April 11, 2012
Toronto Real Estate lawyer, Stephen Shub weighs in on the pitfalls and challenges of buying a former grow-op property. His points really echo the importance of working with competent legal & real estate professionals who are aware of the overall dynamic.
A buyer acknowledged in the terms of the purchase agreement that the property being purchased had been previously used for illegal activities and agreed to accept the property in as-is condition and to assume the existing tenants.
The owners had been on title for about 7 years (having rented the house) but 3 years ago the police discovered it was being used by a prior tenant as a grow-op.
Once the Toronto police got involved (3 years ago), they notified the City of Toronto who registered an “UNSAFE PROPERTY” work order on the title in the land registry system three years ago.
This now means that it is extremely unlikely that the buyer (who has a firm unconditional “low” priced deal) can close due to the following facts:
1) Such a work order, if registered on the title as in this case, can be extremely expensive and time consuming to remove. The seller will refuse to remove it since the buyer acknowledged the past history of the property in the terms of the agreement and that the property was being sold AS IS. The buyer cannot afford to spend the extra funds to finish the remedial work since the buyer had only budgeted to pay a 10% down payment.
2) The buyer will likely be unable to get fire insurance due to the history of the property and due to the continuing existence of the City work order. Without fire insurance on closing, a mortgage lender will not provide funds for closing.
3) The buyer’s lawyer is obligated to disclose the work order by the City (registered on title) to the mortgage lender who will then likely refuse to proceed with funding the mortgage. The buyer will then be unable to close the unconditional purchase and will suffer the consequences of breach of contract including loss of deposit, etc.
The fact that a property was previously (3 years ago) a grow-op does not mean all remedial work was done by the prior owner. If the City has registered a work order, watch out! Mortgage funding and insurance might be impossible to get. The purchase price might be too good to be true and the ultimate price to the buyer could be financial death for the unsuspecting purchaser who thinks he can buy with a low down payment.
1) Conditional on buyer’s lawyer’s approval (the lawyer should immediately check to make sure no work order is registered on title in the land registry office).
2) Conditional on buyer being able to get fire insurance.
3) Conditional on home inspection in order to verify how much remedial work has been done so far and how much still remains to be done.
4) Conditional on a firm mortgage commitment where the mortgage appraisal has been done.
The best type of buyer for this situation is one who can use a credit line on another house to buy the subject property without arranging any mortgage on the property bought and who has the funding to complete any outstanding remedial work.
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