Why You Should Be Adding a Holdback Clause

Reading Time: 5 minutes

One of the most frustrating issues in the closing process is the discovery of minor property damage or broken appliances right before closing.

The buyer's legal remedy is technically post-closing. This means the buyer has to initiate a claim after they take possession and chase the seller for a judgment and payment.

These types of issues are generally not a valid reason to refuse to close.

In my firm, we always advocate for our clients by attempting to negotiate a holdback when these issues are discovered.

The difficult part is that I usually don't have any legal leverage to push with. If the seller disagrees or doesn't want to cooperate, we still have to close.

Any agreement to a holdback is usually done out of good faith, and I'd say we're successful about half the time.

Recently, one of the agents we work with asked if there was anything they could do in the drafting stage to better protect their clients.

So, I did some research and found an interesting article by Brian Madigan.

He provides some sample clauses regarding testing appliances and, more importantly, contractually agreed-upon holdbacks.

I have repurposed his examples into a "Detailed" version and a "Subtle" version :

1. The Detailed Clause

In the event that any one or more items of such equipment, appliances, chattels and fixtures are not in good working order as determined in the sole discretion of the Buyer, then, the Buyer shall be entitled to holdback the sum of $X.XX, which shall be held in trust by the Buyer’s solicitor for a period of X days following completion of the transaction. The Buyer’s solicitor subject only to the direction of the Buyer shall 1) pay any invoices for repair or replacement, and 2) remit the balance to the Seller. Provided further, that the Seller shall be obligated to fulfill his obligations under the Agreement notwithstanding such holdback and shall pay the amount of any deficiency to the Buyer within 30 days following any such demand.

2. The Subtle Clause (Can be added to the end of a Good Working Order clause):

In the event that any one or more items of such equipment, appliances, chattels and fixtures are not in good working order, the Buyer shall be entitled to an appropriate holdback for such deficiencies.

The challenge is getting the seller to agree to this in the APS.

The Detailed version will obviously be more difficult, but it all depends on your negotiating leverage.

And hey, if there was ever a market to get away with this...

Just to be clear, I don't have any case law on the efficacy of these specific clauses, and there's always room for dispute in contract. But having this in the APS would certainly provide us with more leverage at closing.

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