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What is a Clause Sale?

I was asked recently, just what is a "Clause Sale"?

Wow, that is a term I haven't heard in quite some time, but it makes sense that we, as Realtors, would start seeing it again with the Calgary real estate market being as slow as it is. (i.e. Both the new and resale markets).

So, what is a "clause sale"?

Let's start off with the fact that both terms and conditions in an "Agreement of Purchase and Sale" are collectively called "clauses." Okay, got that? But the term "clause sale" refers specifically to one very specific condition. That condition is that the buyer and the seller agree that the buyer has a type of first-right of refusal on the purchase of a home while they are actively trying to sell their own home.

Generally, we see these types of agreements when the market is slow, and the buyer wants to buy a particular home, but they need to get their own home sold first. So, the buyer and seller come to an agreement in an Agreement of Purchase and Sale with the terms set out in an Addendum or a Schedule (the inclusion of that Schedule is critically important to the seller and many buyers will try to omit it). Typically, the terms are something like:

The buyer will list their home for sale within a defined, short amount of time (or has it home already listed for sale) with a particular real estate brokerage for a price that is agreed upon by the seller of the home they want and the buyer (i.e. the seller of the home that needs to be listed for sale).

With me so far?

And then in that schedule is another term that states that if another buyer comes along (let's call them Buyer 2), and places an offer on the home that Buyer 1 is contracted to buy, then Buyer 1 has a defined amount of time to release their conditions which are:

1. Subject to the Sale of the Buyers' Home, and typically,

2. Financing, and/or

3. Home inspection.

Typically, that defined amount of time is 48 hours, but can be sometimes only 24 hours or possibly as long as a few days (again, these terms are agreed to by the seller and the Buyer 1 during their negotiation of their agreement). This is where the names "24-hour clause" or more commonly, a "48-hour clause" comes from.

The benefit to the Seller is that they have a really good chance of selling the home for the agreed upon price as usually Buyer 2 will be encouraged to come up with at least the amount of purchase price as Buyer 1 has already committed to, or make their offer without any conditions. Buyer 2's purchase contract has a term inserted that acknowledges the fact that there already an offer on the home and requires the Seller to provide the Seller to provide Buyer 1 with Notice to remove all of their conditions as per the details of the condition agreed to by the Seller and Buyer 1 in their purchase agreement. The risk to the Seller is that Buyer 1 will release their conditions as stipulated and then not be able to sell their home before being forced to purchase the Seller's home. If they can't complete the purchase, then they will most likely lose their deposit and the home will go back on the market.

The benefit to Buyer 2 is that it is rare that the buyers are able to purchase a home without selling their own home first, and therefore can't get financing approval. So, Buyer 1 will most likely not release their conditions and therefore Buyer 2's contract becomes the only Agreement of Purchase and Sale that is dealt with. Granted, there is a slim chance that Buyer 1 immediately firms up their purchase agreement with the seller, but it is slim – and, if that happens, then Buyer 2 just continues home hunting.

The benefit to Buyer 1 is that they can contract on a home they love and have a little extra time to get their home sold and to immediately begin to fulfill conditions like a home inspection. There was a time that buyers wouldn't even look at homes that were already conditionally sold, but that time has long gone. Buyers are always encouraged to continue to view all available homes especially in a market where enhanced mortgage qualification rules are normal. (A small, but not insignificant, number of financing applications are declined.) If Buyer 1 is lucky, there is no second buyer that comes along (it's a slow market, remember) and they can keep lowering the asking price of their home until it sells, so they can complete the purchase their next dream home.

Why don't we, as Realtors, see this term as frequently as we used to? Because there is no longer a specific MLS Rule that specifically deals with it. It is now just another conditional sale and the Seller must provide direction to their Realtor as to how to disclose the conditional sale. In this case, the seller probably wants their home to continue to be shown so they will either instruct their agent to market the home as "under contract" or disclose the "clause sale" when another agent books a viewing. Or possibly they will ask their agent to only disclose this fact when a second written offer comes in.

When do we see "clause sales" being used? In a SLOW market like we have today in the Calgary region.

If you're unsure if you can buy a home when your home is already listed for sale or is all ready to be listed for sale, then speak with your real estate associate about this opportunity. If they don't have an adequate an answer for you, then have them speak with their designated broker of their real estate brokerage agency with which they are registered. These clause sales are so infrequently used that many real estate agents may have heard of them but have never had one in practice (it is one of the four standard fill-in-the-blanks conditions on our standard MLS Agreement of Purchase and Sale in Alberta).

If you're looking at buyer a brand new home, yes, this option is still available to you. However, most new home sales personnel are unlicensed in Alberta and therefore won't have the benefit of the Alberta MLS Agreement of Purchase and Sale to use. This is another great example of where you should have your own representation when you're buying a home.


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