What is a holdback?

A hold back is an agreed upon dollar amount that is not released to the seller on the closing of a real estate transaction until a certain item is completed or provided.  For example, the seller may agree to complete the landscaping, and agrees to hold back $5,000.00 until the landscaping is complete.  The terms of the agreement to hold back these funds are usually agreed to in writing by the buyer and the seller, or agreed on between their respective real estate lawyers.

What should be included in a holdback agreement?

When negotiating a holdback, 5 questions should be answered:

  1. What must be completed or provided?
  2. What is the holdback amount?
  3. How do you decide whether the task has been completed or item has been provided?
  4. What is the timeline for completion of the work?
  5. What happens if the task is not completed?

How do you determine the holdback amount?

Consider and balance the following factors: the amount required to complete the work/task, the amount suitable to incentivize the seller, the amount the seller will reasonably agree to hold.

How do you decide whether the task has been completed or item has been provided?

When funds are held back from the sale proceeds until the seller completes a repair item, the determination of whether the task has been completed or the item has been provided should be outlined in the agreement between the parties. The specific mechanism for determining completion may vary depending on the terms negotiated and agreed upon by both the buyer and the seller.

For instance, the agreement may specify that an independent inspector or qualified professional will assess and conclude whether the required work has been completed to satisfaction. In such cases, their professional opinion will serve as the determining factor.

Alternatively, the agreement may require a statutory declaration from the seller, affirming that the work has been successfully completed. This declaration serves as a formal statement by the seller, attesting to the fulfillment of their obligations.

Other possible mechanisms for determining completion could include written notice by the seller to the buyer, providing evidence such as receipts or invoices for the completed work, or presenting a municipal permit or certificate of compliance for any necessary repairs or modifications.

It is important to note that if the agreement does not specify a mechanism for determining completion, there is a potential for disputes to arise. To avoid such conflicts, it is advisable to include clear and detailed provisions in the agreement regarding how the completion of the repair item will be assessed and verified.

It is crucial for both the buyer and the seller to carefully review and understand the terms of the agreement, including the specific mechanisms for determining completion. If there is ambiguity or disagreement regarding the completion of the repair item, it may be necessary to seek legal advice or mediation to resolve the dispute.

How to do you determine the timeline for completion of the undertaking?

The timeline for completion of the work, in the context of holdbacks, should be clearly outlined in the agreement between the buyer and the seller. However, it’s important to note that the seller may have valid concerns about agreeing to a strict or short deadline. Factors such as seasonal or weather changes and potential delays with trades or materials can affect the timely completion of the work.

Understanding these potential challenges, it is advisable for both parties to have open and transparent communication during the negotiation process. The seller may express their reservations and discuss the need for a reasonable and flexible timeline that takes into account external factors that could impact the completion of the work.

By engaging in discussions and considering potential obstacles, both the buyer and the seller can work together to establish a realistic timeline that strikes a balance between the buyer’s expectations and the seller’s practical constraints. This may involve allowing for reasonable extensions or adjusting the timeline as necessary to accommodate unforeseen circumstances.

It is important for all parties to approach the timeline negotiations with fairness and understanding, recognizing that unexpected delays can occur. By maintaining open lines of communication and being flexible, the buyer and the seller can work towards a mutually satisfactory agreement on the timeline for completion.

What happens if the task is not completed?

If the seller fails to complete the required work by the agreed-upon deadline, the specific consequences or actions to be taken will depend on the terms outlined in the holdback agreement between the buyer and the seller. The agreement should include provisions addressing this scenario and potential remedies for the buyer.

In such cases, some potential outcomes could include:

Extension of the deadline: The buyer and the seller may agree to extend the deadline to provide the seller with additional time to complete the work. This extension would need to be mutually agreed upon and documented in writing.

Holdback funds: If there are funds being held back, the funds may be released to the buyer however funds cannot be released without the agreement of both parties. 

Completion by alternate means: If the seller fails to meet the deadline, the buyer may choose to complete the work themselves or hire a third party to complete it. In such cases, the buyer may seek reimbursement from the seller for the reasonable costs incurred in completing the work.

Legal remedies: If the failure to complete the work by the deadline constitutes a breach of the agreement, the buyer may pursue legal remedies. This could involve seeking damages for any losses incurred as a result of the seller’s non-compliance.

It is essential to review the agreement carefully and consult with your lawyer for guidance on the appropriate course of action based on the terms of the agreement and applicable laws.

What are your feelings
Updated on August 23, 2023