Things don’t always go exactly as planned in a real estate deal.
Sometimes, repairs aren’t finished. Other times, certain payments or legal issues still need to be sorted out. That’s where a holdback comes in. It’s a common tool used in property transactions to help protect both buyers and sellers when something isn’t fully resolved by the time of closing.
A holdback means part of the money from the sale is set aside and held in trust, usually by the seller’s or buyer’s lawyer. It stays there until the job gets done, or the issue is cleared. This helps keep the deal moving without setting aside money for risk.
Holdbacks are often used for things like post-closing repairs, delayed installations, or to meet legal requirements under the Construction Act in Ontario.
Knowing how a holdback works—and when to use one—can help avoid surprises and reduce stress during the buying or selling process.
In this article, we’ll break down the basics and explain how holdbacks are handled under Ontario law.
Understanding Holdbacks in Real Estate
When buying or selling property, funds can be held back from the seller until agreed conditions are met. A holdback creates a clear safety net, monitored by lawyers, to ensure those tasks do get done.
Lawyers place the held amount in trust and release it only once specific requirements—like completing repairs or providing outstanding documents—have been satisfied. Holdbacks negotiated and must be agreed upon in writing, often either during the offer or just before or on closing day.
Typical reasons include ensuring repair work, tabled documents such as a Real Property Report, or last-minute issues discovered during final walkthroughs.
Trusting the funds remain in a lawyer’s account until tasks are done offers assurance to both sides, while still allowing the deal to finish on schedule.
Why Use a Holdback?
Sometimes, closing day comes when not everything is fully sorted out. A holdback helps both buyers and sellers stay protected.
Here are the main reasons it’s used:
1. Ensure Agreed Repairs
It’s common for buyers to ask for repairs after a home inspection. These could be things like fixing a leaking roof, replacing broken windows, or repairing appliances. If both parties agree, the lawyers will hold back a set amount from the seller’s proceeds. This money stays in trust until the repair is done properly and proof—like receipts or photos—is provided.
The holdback gives buyers peace of mind and helps sellers avoid delays in closing. The exact amount depends on the cost of the repair, but it usually includes a little extra to cover any unexpected expenses.
If the work isn’t done on time, the buyer may use the holdback funds to hire someone else.
2. Cover Unknown Liabilities
Sometimes, certain costs don’t show up until after the deal is closed. These might include unpaid property taxes, outstanding utility bills, or condo fees that weren’t disclosed earlier. In some cases, special assessments from a condo board may also apply.
To avoid surprises, buyers and their lawyers may ask for a holdback. This way, a set amount is put aside to cover any of these future costs. If no liabilities are found, the funds are released back to the seller.
But if an issue comes up, the buyer can use the holdback to pay it off without having to chase the seller later.
3. Statutory Protection for Renovations
The Construction Act Ontario requires a 10% holdback on any payment for construction or renovation work. This applies to both residential and commercial projects. The rule protects contractors and subcontractors by making sure money is available if they are not paid. It also protects the property owner from legal claims. The holdback must be kept for at least 60 days after the work is substantially completed.
During this time, anyone who hasn’t been paid can file a lien against the property. If a lien is filed, the money can be used to settle it. In some cases, when the work isn’t finished yet, a second 10% holdback—called a finishing holdback—might apply until everything is fully completed.
4. Protect Against Lien Claims
A lien is a legal right that allows a contractor or supplier to claim money they’re owed by placing a charge on the property. In Ontario, if a subcontractor isn’t paid—even if the owner already paid the main contractor—they can still register a lien. This can be a serious issue. It may prevent the sale or refinancing of the property.
A holdback helps reduce this risk. By keeping part of the payment aside for a fixed period, it ensures that money is available if someone files a lien. This protects both the owner and the new buyer from being held responsible for unpaid work.
5. Improve Transaction Confidence
Not every closing goes smoothly. Sometimes, small issues come up at the last minute. Instead of delaying the entire deal, lawyers can agree on a holdback. This allows the closing to go ahead while giving everyone the time and security they need to fix the outstanding item.
Buyers feel protected because money is there if something doesn’t get done. Sellers benefit too because the sale can still close on time.
This approach can lower stress and help both sides stay cooperative. It’s also helpful when buyers need financing, as lenders often prefer that all major issues are clearly handled.
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How Holdbacks Work in Practice?
Holdbacks help move a transaction forward even when some conditions aren’t fulfilled by closing day.
Below is how they typically work in Ontario:
Negotiated Agreement
A good practice is to include holdback terms early in the Agreement of Purchase and Sale. This helps set clear expectations about the holdback amount, what conditions must be met, deadlines, and who will hold the funds.
If items arise later—such as a broken appliance discovered just before closing—lawyers can negotiate a holdback at that stage.
Lawyer Holds the Funds
Once holdback terms are agreed, the funds typically go into the buyer’s or seller’s lawyer’s trust account.
Lawyers ensure the money remains safely in trust. That way, buyers are confident the funds exist and sellers know the money is secure until conditions are met.
Clear Release Terms
Funds are only released when agreed conditions are met. Typically, an agreed upon timeline is specified for the seller to complete repair work or provide outstanding documents.
Upon the completion of the work, the lawyer of the party who has conducted the work typically provides the other party’s lawyer with proof of completion. The proof may include invoices or official documents. In most cases, this is required before releasing the funds to the seller.
Use of Holdback Funds
Holdback agreements typically include terms that allow the buyer to use the funds if the seller fails to complete the work. The money might be returned to the buyer if the work isn’t completed.
Common Issues with Holdbacks
Holdbacks can be helpful, but they don’t always work out as planned. Some problems come up more often than others and can lead to stress or delays in closing. That’s why it’s important to get the terms right from the start.
What can be those problems?
Let’s learn about them below!
- The holdback amount is too low compared to the cost of the work or issue it’s meant to cover.
- There’s no clear deadline for the seller to finish their part, which can lead to long delays.
- The buyer has no option to use the holdback money if the seller doesn’t act in time.
- The wording in the agreement is unclear, so both sides might argue over what the seller is actually responsible for.
- Disagreements about the terms can lead to extra legal costs and slow down the release of funds.
Common Holdback Scenarios
Holdbacks are often used when something small still needs attention before or just after closing. These situations don’t always stop a deal, but they do need a little time to sort out. That’s where a holdback helps.
Here are some of the most common scenarios:
Repairs Promised After Inspection
After a home inspection, buyers might ask the seller to fix things like broken windows, plumbing issues, or faulty appliances. If everyone agrees, the seller promises to do the work, and a holdback is arranged. The money stays with the lawyer until the seller finishes the job and shows proof. This might give the buyer peace of mind while letting the deal move ahead.
Final Clean-Up or Upgrades
Some sellers agree to small finishing tasks—like staining a deck, re-seeding the lawn, or clearing leftover debris. These jobs can be weather-dependent or just not completed in time. A holdback lets the sale close while the seller finishes up. The money is only released when the work is done as agreed.
Minor Permit or Title Issues
There are times when a small permit that is still pending needs to be cleared up. These don’t always stop a closing, but still need to be addressed. A holdback keeps funds available in case the buyer has to fix the issue later. It also motivates the seller to resolve the matter quickly.
Last-Minute Findings
Sometimes, problems are found just before closing—like a new water leak or missing appliances. If there isn’t time to fix it before closing, the buyer might be able to ask for a holdback. That way, the funds are available to cover the repair or replacement if the seller doesn’t follow through.
What If the Seller Doesn’t Complete What Was Promised?
Sometimes, sellers agree to fix or finish certain things before closing, but they don’t get them done on time. In these cases, a holdback helps protect the buyer.
The buyer’s or seller’s lawyer will hold back part of the sale funds in trust. That money stays put until the seller completes the work as promised in the agreement.
This gives the buyer some protection. It also gives the seller a reason to finish the job quickly. If the work still isn’t done after a set time, the buyer may be allowed to use the holdback money to handle it themselves.
The exact rules depend on how the holdback terms were written in the agreement and how they were negotiated. That’s why it’s important to get the details right before closing day.
Final Thoughts
A real estate holdback is a practical tool in Ontario property deals. It protects buyers by ensuring agreed tasks are completed without stalling the sale. It offers sellers a way to close on time, with clear terms and trust.
When drafted thoughtfully—early, clearly, and fairly—it brings confidence and clarity to every deal.
To make sure your holdback is set up properly, it’s always a good idea to speak with a reliable real estate lawyer who understands the process and local rules.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
