You are selling your home or cottage and moving to another, or you are buying a new home or a new cottage and are excited to get the deal closed. Everything is going smoothly, then in advance of closing the deal, the lawyer tells you that you need to chat about the water test results. That conversation sometimes ends in explaining and negotiating a water holdback from the purchase and sale funds. So, what is a water holdback and why is it required?
The Importance of Water Testing in Residential Property Transactions
Whenever you are buying or selling a property in Prince Edward Island that is not on a municipal water supply, there will be a provision in the agreement of purchase and sale regarding water quality. The purpose is to protect the Purchaser—and in most cases their mortgage lender too—by ensuring the property they are investing in has potable water. Without potable water available on a given piece of land, its value drops significantly.
The standard provision in an agreement of purchase and sale in PEI includes the following language:
"This Agreement is conditional upon the Seller providing a Water Quality Test Report from the [Government] confirming that the drinking water... meets the Guidelines for Canadian Drinking Water Quality for the Government of Canada with respect to bacteriological and chemical analysis..."
The guidelines for Canadian Drinking Water Quality, for those interested, can be found here. Vendors in PEI will arrange for an impartial individual, such as a plumber, to sample the water from the property to be sold and have it tested through AccessPEI. If the sample results on bacteria and chemical come back and meet guidelines – great. If not, however, the issue needs to be addressed.
What is a Water Holdback?
Occasionally, a water quality issue can be addressed prior to closing the transaction by fixing the issue or installing a suitable water treatment device in the home, such as a UV-light filter. In most cases, however, the Vendor and Purchaser will agree to proceed with closing the transaction but further agree to set aside a portion of the transaction funds—the Holdback—to deal with the water issue after the fact. The parties usually agree to closing on these terms as it allows a Purchaser, who may have moving trucks ready and waiting, to move in, while also unlocking the transaction proceeds so the Vendors can be paid out their equity, less the Holdback. Usually, the lawyers will negotiate the terms of the Holdback and they should be specified in writing.
The goal when a water quality issue arises, is to ensure that the new Purchaser gets safe drinking water as confirmed by a government of PEI water test result. The Holdback funds provide some certainty to the buyer that regardless of the issue with the water, there is enough money from the transaction available, if needed, to address and fix the issue. Some fixes are relatively low-cost whereas others can get expensive. Holdbacks, as of this article, are in the $10,000 – $12,000 range, held in trust by the lawyers, to be used if or as necessary to fix any issues with the water.
As an example, if a water test failed on bacteria due to the presence of Coliform, then a typical solution is to shock the well and the water pipes and then re-test afterwards. If a well is shocked and subsequently two clear water tests are obtained and provided to the buyers, then the Holdback is released to the Vendor in full. This is typically the least expensive fix. From there, fixes can be several hundred to a couple thousand dollars if installing a water treatment product, such as an ultraviolet light filter or reverse osmosis system. Finally, if necessary, the most expensive fix that is required occasionally is the need to dig and connect a brand new well. This is the main reason that $10,000 – $12,000 is held back as that is the going price at the time of writing this article for a standard well install.
Ultimately, when looking to sell or buy property, the Vendor should order the water test soon so any issues that may arise can be dealt with before closing, eliminating the need for a Water Holdback altogether.
If you're considering buying or selling residential property in PEI, reach out to our team to discuss the process and get all the information you need to make it a smooth transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
