Home Inspection Reports (are they worth the paper they are written on?)

1. What is an “exculpatory clause?”

An exculpatory clause is a clause in a contract or other agreement which purports to eradicate or limit the liability of one of the parties (usually the party who drafted the contract).

Standard contracts often contain such clauses in an effort to limit the liability of companies and big organizations who deal with large numbers of customers.

You will find exculpatory clauses in airline tickets, parking receipts, baggage claims and sporting event tickets.

2. Exculpatory clauses in standard home inspection contracts

Prior to September, 2016 all standard BC Home Inspection Contracts contained a clause which purported to limit damages for negligence of a home inspector to the cost of the home inspection (usually about $500).

This clause was upheld in BC Supreme Court in in Gordon vs. Krieg (2013 BCSC 842), purporting to rely on a recent Supreme Court of Canada case (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010]).

In the Gordon case the court found that the building inspector was negligent and would have awarded the plaintiffs $67,000 but for the exculpatory clause (which limited the claim to $400, being the cost of the inspection).

Thus, public policy (not to mention the legal requirement) for home inspectors to be insured was totally defeated by the provisions of their standard contract.

However, in September of 2016 the BC government disallowed the use of such clauses in standard home inspection contracts, so now an aggrieved homeowner has recourse to the courts to obtain proper compensation.

Home inspectors are now required to carry insurance for an amount up to $1,000,000 to insure that damage awards for negligence are actually paid.

3. Why was the law changed?

We are advised by the BC Consumer Protection Office that pressure from the public (which we hope included members of our network who read our article on this issue earlier last year) and other interested stake holders caused the government to eliminate the use of exculpatory clauses in standard home inspection contracts.

That is good news for home buyers.

A home is usually a person’s major asset and an inspection by a qualified home inspector is a standard item of due diligence when buying.

However, even experienced, qualified and competent home inspectors can make mistakes or overlook deficiencies on occasion. That is why they are required by law to carry insurance. Thanks to the above mentioned legislative amendment, consumers can now obtain the protection of said insurance when appropriate.

7. Are exculpatory clauses used by other service providers or professionals?

Lawyers –   NO         Mortgage Brokers – NO

Doctors –   NO          Architects      –  NO

Dentists –   NO         Accountants   –  YES

Realtors –   NO

In addition, the biggest culprit by far is the GOVERNMENT which constantly limits its own liability for negligence by way of legislative exculpatory clauses.

If you are thinking of buying, selling, mortgaging or title insuring real estate in BC call us BEFORE you sign. We can often save you time AND money while ensuring that you fully understand all of the terms.

Disclaimer:  The foregoing is for information purposes only and not intended as legal advice to the reader.  Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future. 

(C) 2017 Pazder Law Corporation 

What are the 7 risks of buying a Pre-Sale Condo?

A pre-sale condominium is a townhouse or apartment that is available for purchase prior to it’s construction or before it is move-in ready. Buying a Pre-Sale has many benefits:

  • Pre-sale homes come with extensive warranty protection;
  • you don’t start paying the mortgage until completion of the building, thereby getting the chance to potentially save for the balance of the down payment; and
  • if prices rise over time (which they have done consistently for the past 15 years (except for 2007- 8), your new home will be worth more than what you paid for it – before you take possession!

However it’s equally important to be aware of the risks associated with pre-sales so you can make an informed choice to buy or not.

Pre-sales of Condominiums in British Columbia are governed by the Real Estate Development and Marketing Act [“REDMA”]. This Act permits developers to engage in sales and marketing of pre-sales prior to obtaining either a building permit or financing under certain circumstances.

Unlike the Residential Tenancy Act of BC, REDMA does NOT prescribe any particular form of pre-sale contract, so developers typically have their lawyers draft very one-sided contracts in favor of themselves. It is the nature of such contracts where most of the risk related to pre-sales arises.

The 7 main risks of buying a Pre-Sale condo are:

  1. Market Value
  2. Interest Rates
  3. Financing
  4. Completion date
  5. Size and layout
  6. Finished product
  7. Legal consequences

———————————-

1. Market Value

What will be the market value of the unit by the time it is ready to be occupied? Can anyone reliably say what the price of a property will be 2, 3 or 4 years from now? While the BCREA, CMHC and others try to predict housing trends in advance, no one pretends to know with any certainty what prices will do more than a year in advance, much less several years.

Would you advise your client to buy a “gold futures contract” for a half a million dollars at today’s prices with delivery in two years?

No? Is that because the price of gold could go DOWN and leverage works both ways?

Yet, that is exactly what a pre-sale contract is in BC. A pre-sale agreement is essentially a futures contract in real estate with an uncertain delivery date no less. So the buyer must carry the risk of market fluctuations and absorb the losses if the market goes down.

2. Interest Rates

Do you know what the interest rate will be 2 or 3 years from now? Will the current prime rate begin to climb or will it stay put?

While financing a condo at today’s best rate might seem feasible for a first- time buyer today, what if rates increase by the time the condo closes? On a $350,000 mortgage, each percentage point adds $300+/month onto the buyer’s monthly mortgage payment.

Predicting interest rates is even more of a gamble than real estate prices, as there are a multitude of factors which affect rates such as the economy, balance of trade, currency spreads and the government’s fiscal and monetary policies –which may be completely at odds with a buyer’s plan to finance a home purchase. Make sure your budget can handle a rise in interest rates before you buy.

3. Financing

While a purchaser may qualify for a mortgage today there are at least 3 ways he may not be qualified when the purchase closing date arrives:

  1. The rates have gone up and he can no longer afford the payments under the bank’s lending guidelines;
  2. The property value has gone down, in which case the bank will lend ONLY on the current reduced market value and he has to make up the difference;
  3. The purchaser and/or his partner have been laid off or had his hours reduced in the interim;

What if the buyer has a “rate hold” from the lender doing the construction financing on the pre-sale project? Most lenders no longer hold rates for more than 90-120 days and if they do so on a project, it’s normally for 18 months maximum. If the completion date gets extended beyond that date by the developer the rate hold expires. Also, if the market value goes down, the bank may require the buyer to make up the difference [see 2. above].

4. Completion Date

This is a moving target in pre-sale contracts. Most contracts provide an estimated completion date which is generally a year or two away. However, the contract will stipulate that the date is subject to change by the developer by a significant amount of time.

Thus, the developer may extend the closing date many times up to a specified “outside completion date” which may be several years past the original estimated closing date. The developer may be within its rights to extend the closing even in a declining market by years beyond the date the purchaser may have planned for.

Pre-sale contracts usually contain force majeure clauses which purport to allow developers to extend closing even beyond the outside completion date if the project has been delayed by “earthquake, terrorism, flood or other act of God, fire, explosion, accident howsoever caused, act of any governmental authority, strike, lockout, inability to obtain or delay in obtaining labor, supplies, materials or equipment, delay or failure by carriers or contractors, breakage or other casualty, climactic condition, interference by the Purchaser, or any other event of any nature whatsoever beyond the reasonable control of the Vendor.

In the meantime, the purchaser is on the hook to buy the unit for what amounts to an indefinite period of time.

However, when the developer is finally ready to go, the contract provides for a short closing notice [usually 7-10 days] wherein the purchaser must be ready to close or face being in breach of contract.

5. Size and layout

Most pre-sale contracts grant the developer the discretion to alter the layout of the unit. Although few buyers seem to think that this will ever happen, when it does they are generally very upset –especially when they find out that they have agreed to allow the developer to do so in the contract.

The size of the unit can generally be 5% smaller than set forth in the draft strata plan or marketing materials with no recourse to the buyer. Size discrepancies of 6% or more can usually only be addressed by a price reduction – not the right to rescind by the buyer.

6. Finished Product

What you see [or rather what you saw a few years ago in the display suite, brochures, videos or other marketing materials several years earlier] is not always what you get. Pre-sale contracts normally allow developers to substitute materials and finishing to a large extent.

In addition the quality of finishing and workmanship may also be far less than expected [or recalled from viewing the display suite].

There is also a “no warranties or representations” clause in the contract which prevents the buyer from relying on any marketing materials or verbal promises made at the time of sale UNLESS they are specifically recorded in the contract of purchase.

A pre-closing inspection occurs about 10 days prior to closing so by the time a buyer sees the final product it is too late to do much about it. The contract will provide for NO deficiency holdbacks even if substantial deficiencies are apparent.

7. Legal Consequences

When a buyer is called upon to close and he finds that one or more of the aforesaid risks have materialized he will usually start learning about the contents of the contract for the first time.

If a purchaser fails to close without lawful excuse, he will normally forfeit his deposit without prejudice to the developer’s legal right to pursue further damages if the deposit is not sufficient to offset them.

On the other hand, if the developer fails to close, it has the option to simply return the deposit to the purchaser with NO FURTHER LEGAL CONSEQUENCES.

If the unit has poor workmanship, less-than-acceptable substitute finishes, changed lay out, smaller than expected size or lesser view (or no view), the developer will normally not admit any fault or responsibility and insist on closing with no price adjustment.

If promises made to the purchaser by the developer’s sales staff have not been met, unless they have been reduced to writing and included in the pre-sale contract the developer will deny them or rely on the no warranties or representations (“if it’s not in the contract it doesn’t matter”) clause contained in the pre-sale contract.

If the purchaser decides to fight the matter in court, he will generally run legal expenses of $50,000 or more and his legal fees are NOT tax deductible. The developer on the other hand, has much deeper pockets, a litigation firm on retainer and its legal bills are tax deductible as a part of the cost of doing business.

The moral of the story:

LOOK BEFORE YOU LEAP (or rather, do your due diligence before you sign).

If you feel that you can handle the aforesaid risks then:

  1. ALWAYS have your own realtor represent you when you buy a pre-sale. The developer will usually pay him or her a pre-arranged commission for bringing in a buyer (so your realtor gets paid and you get independent representation).
  2. After you sign, bring the purchase agreement (and the Disclosure Statement) to your lawyer for review. REDMA gives you a 7 day rescission period. If you change your mind after reviewing all of the documents in detail with your lawyer, you can cancel the contract within this period.
  3. ALWAYS retain your OWN lawyer to represent you on the closing. Often the developer will provide a “recommended lawyer” for closing who may have (what appears to be) a discounted legal fee package for buyers.

Remember, you get what you pay for. Discounted fees generally means discounted service.

Also, if a problem arises upon closing, the “recommended lawyer” is in an ethical bind. He is legally bound to represent your interests, but he is also beholden to the developer for permitting him to advertise his services on site. You are only one client out of hundreds of potential clients the developer may send his way on the project in question (and on future projects). Why put yourself in this predicament for a couple hundred dollars savings (on a half a million dollar investment)?

If you need advice on purchasing a Pre-Sale, call or email our office and we’ll be glad to help you.

© 2017

————————————————————————

PAZDER LAW CORPORATION  

Barristers & Solicitors         

1460 – 800 W. Pender St.      

Vancouver, B.C., V6C 2V6

604 – 682 – 1509        

Email: plc@pazderlaw.com

Website: www.pazderlaw.com

  • Call us ANYTIME with questions or concerns;
  • Our aim is to provide unparalled service to our clients;
  • We are approved solicitors for all major lending institutions;
  • We have completed in excess of 30,000 purchases and over 60,000 mortgage re-finances;
  • We set up the legal program for the Home Owner Protection Office to assist leaky condo owners;
  • We were involved in the mortgage processing set-up of the first title insurance company in BC;
  • We pioneered the first province-wide mortgage refinance program in BC for a major chartered bank;
  • Members of the Law Society, Canadian Bar Association, Mortgage Brokers Association of BC, Mortgage Investment Association of BC, Condominium Home Owners Association of BC and the Real Estate Lawyers and Notaries Association of BC, People for the Ethical Treatment of Animals;
  • Clients may come back to us with questions or concerns for as long as they own the property at no additional charge;

————————————————————————

Schedule

BASIC Pre-sales contracts general checklist:

  1. PriceTotal price
  2. Extras or add-ons
  3. Additional parking stall(s)
  4. Deposit(s)How many deposits made
  5. Cash or deposit bonds
  6. Liquidated damages or not
  7. GSTPrice is inclusive or exclusive of GST
  8. New housing rebate available or not
  9. Developer will process rebate or not
  10. Transitional rebate available or not [must claim after closing]
  11. BCTT payable or not
  12. Closing dateEstimated completion date
  13. Outside completion date
  14. Force majeure clause
  15. Closing notice to purchaser
  16. ParkingKind: [ ] cp [ ] cp with lease [ ] lcp [ ] fixed lease only
  17. Number of stalls
  18. Lien holdback – 7% of purchase price for 55 days after completion
  19. Permitted changesSize
  20. Lay out
  21. Materials and finishes
  22.  AssignmentsAssignability
  23. Assignment fee
  24. Continuing liability for assignor
  25. PTTPayable on purchase price for original purchaser
  26. Payable on assignment price for assignee
  27. First Time Homebuyer limits and restrictions
  28. Disclosure Statement and amendments
  29. 7 day right of rescissionTime limited rescission rights for building permit and financing approvals
  30. Final occupancy permit
  31. New Home Warranty certification
  32. Subject conditions for buyer:financing

Other

  • Any ability to negotiate adverse clauses from agreement?

Disclaimer:  The foregoing is for information purposes only and not intended as legal advice to the reader.  Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future. 

(C) 2017 Pazder Law Corporation 

Title Insurance Re-visited

In light of the December 18, 2015 decision of the B.C. Court of Appeal in Lin v. CIBC Mortgages Inc., 2015 BCCA 518, it’s worth mentioning again that one of the best values in Canadian real estate is title insurance.

In 2013 Lin re-mortgaged his home with CIBC to pay out an existing Bank of Nova Scotia (“BNS”) mortgage and to have some left over funds for other purposes. While he and his wife received the left over funds, their BC notary, Agatha Chung stole the mortgage proceeds destined to pay off the BNS mortgage (along with millions of dollars of other clients’ money).

Much to their chagrin Lin and his wife then had TWO mortgages on their home instead of just the new CIBC mortgage.

Fortunately for them they had purchased an owner’s title insurance policy* some ten years earlier and the title insurer defended their claim that CIBC’s registered mortgage was invalid.

The legal reasoning of the Court of Appeal is in my opinion, dubious, BUT as it is the highest court in BC, its decision is now the law in this province.

It was held that CIBC’s mortgage was not valid and enforceable in these circumstances (as the funds were never really “advanced,” given that the bank’s notary’s undertakings were not complied with by the borrower’s notary).

The net result was that CIBC’s mortgage was struck from the borrowers’ title and the borrowers did not have to pay it back (other than the “left over monies” which they actually did receive). The title insurance company also covered all of their litigation costs through the BC Supreme Court and then the BC Court of Appeal (which would have likely been well over $100K).

Why is Title Insurance such a great bargain?

1. The owner’s policy only cost a few hundred dollars.

2. NO annual premiums are charged after the policy is purchased.

3. There is NO deductible when a claim is made.

4. The policy remains in place for the full purchase price for as long as the owner owns the property.

5. The coverage is much wider than any legal opinion that a lawyer or notary can provide.

6. There is no need to sue the notary (who in this case had fled to China with the mortgage proceeds by then), as the policy is “no fault,” meaning that if the claim is covered it is not necessary to prove negligence or malfeasance to collect (as it is against a notary or lawyer).

How Do You Buy Title Insurance?

Title insurance in BC is generally purchased through a buyer’s lawyer or notary when the property is bought, however it can also be obtained after a purchase as well (called an “existing home owners policy.”)

It covers many risks including title fraud, forgery, survey issues (i.e. encroachments), unpaid liens, taxes or strata levies, outstanding work orders or lack of proper building permits and generally any other claim against the title to the property which a.) the purchaser did not know about and b.) did not cause or agree to.**

Major title insurance companies in Canada include First Canadian Title, Stewarts Title Guarantee Company,* Title Plus and Chicago Title. They are regulated in British Columbia by the Financial Institutions Commission (“FICOM”).

*Stewarts Title Guarantee Company was the title insurer involved in this case which offered protection to its insureds under the “duty to defend” provision of the owners policy.

**Refer to individual policy wording for terms and conditions of coverage.

Disclaimer:  The foregoing is for information purposes only and not intended as legal advice to the reader.  Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future. 

(C) 2016 Pazder Law Corporation 

COOLING OFF THE BC REAL ESTATE MARKET FROM THE TOP DOWN

In our real estate law practice we have seen houses steadily rise over the past seven or eight years and jump drastically since January of this year.

For example, homes in Vancouver on Connaught Drive which were selling for $3-4,000,000 a few years ago are now on the block for $10-15,000,000 (a client of mine recently turned down an offer on her home in this area at $15.8M.  The home was purchased for $6M!)

Correspondingly, homes which were $1-2,000,000 are now $4-5,000,000.

Even condominiums which were valued at a half a million dollars a last summer are now worth $800K to $1M.

Prices are rising so fast, one has to buy a property BEFORE putting one’s own property up for sale, for fear of being priced out of the market!

Before the completion date occurred, another client of mine who bought a home in North Vancouver for $1.5M was offered $250,000 by the seller NOT to complete the purchase!

In my view, this lunacy is being fueled to a large extent by foreign money which is pouring into the Lower Mainland at an unprecedented rate and pulling the prices UPWARDS from the top end.

This inflow of money (Chinese principally, but there is also a lot of Iranian, Indian and American capital coming in, as there is still a very substantial discount on the Canadian dollar for those who deal in USD), is destabilizing the BC real estate market for everyone who lives and works here.

Tragically, the only people who can’t seem to see this are the provincial and federal politicians and the many pundits who make a living commenting on things they t know nothing about (newspaper columnists, economists, business school profs and other so-called experts).

They remind me of the referees at a World Wrestling Entertainment match. Everyone in the stands is screaming that the bad guy has a concealed weapon and the only one in the building who can’t see it is the referee!

However in the WWE the refs are paid to look clueless.

Our politicians are paid to govern in the interests of Canadian citizens, not foreign speculators -but looking at their behavior, one would never guess that.

While it is reported that foreign ownership may be as little as 3-5% of the housing stock that is more than enough to affect the entire market adversely -and it has done so in spades as few can now afford to own a house in Vancouver and even condominium ownership is becoming a stretch.

WHAT TO DO?

1. Make foreign buyers confirm the source of their funds

Right now any foreign buyers can wire any amount of money into  their lawyers’ or notaries’ trust accounts from any bank in the world to buy a property in BC with no questions asked.

Realtors and mortgage brokers are required to fill in a bunch of useless FINTRAC forms and obtain client identification documents, but NO ONE is asking where the money came from in the first place!

I have heard many stories from realtors of bidding wars where a property is listed at a certain price and then a half a dozen or more offers come in steadily bidding up the price by fifty or one hundred thousand dollar increments and then the final offer comes in at a half a million dollars over everybody else’s!

A lawyer in our office recently had the same experience in BC Supreme court on a foreclosure sale.  The offer the court was asked to approve was $1.5M and a six or seven other buyers showed up at the hearing.  As is the court’s practice, everyone  was advised of price of the original offer and given the opportunity to bid or re-bid in a sealed envelope.  The Master opened the sealed bids at $1,55M, $1.65M, $1.725M, $1.9M and the WINNER was $3.1M!

It would appear that the winner wanted to pay AS MUCH AS POSSIBLE.

It has been our experience that much like locals, foreign buyers usually don’t want to pay a penny more than is necessary to purchase a property here (much less an extra million dollars on a foreclosure purchase).

As most foreign buyers have local realtors who are well aware of the market prices, the only explanation which seems to make any sense is that some foreign purchasers are using the Canadian real estate system to launder their money.

Once a house is purchased in BC the seller has effectively washed it and it can be moved anywhere in the world easily by selling the property (as the seller then has the contract of sale and all the documents necessary from the lawyer’s office to “prove” that his funds came from the legitimate sale of Canadian real estate). No foreign country will look past the most recent transaction to confirm the legitimacy of the funds.

In the criminal world, the fee to launder money can be 50% or more.  In Canada, it seems to be NIL.

I believe that many foreign buyers when confronted with a requirement to show where their funds came front would balk and refuse to complete the purchase.

Stemming the flow of dirty money into Canadian real estate would terminate a number of high end purchases, which may push down some of the prices at the $10M – $15M range which would in turn push down the medium high end prices and so on.

2. Increase taxes significantly on those who purchase property in Canada but do not live here or pay taxes here. 

It is commonplace for foreigner investors to park some of their money in Canada (as they do not trust their own governments).  They typically put the title of a property into the names of their wives or children (it is always interesting to look at the occupation listed on the titles to high end real estate like “worker,” “student” or “home maker”).  The wife and kids live in the property as their principal residence and pay no taxes as they have no income.

The father, who is a non-resident, continues to make money in a foreign state at a much lower tax rate.  Canada taxes income on the basis of RESIDENCY, so the father pays NO CANADIAN TAX.  The family enjoys the benefits of the Canadian health care system, school system etc. while paying nothing other than property taxes.

The misguided view of the premier of this province is that the above situation constitutes FOREIGN INVESTMENT IN BC, to be encouraged at every step.

With all due respect, that is nonsense.

As the BC government is perpetually short of money for every worthwhile endeavor (hospitals, schools, pubic housing, seniors, homeless shelters, transit, mental health, child poverty -the list is endless), it would seem obvious that one source of revenue which would be virtually unopposed by BC taxpayers would be to increase Property Transfer Tax and municipal property taxes on foreign buyers who are simply taking advantage of the laxity of the current legal and regulatory framework in BC.

An appropriate rate would be perhaps 20% Property Transfer Tax and triple current property taxes for those who choose to evade paying Canadian income tax (or pay only a token amount for appearance purposes) or simply leave their BC homes vacant.

A sale of a residence so occupied (or unoccupied as the case may be) should also attract income tax on any increase in value (not capital gains tax).

A capital gains exemption for a principal residence should also be disallowed for such owners (these two changes would of course require an amendment to the Income Tax Act which is a federal statute).

These  even for so-called “legitimate” off-shore funds would also dampen foreign demand for Canadian real estate, however to the extent that it does not, then at least there is SOME benefit flowing back to the Canadian tax system.

Are these measures discriminatory?  Absolutely!  They discriminate against foreign buyers who are simply seeking to take advantage of the Canadian real estate system, while parking or washing their funds.

These changes should apply to ANY foreign buyer of any nationality (US, Europe, Britain and Australia included).

UBC already does this with foreign students who are required to pay much higher annual tuition than local students –and no one is complaining!

Will this “fix” the real estate affordability problem?  Maybe not, but you have to start somewhere and you might as well start with the most obvious cause.

Are either of these measures likely to come to come to pass?  I would not hold my breath.

Generally, by the time the government gets around to doing anything of consequence “the proverbial horses are already out of the barn and the farm has been sold off to a foreign syndicate.”

Disclaimer:  The foregoing is for information purposes only and not intended as legal advice to the reader.  Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future. 

(C) 2018 Pazder Law Corporation