser fails to complete within that time, the vendor can forfeit the deposit and proceed to re-sell the property to another.

While this does not mean that the purchaser is without redress since, if the delay is due to the vendor’s default, the purchaser can always go to Court to force the vendor to complete or to recover damages, this will necessarily involve additional costs and delay. Therefore, to attempt to be compensated without necessarily having to go to Court, the purchaser should discuss with his attorney the feasibility of having the agreement specify that the purchaser be entitled to interest or some other sum of money from the vendor in the event of the vendor’s delay in completing the sale.

Conclusion

These are just a few of the most common problems a vendor or purchaser may encounter on a sale of real estate in Barbados. In all circumstances before signing any document or paying or accepting any sum of money from the other party, each party should consult his attorney.

The vendor should disclose as much information as possible about the property to his attorney, including the receipt of any compulsory acquisition notices, any rights that third parties enjoy over the property and any matter affecting the use or value of the property. The purchaser should let his attorney know his plans for using the property and how he plans to finance the purchase. In this way, both attorneys will be able to arrive at an agreement which is both reasonable and beneficial to both parties, and which will not be the source of disputes later on.

Clarke Gittens Farmer is a commercial law firm, providing legal services for both domestic and international corporate and private clients. The firm has a reputation for high quality work in property, banking, corporate, commercial and business law areas. The firm is the Barbados member of Lex Mundi, the world’s leading association of independent law firms.
The information provided in this article is not comprehensive and is not intended to constitute professional legal advice.
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