Backup Offers

Posted on: Wednesday, April 3rd, 2013

What is a Backup Offer?

A backup offer is the term used to refer to an offer that is submitted to a seller after the seller has already accepted an offer.

The first offer that is submitted to and accepted by the seller becomes the primary contract in a real estate transaction. Any further offers which are submitted to the seller and accepted become backup offers. The reason a buyer would submit a backup offer would be to ensure they are next in line if for any reason the first contract is terminated. This is especially common when the first contract contains conditions that appear likely to be unfilled like the sale of a home by a certain date or financing.

There can be more than one backup offer in place for a home and therefore the language used in submitting a backup offer should be carefully considered. In situations where the primary contract is not completed, and the deal fails to close, the buyer holding the backup offer should always inquire as to why the deal failed. This is especially important if the termination was due to something revealed during a home inspection.

If your client holds the first contract in a backup offer situation you as the agent should be very careful in advising your clients. As can be seen in a case out of the Provincial Court of British Columbia, Wright v. Hampster, some amendments will constitute a collapse or non-completion of the primary contract.

In Wright v. Hampster, the plaintiff (the purchaser who held the backup offer) claimed that the defendant (the seller) had altered a material term in the primary contract to the effect that the deal would have failed. The amendment that was made by the defendant (the seller) to the primary contract was that an extension was to be granted to the original buyer in order to obtain financing. As a result of this amendment, the plaintiff (backup purchaser) brought forth an action claiming that this had amounted to a “collapse” of the transaction; therefore, the defendant (seller) had breached their contract with the plaintiff (backup purchaser).

The judge in this case was left to determine whether or not the amendment did in fact amount to a collapse. To reach this decision the judge turned to a previous case, B.D. Management Ltd. V. Tajico Holdings Ltd., out of the British Columbia Court of Appeal. In this case, the backup offer was stated to be “subject to the non-completion or collapse of the [original] offer”. The original offer was amended in such a way as to allow for an extension to the closing date and increase the amount required for the deposit. The plaintiff (backup purchaser) in this case also argued that these changes constituted a breach of the collapse clause that was set out in the backup offer. Originally, the plaintiff (backup purchaser) was awarded damages, however, on appeal the judge determined that the amendments that were made were “all of a character which affirm and do not reject the original contract”. As a result, the judge determined that the original contract was amended in “non-fundamental” ways which confirmed “the continuing existence of that contract” and the appeal was allowed.

Due to this decision, the judge in the Wright v. Hampster case determined that “the amendment at issue in this case is not of a character which rejects the original […] deal, but is of a character which affirms it.” Therefore, the original contract did not collapse and damages were not awarded.

We can learn from these decisions that any amendment that is made to an original accepted offer, where there is a backup offer in place, should be approached cautiously. These two actions were commenced by the backup purchaser to challenge the seller’s right to continue to accept the primary contract. This is because some amendments may result in the termination of the original contract and others would be open to the seller to allow and confirm the first contract. From the two decisions that I was able to locate on this topic the position of the court is that if the amends are in character with the existing terms they are allowed, but if they would change the agreement in a fundamental way this would terminate the contract. For example, a change to the purchase price or additional terms not merely an extension to existing conditions would likely terminate the first contract. Therefore, in situations in which a backup offer is in place it is recommended that both the seller’s and buyer’s agents advise their clients to seek legal advice.

What are the best clauses to insert in a backup offer?

The backup offer should contain a clause outlining that it is contingent upon the cancellation of the original contract, and that it automatically becomes a contract if the first buyer does not satisfy their conditions as stated in the original offer. A recommended clause is as follows:

The parties acknowledge that this agreement is accepted as a backup offer only and is in first position behind the primary contract previously accepted by the seller. All time frames in this contract shall commence after written notification from the seller to the buyer that the primary contract has been cancelled. The buyer reserves the right to withdraw this offer prior to being notified by the seller, in writing, that the primary contract has been cancelled. For the purpose of this contract, acceptance will be defined as the date the buyer has been notified that the primary contact has been cancelled.

What is a clause to be inserted by the Seller to allow backup offers?

A seller that accepts a conditional offer, especially a long conditional period or complicated conditions, should protect his position in the market by inserting a clause to allow for backup offers to be accepted. A recommended clause is as follows:

The seller reserves the right to continue marketing the property and to accept an offer as a backup offer which would become a primary offer only in the event of the buyer’s default or non-performance of this contract.

While this clause is not required for a seller to have the right to accept backup offers, it would be a good way to signal to the buyers that long or complicated conditions may be problematic.

Of course a clause to trigger the conditions to be waived or fulfilled upon acceptance of another offer is in your seller’s best interest in a good market. A recommended clause for this purpose is:

The seller may continue efforts to sell the property. If a third party submits an offer to purchase the property at a price and upon terms acceptable to the seller, the seller shall give written notice to the buyer and the buyer shall have 48 hours after receipt of the notice to waive or fulfill all conditions herein. If the buyer fails to execute and deliver the waiver/fulfillment in the time specified, the seller may accept the third party’s offer, in which event, this contract shall be null and void, and the seller and buyer shall be released from all their obligations hereunder.

As the listing agent am I required to disclose to all individuals putting in an offer that their offer is in competition?

It is important to note that in Ontario the seller’s real estate agent is required to disclose the number of competing offers to all buyers who have submitted a written offer. The agent is not allowed to disclose any terms or conditions. I have discussed this disclosure requirement with the RECO’s Manager, Complaints, Compliance and Discipline and his response was that Section 26 of the Code is very clear that any offer in writing must be disclosed and all terms and conditions must be kept confidential.

Competing offers

26. (1) If a brokerage that has a seller as a client receives a competing written offer, the brokerage shall disclose the number of competing written offers to every person who is making one of the competing offers, but shall not disclose the substance of the competing offers.

I intend to continue my discussions with the Manager at RECO in light of the fact Fusion Computer Systems contains information on the conditions and time lines that he has considered confidential, while in practice, this information is very much relied upon by the agents to draft backup offers. You can view the RECO’s consumer publication by clicking here.

A question that requires further consideration: if the information on the terms of the backup offers is to be treated as confidential how is this impacted by a listing agent who represented both sides?

The content of this article is intended to provide a general guide to the subject matter. The information does not constitute legal advice and a solicitor and client relationship is not created.

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