Water Holdbacks in PEI Real Estate Transactions

November 2025

Water Testing in PEI Real Estate Transactions

If a property in Prince Edward Island is not on municipal water, the agreement of purchase and sale will almost always include a condition about water quality. The purpose is to protect:

  • the buyer, who needs safe, potable water for day-to-day living; and

  • the lender, who wants to be sure the property securing the mortgage has potable water which of course affects its value

Without access to potable water, the value and usefulness of a property can drop dramatically. Ordinarily, the seller must have their water sampled by an independent sampler (often a plumber) with analysis completed through a government-approved lab (commonly via Access PEI) in order to provide a water quality test report. The water is tested against the Guidelines for Canadian Drinking Water Quality for both bacteriological and chemical parameters. If the results meet the guidelines, everyone moves on. If they don’t, the issue needs to be addressed before or, more usually, after closing.

Water Holdbacks

Usually a water issue can be fixed and the fix is relatively straightforward, for example, by:

  • Shocking the well

  • Repairing or replacing equipment, or

  • Installing a treatment system such as a UV filter or reverse osmosis unit.

In many cases, however, either the water test results themselves, or the fix, cannot be done prior to the scheduled closing date. In these cases, the majority of buyers and sellers still want to close, especially if there are moving trucks booked, financing deadlines, or back-to-back sales. That’s where a water holdback comes in.

A water holdback is an amount of money taken from the sale proceeds and is held in trust by a lawyer after closing to deal with the water issue. The key points:

  • The transaction closes and the buyer gets the keys

  • The seller receives their sale proceeds minus the holdback.

  • The holdback remains in trust until the water issue is resolved and satisfactory retesting is completed.

  • The written agreement between the lawyers sets out who can use the funds, for what, and when any remaining funds are released.

The goal is simple: ensure that the buyer ultimately gets safe drinking water by holding enough money that the issue can be satisfactorily dealt with since the vendors will be highly motivated to take steps to ensure a clean water test is provided so they can get their full sale proceeds.

So How Much Money Is Typically Held Back?

The amount of the holdback is negotiated, but it is usually sized to cover the worst-case reasonable scenario. As of this article, water holdbacks in PEI are typically $12,000 because:

  • Some fixes are relatively minor (e.g., shocking the well, servicing existing equipment).

  • Others can be more significant (e.g., installing a new UV system or filtration system).

  • In occasional cases, the solution is to drill and connect a new well, which can be costly—hence the $12,000.

Because the actual fix isn’t always known at closing, the holdback is meant to provide enough financial cushion so the buyer isn’t left with unsafe water and no practical way to address it.

A Simple Example of How a Water Holdback Works

  1. The initial water test fails due to bacteria (for example, the presence of coliform).

  2. The parties agree to a water holdback and close the transaction.

  3. After closing, the well is shocked and the system flushed.

  4. Follow-up water tests are completed.

  5. If the water passes, the holdback funds are released to the seller.

  6. If the water still doesn’t meet guidelines, the seller will take steps for further remediation, such as new treatment equipment, and repeat the above process.

  7. The holdback is there in a worst case scenario if the seller is not taking any reasonable steps to provide a clear water test.

How Golden Pines Law Can Help

Water issues can be stressful in the middle of an already busy transaction. Our team can help by:

  • Reviewing your agreement of purchase and sale and the water test requirements;

  • Explaining your options if a test fails, including whether a water holdback makes sense;

  • Negotiating the holdback terms so your rights and obligations are clear; and

  • Coordinating with your realtor, lender, and the other party’s lawyer to keep your closing on track while ensuring all parties are adequately protected.

If you’re buying or selling a residential property in PEI and have questions about water tests or water holdbacks, contact Golden Pines Law to discuss your situation. We’ll help you understand the process and move toward a smooth, informed closing.

902-201-4303 | office@goldenpineslaw.com