A hold-back applies when a seller agrees to rectify something in a property and isn’t able to get the work done before closing. For example, the seller may agree to remove knob-and-tube wiring before closing, or replace a broken window, or paint, or clean the carpets.
Sometimes, the buyer will discover during the final walk through that something the seller had promised to do hasn’t been done, or that it hasn’t been done properly. Usually the agreement specifies not only that the repair will be done at seller’s expense, but in a good and workmanlike fashion.
Rather than hold up the deal, or prevent it from closing, instead of releasing the proceeds of sale to the seller’s lawyer, the buyer’s lawyer “holds back” a sum of money sufficient to cover the repair.
Once the seller completes the work at their expense, the hold-back is released to the seller’s lawyer.
If an amount for a hold-back has not been specified in the Agreement for Purchase and Sale, then it must be negotiated and agreed to between seller and buyer, through their lawyers. Sometimes the realtors are asked for their advice too as to an appropriate amount to cover the repair.
The seller, obviously, wishes to hold back as little as possible; they may need those proceeds of sale to complete another deal. On the other hand, the buyer wants to make sure that the amount is sufficient to cover the work to be done so that they don’t have sue the seller for any discrepancy between the amount of the hold back and the actual cost if they end up having to do the work themselves.
Most of the time, these negotiations take place shortly before closing, since up to the point of closing, the seller could complete the work, in which case the problem is gone.If not, both parties are usually under a lot of pressure to resolve the issue ASAP so the hold-back amounts are usually agreed to pretty quickly.
What happens if the buyer ends up having to do the work and the amount of the hold-back isn’t sufficient to pay for it?
Well, there are always contractual remedies through the courts, but who wants to do that?
Much better to keep an eye on the situation before things get that far. Your realtor should be touching base with the seller’s realtor regularly to find out the status of the repairs. In a properly worded agreement, the seller is required to provide receipts and the buyer should be able to verify during the final walk through or a further inspection before closing.
For that reason, the final walk through should be arranged to leave enough time to let your lawyer know if there’s a potential problem. Don’t leave it until the very last moment to tell your lawyer, eg. on the day of closing that there’s a problem; they need enough time to discuss it with the other lawyer and negotiate the hold-back before funds are transferred and the deal is done.
What you don’t want to happen is to move in to your new home without a hold-back in place, only to find out that the promised work wasn’t done. By then, the seller will have received all the funds from the sale, and you’ve lost your leverage.
UPDATE: Leslie Kirk, an Ottawa real estate lawyer, points out that the Agreement of Purchase and Sale should say that ” if evidence of the repair is not provided then seller agrees to hold-back x amount.” If that’s not in the contract, she says the seller has no obligation to agree to a hold-back – they can say the buyer’s sole remedy is in damages (i.e., going to court) with no right to refuse making full payment and, if the buyer refuses to close, then the buyer is in breach of contract. She notes, however, that it rarely comes to this – most sellers agree to do something to make the deal happen. She also agrees that the best solution is to have the requirement for receipts and the final walk-through and the terms of the hold-back clearly set out in the agreement in case the required work isn’t done.