The old legal principle of ‘equitable conversion’ gives the buyer ownership once both sides have signed the deal, writes Bob Aaron.

A compelling situation was raised in a Facebook group for real estate professionals last month by a realtor in Mississauga.

The situation involves a client who had sold a condo townhouse — without any conditions — and the deal is to close in January. But a water leak in the complex now means the property management company needs to enter the unit, as well as neighbouring units, to find the leak.

There is also a chance that the basement and foundation of the realtor’s client may need to be dug up to find the leak. Understandably, the seller is worried that if the property management firm is allowed to do this, the buyers of the condo townhouse may walk away from the deal.

The realtor also noted that the client’s lawyer was unable to advise on this issue.

Two questions were posed:

Does the seller have to allow management into his unit, or can he refuse? If he refuses, does he risk legal issues?
Could the buyers walk if they saw the basement dug up — even though the deal is firm — because the unit will be different than what they saw when they initially looked at the townhouse?

The answer is that the seller has the obligation to maintain the property for the buyer. In this scenario, it would mean letting management into the townhouse to make the repairs before closing. And that’s whether or not the buyer agrees.

This solution is based on an old English doctrine called equitable conversion.

Under this old legal principle, once a buyer and seller sign an agreement of purchase and sale, the buyer immediately becomes the owner of the property “in equity.”

Once the ink dries, the seller only has the right to possession and to receive the purchase price, while the buyer has the right to ownership. Until the closing takes place, the seller simply holds the property in trust for the buyer.

Most people incorrectly think that once an agreement is signed, the seller remains the owner until closing. But this is not correct.

On the Facebook posting that discussed this issue, a Toronto real estate lawyer correctly commented that the closing date — when the money changes hands — is simply the time when the change of ownership is electronically recorded in the land registry.

This concept was first recognized by British courts in 1876 in the case of Lysaght v. Edwards. In that case, Samuel Edwards agreed to sell his mansion for about $8 million in today’s dollars.

Before the transaction was completed, Edwards died and left the house to his wife in his will. The wife and the buyer wound up in court. The wife wanted to keep the property and the buyer wanted to complete the purchase.

The court ruled that as soon as a contract is signed and becomes enforceable, the buyer has a right to the property (called equitable ownership) and the seller only has a right to the money together with a right to possession until the transaction closed.

That’s still the law in Ontario.

And as for the lawyer who couldn’t advise on a problem which crops up in mid-transaction, my suggestion is that the seller should get another lawyer.