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Adjustments |
| Normally refers to those items requiring
apportionment as of the date of closing a
transaction. Such adjustments include rent,
mortgage interest, realty tax, local
improvement rates, unmetered public or
private utility charges, and non-metered
cost of fuel. Adjustments are apportioned
and allowed to the day of completion, the
day of completion itself to be charged to
the buyer. Terminology concerning day of
completion will vary by province—in some
instances, the term closing date is used. |
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| Standard agreements/contracts in various
provinces contain a clause concerning
adjustments as of the date of closing. A
typical wording is included relating to a
residential transaction. |
| |
Any rent, mortgage
interest, realty taxes including local
improvement rates and unmetered
public or
private utility charges, and unmetered cost
of fuel, as applicable, shall be apportioned
and allowed to the day of completion, the
day of completion itself to be apportioned
by the Purchaser |
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Adjustments:
Fuel |
| If metered and a reading is taken on
closing, no adjustment is required. In the
case of tanks, the seller fills the tank and
the buyer pays for a full tank at closing. |
| |
|
Adjustments: Insurance |
| The buyer arranges new coverage and no
adjustment is required as per the agreement.
The Agreement of Purchase and Sale used in
Ontario specifically states: |
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Adjustments: Interest on Assumed Mortgages |
| The seller makes regular payments until
closing as mortgages are paid in arrears.
The principal balance is determined after
the last payment is made by the seller.
Interest is calculated on a per diem basis
and credited to the buyer, and he/she makes
the next regular payment. Interest due on
the mortgage for the actual closing day is
the responsibility of the buyer. |
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Adjustments:
Rent |
| The buyer should be
given credit for prepaid rent accruing from
the closing date to the next rent due date. |
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| Example
of Adjustments
–
Rent |
| If rent of $900 is paid on the first day
of the month, the buyer gets credit for one
day if the deal closes on June 30th, i.e.,
1/30th of $900 or $30. The adjustment
includes, where applicable, a credit of any
deposit paid by the tenant for the last
month’s rent along with interest on that
amount. If this residential tenant took
possession on January 1st and paid a deposit
of $900, there will be a credit to the buyer
of $900 and approximately $27 in accrued
interest (assuming a statutory 6% interest
rate on rent deposits). |
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| As a general statement, the adjustment
is calculated on the proportionate share of
taxes borne by the buyer and seller in
relation to the closing date. However,
fluctuations in payments to the municipality
during the year can result in more complex
calculations. The situation is complicated
due to municipal budgeting processes.
Municipalities must determine in advance
what the anticipated taxes will be for the
upcoming year. As councils are frequently
elected in the fall, the final budget is not
determined until the spring. Consequently,
municipalities must estimate taxes and
distribute interim tax bills. Sellers remit
taxes based on these interim bills with
adjustments made coincident with the final
tax notice. Further, all taxes for the year
are usually paid in advance of the year end.
Consequently, the seller’s position in
regard to taxes paid can vary significantly
depending on when the sale occurs during the
year. |
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|
Adjustments: Taxes/Local Improvements |
| When property is sold, the tax
apportionment is relatively straightforward.
If the sale is completed on May 23rd, the
seller will pay the taxes for 142 days and
the buyer will pay taxes for 223 days
(including day of completion—the day the
buyer takes legal responsibility for the
property). |
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| However, if a new mortgage is placed on
the property, the mortgage lender wants to
ensure that enough monies are collected to
pay taxes for the full year. |
| |
| Some lenders demand payment at
completion date, while others will increase
the monthly tax payment due in order to
recover the deficiency over the next year. |
| |
| Example
of
Adjustments
–
Taxes/Local
Improvements
(New Mortgage) |
| Assume that the lender must forward the
full tax payment of 839.50 by June 30th. |
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|
Adjustments: Taxes (Assuming a PIT Mortgage) |
| When assuming a PIT mortgage, monies
accumulated in the tax account remain with
the mortgage, since the lender will not
return the funds to the seller. The buyer
will reimburse the seller through an
adjustment on the Statement of Adjustments. |
