Far too often Sellers agree to do things that they don’t end up doing. In a Real Estate transaction this could result in a Buyer being responsible for thousands of dollars in repairs or future payments if a Seller does not do what they agree to do.
A holdback is a very good way to ensure that what a Seller agrees to in an Accepted Offer actually gets done.
What is a Hold Back?
A holdback is when the Buyer's lawyer keeps (or “holds back”) some of the money the Buyer is paying the Seller for a specific purpose, for a set period of time AFTER the Buyer has bought the property. If the money is not used for the specifed purpose before the holdback expires, the money can be released by the Buyer's lawyer to the Seller.
Why use a Holdback?
Often in a Contract of Purchase and Sale, the Seller is responsible for repairs to a property before the Completion Date or payments to a third party after the Completion Date as part of the deal.
A holdback ensures there is sufficient money for any future payments the Seller fails to pay as well as if the Seller doesn’t do the required repairs before the Completion Date. A Buyer does not have to rely on the Seller's word, but can have tangible evidence that money is held by the Buyer's lawyer set aside for the agreed work or payments.
Holdbacks can be very good to use with Sellers who are overseas or are difficult to contact as well as those who have not been acting in good faith. Lawsuits are expensive and time consuming. It is far easier and simpler to have money set aside when the Contract of Purchase and Sale is negotiated to absolutely ensure the that what the Seller agrees to actually occurs.
Holdbacks are often used in new construction as well.