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A Tale of Two Clauses PDF Print E-mail
Ordinarily this kind of clause is decided long before closing. It is there to allow the builder to ensure he has sufficient pre-sales to start building.Today I intend to bring to your attention two specific clauses. One I have found in the ¬ pre-payment clauses in a bank’s commitment and the other in a builder’s offer.

Let us start with the bank clause. No, I won’t tell you which bank, just that it is one of the big ones. What this clause relates to is the ability to prepay your mortgage in full or in part. The first part is normal, it asks for three months penalty interest, but then there is an option to charge a greater amount in the next section. First, if you can figure out what this section of the clause says you are amazing, and second what it does say is that you can only pay off your mortgage if you pay whatever amount they decide to make you pay. Here it is:

“(ii) if the Interest Rate chargeable under the Mortgage exceeds the Prevailing Rate (as defined below) (the amount of such excess being the Excess Interest Rate), the amount of interest calculated at the Excess Interest Rate on the amount prepaid for the period of time beginning on the date of prepayment and ending on the Maturity Date. The Prevailing Rate means the interest rate at which we would make a loan to you on the security of a first mortgage of the Property for a term commencing on the date of pre-payment and expiring on the Maturity Date. The Prevailing Rate is determined in our discretion and may not be the same as one of our published mortgage rates;”  

Wow!!! They can charge you whatever they want!!!!! BE CAREFUL and have your lawyer check this stuff.

Ok here is the builder clause.

“This Agreement and the transaction arising there from is conditional upon the Vendor determining on or before the day which is 30 days before the date set for closing that in its sole and absolute discretion, the Vendor is satisfied with the economic feasibility and viability of constructing the dwelling units included with this project, . . . failing which the Vendor shall have the right to . . . terminate this agreement . . . The foregoing condition is inserted for the sole benefit of the Vendor and may be waived by the Vendor.”

What this clause does is allows the builder to TERMINATE your deal for economic reasons 30 days before Closing. So here is the scenario I envision. You buy a home or condo and the Closing is anywhere from 1-4 years away. Prices go up significantly and on the date set for the Closing your home worth is now 50% more. You are all excited. The builder cancels the deal 30 days before closing and resells the home immediately and makes the increased profit. Unfair – yes; good faith – no; legal – probably. If I saw this clause I would simply tell the builder to delete it, modify it significantly  or I would not buy their home. Ordinarily this kind of clause is decided long before closing. It is there to allow the builder to ensure he has sufficient pre-sales to start building.

Good luck and happy home hunting!!!!!!!