Canada’s first pre-sale register to crack down on flipping

construction crane

The BC government is announcing the creation what appears to be yet another make work project to create needless government jobs (doubtless for NDP supporters).

It’s called “The Condo and Strata Assignment Integrity Register.”

Even the name is odd.  It implies that there is a difference between condos and stratas.

However, in common parlance, a condo is a strata and vice versa.

Furthermore the BC Condominium Property Act (which used the term “condominium”) was replaced with the Strata Property Act over 20 years ago and the new act uses the term “strata” (and no mention of the term “condo” or “condominium” is made in its definition section).

While there are still some condominiums that exist (built pre-1998), they certainly are not going to be flipped by way of contract assignments.

Moreover, the misleading headline put out by the government says that the new assignments register will “crack down on flipping.”

With respect, it will do no such thing. It is simply a registry whereby data on assignments is collected.

“It is widely acknowledged that the practice of pre-sale flipping has been a factor in driving up real estate prices while facilitating tax evasion. Because of a lack of transparency regarding these transactions, it is unknown exactly how many assignment flips occur each year.  This new register will put an end to this lack of information.” (emphasis mine)

Rather than putting an end to the lack of information, how about putting an end to the practice!

If the government was serious in its assertion that pre-sale flipping is driving up the price of real estate it could easily pass a regulation under the Real Estate Development and Marketing Act (“REDMA”) prohibiting assignments of pre-sale contracts.

In fact, I wrote to the BC housing minister before this registry was proposed suggesting just that.

If assignments were prohibited, a buyer would have to complete the pre-sale purchase, pay the GST and PST (thus ensuring that the federal and provincial governments got their slice of the pie) and then, if the buyer chose to do so, he could re-sell the property to someone else.  There would be no need for another wasteful bureaucracy to track meaningless information, as there would be no assignments to be concerned about.

Exceptions could be made for special circumstances (such as a job loss, divorce, accident, death or other unforeseen circumstance that could befall a genuine purchaser), but by and large a prohibition on condo flipping would work far better than a registry to merely record the details.

Speculators, both local and foreign have made billions of dollars buying and re-selling pre-sale contracts in BC over the past 15 years.

Instead of putting an end to this highly SPECULATIVE practice, the government will simply record the details, which will in no way decrease condo flipping when the market starts to rise again.

Ironically, the NDP government just recently enacted the SPECULATION and VACANCY TAX which retroactively targets both local and foreign homeowners who happen to own a second property (or interest therein) in designated parts of BC.  There is little to suggest that this poorly drafted piece of legislation will penalize any speculator, but a great many of ordinary homeowners who find themselves on the title to a property that they don’t reside in, will be definitely be unfairly penalized.

More on the Spec Tax later, but for now, suffice it to say that the Condo and Strata Assignment Integrity Register is both a waste of time and tax payers’ money.

© 2019 Pazder Law Corporation

 

1460- 800 W. Pender St., Vancouver, BC, V6C 2V6
Tel: 604-682-1509 Fax: 604-682-3196
Web: www.pazderlaw.com Email: plc@pazderlaw.com
Call Kenneth Pazder or Melissa Valana

DISCLAIMER: The foregoing is not legal advice. It is presented for information purposes only. Cases and/or statutes cited or contract provisions may change over time. When drafting a legal contract it is strongly suggested that competent professional advice be obtained by the parties prior to signing the contract or removing subject conditions contained therein.

Do Listing Agents Owe a Duty of Care to Prospective Buyers?

two people reviewing a contract

The short answer: YES!

It has long been established that even where there is no contractual relationship, a real estate agent owes a duty to exercise care when providing information to those who may be reasonably expected to rely on it.

For example, an MLS Listing contains information about the property type, its age, size, number of rooms, zoning, municipal taxes and many other things. It is reasonable to assume that a potential buyer may rely on this information.

For a buyer to bring a claim against a seller’s agent for negligent misrepresentation, he must establish that:
• a duty of care existed,
• there was a breach of that duty by a negligent misrepresentation,
• the party reasonably relied on that representation, and
• a loss resulted because of that reliance.

Eck v Montreal Trust Co. of Canada (1991) 16 R. P.R. (2d) 83 (BCSC), is an example on how mistakes in marketing materials prepared by the seller’s agent can give rise to a claim in negligent misrepresentation. In this case, an information brochure stated that the cottage on the property could be rented. However, after completion, the municipality informed the buyer that renting the cottage was prohibited by a bylaw. In this case the buyer succeeded in the action against the seller’s agent.

To avoid be held liable for any inaccuracies that may be contained in their MLS listings and other marketing brochures, listing agents commonly insert a disclaimer that the information contained therein is not guaranteed.

However, a recent unreported case of the BC Provincial Court, Koerber v Salmon (2018) BCPC provides a warning for all listing agents about the information contained in their marketing materials or they could find themselves liable to buyers for negligence for inaccuracies. In this case, the provincial court found the seller’s agent negligent for including an inaccurate square footage calculation in the MLS Listing despite the following disclaimer: “the enclosed information while deemed to be correct is not guaranteed.” After reviewing a number of similar cases, the judge held this disclaimer to be ineffective, reasoning that it was not specific enough.*

An example of a more effective disclaimer might be “The Seller does not warrant or represent that the size of the property as stated in the Listing is accurate. All measurements contained in the Listing should be independently verified by the purchaser if important.”

*The buyer, who was self-represented, still lost the case as he was unable to prove damages. He presented no expert reports or appraisals to support his claim that he has suffered a loss because the house was 15% smaller than represented (reinforcing the old maxim that “he who represents himself in court has a fool for a client.”)

Even a beefed up disclaimer can only protect the seller’s agent if he or she has no reason to believe that the information in the listing is inaccurate. A court will not allow an agent to rely on any disclaimer to avoid liability if the information in the listing agreement is known to be false or misleading.

What can listing agents do to avoid liability?

Firstly, try to ensure that the information contained in the Listing or any other marketing materials is as accurate and complete as possible.

Secondly, make it clear to the buyer in the contract of purchase and sale that the information provided by all third parties (such as taxing and zoning data, land titles searches, strata documents, engineering or depreciation reports, sub-division or re-development potential, measurements etc.) is:
• provided for information purposes only;
• not warranted or represented to be accurate by the seller;
• should be independently verified by the purchaser before being relied on.

This will help to ensure that the buyers and their agent carry out their own due diligence, which will in turn, verify the accuracy (or lack thereof) of the information provided in the listing.

I have said it many times before and it bears repeating again: In real estate, no surprise is ever a good surprise.

© 2019 Pazder Law Corporation

1460- 800 W. Pender St., Vancouver, BC, V6C 2V6
Tel: 604-682-1509 Fax: 604-682-3196
Web: www.pazderlaw.com Email: plc@pazderlaw.com
Call Kenneth Pazder or Melissa Valana

DISCLAIMER: The foregoing is not legal advice. It is presented for information purposes only. Cases and/or statutes cited or contract provisions may change over time. When drafting a legal contract it is strongly suggested that competent professional advice be obtained by the parties prior to signing the contract or removing subject conditions contained therein.

 

FLIPPING YOUR PRE-SALE CONTRACT: What You Need to Know

As housing prices continue to rise, once again pre-sale strata units have become all the rage. In our previous blog, we alerted our readers to some of the risks that are associated with purchasing a property that has not been built, but what about the risks in assigning interests in those pre-sale condos?

An assignment occurs when the purchaser transfers their rights in the purchase contract to someone else before the completion date.

For clarity it is best to define the parties as they are used in legal practice:

Assignor:      is the original purchaser. The assignor is the person(s) assigning his/her interest in the contract.

Assignee:     is the new purchaser. The assignee is the person(s) who is being assigned the interest in the contract. The assignee is the person(s) who will ultimately be purchasing the property.

Developer:     is the Company who is building the new development.
Assigning, or as it has been more commonly called “flipping,” pre-sale units before completion continues to be a common occurrence in Vancouver despite the provincial government’s disingenuous attempts at reducing such transactions.

Is My Contract Assignable?

Most Developer’s purchase contracts in BC do allow for assignments subject to certain qualifications:
•    Written consent of the Developer;
•    Payment of an “assignment fee” to the Developer [which can range as high as 2%-3% of the original purchase price];
•    Usage of the Developer’s form of assignment (which makes the Assignor liable to complete the purchaser if the Assignee fails to do so);
•    The assignment usually cannot occur until all the original units in the development are sold (so as to preclude the Developer competing with his previous buyer).

Typically, the Developer will not withhold their consent so long as all these conditions are met and the Developer approves all materials used to market and list the unit.

As a side note, last year the BC government caused the standard BC Real Estate Contract for sales between individuals to contain a NO ASSIGNMENT clause (despite the fact that virtually no one assigns such contracts), but it refrained from doing so with pre-sale contracts which are routinely assigned!

Assignors

Typically, Assignors have only one thing on their mind when making an assignment, namely “how much profit will I make by flipping the property?”

With a completion date a year or more down the road, an Assignor usually stands to make a tidy profit in an escalating market –often a 100%-200% increase on their original deposit (courtesy of the concept of “leverage.”)

Needless to say, leverage cuts both ways and in a declining market like 2007-8, it was not uncommon to see the Assignor’s full deposit wiped out and a further contribution to the Assignee to “take the unit off of his hands.”
Once Assignors assign their interest, they can breathe a sigh of relief that they have no more obligations towards purchasing the property, right?

Wrong!

The Developer in consenting to the assignment, invariably does not release the Assignor from his or her original obligation to complete the purchase (if the Assignee fails to do so).

Developers prefer to be able to sue both the Assignor and the Assignee. However, if the Assignor finds themselves in the position of having to complete the contract, he or she will still have a remedy against the Assignee.
When flipping a property, Assignors should know that their obligations are not released until the day the Assignee completes and not a moment before.

Assignees

As an Assignee you should understand what the Assignment Amount is. Typically the Assignment Amount consists of:
•    Reimbursement of Deposits Paid to the Developer by the Assignor
•    Balance of the Assignment Amount
•    Assignment Amount [ i + ii ]
•    Total purchase price [ ii   +   original contract price ]

The Balance of the Assignment amount is sometimes referred to as the “Lift”. The Lift is what the Assignor is getting paid to assign the contract to the Assignee. When property values continue to rise, the Lift is typically a positive number. However, the Lift can be a negative number as well, such as in 2008 when properties were decreasing in value rather than increasing. Furthermore, in a market where properties are decreasing in value, the Assignor may run the risk of not getting the full deposit or any of it reimbursed in order for the total purchase price to be brought in line with the current market value of the property.

The Assignee in accepting the assignment, is taking on all the risks the Assignor had in buying a presale unit. This includes the risk that the pre-sale contract might never be completed or may be completed later and at a higher price that the Assignee will likely have to pay if he/she wants to complete. Also, depending on when the Lift was paid to the Assignor, any Lift or assignment fee may not be recovered.  The Assignee is also taking over the contract as is. There is no renegotiating the look or layout of the unit or price of the unit. The effect of the Assignment, is that the Assignee is standing in the shoes of the Assignor.

Accordingly, while the deposit can be reimbursed to the Assignor when the Developer agrees to the assignment, the Lift should only be paid when the Assignee completes the purchase.

Further Considerations:

There are many other issues to consider apart from the assignment price.

Residency of Assignor

If the Assignor is not a Canadian resident, then a holdback must be made by the Assignee under S.116 of the Income Tax Act.

GST may be payable by the Assignor, in which case the Assignee’s lawyer must hold it back and pay it, as the rules concerning payment of GST are reversed when dealing with a non-resident.

GST, if applicable should be payable on the Lift only, but we are in the midst of a file where Canada Revenue Agency is taking the position that it should be payable on the whole assignment amount.

GST

GST is typically paid on the original purchase price and often, on the assignment amount. The assignment amount usually includes GST. However, make sure you read the contract to make sure if that is in fact the case. With large transactions such as a home purchase it is always wise to get the opinion of a tax specialist or an accountant.

Property Transfer Tax

The Assignee is required to pay Property Transfer Tax on the original contract price plus the Lift rather than on the purchase price of the property.
The unexpected result may be that the original purchase price fell under the Property Transfer Tax threshold for “first time buyers” or “newly built construction” but with the Lift added, the Assignee may no longer qualify for these exemptions based on the higher fair market value.

An additional consideration if the Assignor is a non-resident, is the “anti-avoidance” provisions of the Property Transfer Tax Act which can result in very substantial fines if the PTT branch audits the assignment transaction and determines that it was made primarily to avoid the Foreign Buyers Tax.

Benefits

But with all of these risks there are some benefits in assigning a pre-sale contract. Let’s face it, sometimes life happens and it just doesn’t make sense for you to buy the property anymore. Assigning a contract enables the Assignor to realize the gain on the property without having to buy it (thus avoiding GST and PST on the purchase price) and getting his or her deposit back long before the completions date.

The moral of the Story

Assignment contracts are very complex.

We always recommend obtaining legal advice prior to entering into the contract so you are aware of the associated risks, tax consequences and the timing of the release of funds in advance.

Pre-sale assignments may delve into many fields: real estate law, GST, PTT, capital gains and Income Tax.

Trying to navigate that landscape on your own is not a good idea.

 

 

2018 (C) Pazder Law Corporation

Feel free to call us if you are buying or selling a pre-sale contract.

Kenneth Pazder (604) 682-1509 ext. 245

Melissa Valana (604) 682-1509 ext. 258

DISCLAIMER:  The foregoing is not legal advice.  It is presented for information purposes only. Always obtain professional advice before embarking on an assignment of a complex agreement like a pre-sale contract.

Police investigating pre-sale development; condo buyers out hundreds of thousands

‘In court reports… they’d found some of the [pre-sale] units were pre-sold more than once – and as many as four times in some cases.’

How risky is buying a pre-sale condo?

‘Future homebuyers considering a pre-sale property might be surprised to find out what’s in the fine print.

They’re drawn in by glitzy showrooms that allow them to choose their unit and finishes, and many sign contracts without really understanding them.’

“People don’t read the last 10-15 pages. They just look at the first page, the price, how many parking spaces I get, is there GST on it? And that’s it,” said real estate lawyer Kenneth Pazder.

Full CTV News article: here.

 

 

Vancouver Real Estate : Where are All the Buyers? (June 2018)

aerial view homes suburb

This summer, an important party seems to be missing from the real estate market…the Buyer. Increasing interest rates and stricter mortgage requirements seem to be having an impact as Buyers are much less active in today’s market.

Sales across Greater Vancouver, Fraser Valley and Chilliwack are continuing to decline. BUT NOTE THAT SO FAR, THE PRICES CONTINUE TO RISE.

Greater Vancouver

In June, sales were down 14.4% from May of this year, but down 37.7% from June 2017. There were 5,279 New Listings, a 7.7% decrease from June 2017 and down 17.2% from May of this year.

Benchmark prices:
Single Family Detached: $1,598,200, up 0.7% from June 2017 and down 0.6% from May of this year.
Apartments: $704,200, up 17.2% from June 2017, and up 0.4% from May of this year.

Fraser Valley

In June, sales in the Fraser Valley were down 43.2% from June 2017 and down 17.4% from May of this year. There were 3,140 New Listings, a 20.8% decrease from May 2018 and a 15.3% decrease from June 2017.

Benchmark prices:
Single Family Detached: $1,018,900, down 0.2% from May 2018 and up 9.0% from June 2017. Apartments: $453,500, up 0.1% from May 2018 and up 39.4% from June 2017.

Chilliwack & District

In June, sales were down 40.0% from June of last year. There were 526 New Listings, an increase of 11.6% from June 2017. Most of the units sold in June were in the price range of $450,000 to $700,000.

Want to Buy or Sell your property or looking to refinance and have questions? Feel free to call us 24/7.

#1460-800 W Pender Street,
Vancouver, BC V6C 2V6
Tel: (604) 682-1509 Fax: (604) 682-3196
Email: plc@pazderlaw.com

Tax Me I’m Canadian! A commentary on the latest Speculation Tax

Like the title to Mark Milke’s excellent book (well worth a read) suggests, Canadians –born under the colonial mantra of “peace, order and good government” roll over again and again as the federal and provincial governments in this country systematically tax them to death.

The BC NDP’s latest shake down is called the “Speculation Tax.”

It follows on the heels of Vancouver’s “Empty Homes Tax,” a draconian measure that penalizes anyone with a property in that city who dares to leave it empty for more than 6 months a year (unless it falls within an exemption, such as a principal residence).

Although the BC government has not yet thought out all the details of the Speculation Tax which is set to come into law later this fall, it seems so far to be nothing more than an expansion of the Empty Homes Tax into other parts of British Columbia, including Metro Vancouver, the Capital Regional District (except the Gulf Islands), Kelowna and West Kelowna, Nanaimo-Lantzville, Abbotsford, Mission and Chilliwack.

It will tax owners from between .5% to 2% of the assessed value of their homes unless they are rented out for at least half the year.

This poorly conceived strategy does not take into account that most renters don’t want to rent for six months or less, so how that will increase the housing stock for non-owners is not immediately evident.

The Speculation Tax is estimated to bring in about $200M per year, with BC residents picking up about $60M and the rest being paid by out-of-BC owners.

No mention has been made as to what the $200M speculation tax revenue will be used for.

While it could be earmarked for social housing or other housing related initiatives, most governments simply take the dough, plunk it into general revenue and then use it as they please. I would put money on the latter option.

The ostensible justification for yet another tax is to address housing affordability by penalizing those who don’t pay taxes here, but own property which is not used in a politically correct way (i.e. rented out).

Rather than just exempt BC residents, the government is proposing a refundable tax credit, which may or may not offset the tax to be assessed against a BC resident’s property.

While it is clear that foreign (i.e. non-Canadian) money has destabilized BC real estate markets in BC for the past 15 years and the government has sat back and done nothing but encourage it (and collect billions of dollars of Property Transfer Tax in the process).

The Speculation Tax would be far more palatable if it JUST APPLIED TO NON-CANADIANS (or “foreign entities” as defined in the Property Transfer Tax Act).

Instead, the BC government seeks to penalize both British Columbians who own a second home as well as other Canadians with the Speculation Tax.

With no due respect, there is no justification to hose those who live in BC (and thus pay taxes here), nor those who live in Canada, who are our fellow county men and women.

This seems to me to be yet another tax grab –plain and simple.

It’s necessary to fund the NDP’s social welfare agenda at the expense of any BC or Canadian resident who has had the wherewithal to scrape up enough money to purchase a second property.

Clearly the NDP government of BC is ideologically opposed to both private property rights as well as the accumulation of wealth.

As with all levels of Canadian government, if the the BC NDP could govern half as well as they can think up new ways to pick taxpayers’ pockets, we would have few problems in this country.

 

Pazder Law Corporation

© 2018

DISCLAIMER:  The foregoing is not legal advice. Details of the BC Speculation Tax are at present few and far between. As several changes to the as yet non-existent tax have already been announced, what the final version will look like is uncertain.

TIME OF THE ESSENCE clauses in Real Estate Contracts

“I can be late for a date that ’s fine, but he better be on time!”– Shania Twain, Any Man of Mine

*tribute to Shania Twain visiting Vancouver!

We have all experienced the horrible consequences of being late on occasion.

This especially holds true for real estate. Timing in a real estate conveyance is critical.  In the standard CBA/BCREA contract of purchase and sale one of the important terms of the contract is paragraph 12, the “time is of the essence” clause.

12. Time will be of the essence hereof, and unless the balance of the cash payment is paid and such formal agreement to pay the balance as may be necessary is entered into on or before the Completion Date, the Seller may at the Seller’s option, terminate the contract, and in such event the amount paid by the Buyer will be absolutely forfeited to the Seller in accordance with the Real Estate Services Act on account of damages without prejudice to the Seller’s other remedies.

Do not take this clause for granted! It not only stresses the importance of the timing in which the contract must be completed but also the consequences of being even “a minute too late.”

What does “Time of the Essence” mean?

It means that the parties must perform their obligations strictly within the time frame stipulated in the contract.

Failure to act within said time frame will constitute a breach of the contract, giving the other party the right to pursue his or her legal remedies forthwith.

When time is of the essence, the consequences of being a minute too late can be disastrous to the offending party.

Losing the Deal

In Gill v Bal 2017 BCSC 2015 the Supreme Court re-enforced the importance of not being late. The contract stated that the transfer documents were to be registered by 4:00 p.m. on the closing date.  However, at 4:00 p.m. the Buyers were not in a position to close as their lawyer had not yet received the money in his trust account to enable him to register the conveyance pursuant to the standard CBA undertakings which are made part of the contract pursuant to paragraph 14. At 4:19 p.m. the Seller required the executed transfer documents to be returned as the Buyers were not in a position to close and had missed the 4:00 p.m. deadline. At 5:36 p.m. the Buyers were finally able to close, having received the mortgage funds. The Seller refused to complete. The court held that the Buyers were in breach having not been ready to close at 4:00 p.m. as required by the contract. The court awarded the Seller not only the deposit but additional damages as the Seller had to obtain additional financing in order to close on another property.

Forfeiting the Deposit

One of the basic principles of contract law is that damages are calculated on the actual loss suffered by the innocent party. An exception to this rule exists in the context of a real estate deposit. In British Columbia, if a purchaser defaults or is otherwise unable to complete a real estate purchase he is liable to forfeit his or her deposit even if there was no actual loss suffered by the seller. In Tang v Zhang 2013 BCCA 52, the BC Court of Appeal confirmed that the Seller was entitled to keep a $100,000 deposit even though the Seller suffered no actual loss as he was able to resell the property at a higher price.  The court considered the deposit to be earnest money (a term borrowed from US jurisprudence) and therefore subject to forfeiture upon default by the buyer.

Extending the Completion Date

Sometimes circumstances occur where it is impossible for one of the parties to complete on the closing date. If the parties agree to extend the closing date, then the time of the essence clause must be expressly reinstated to give sufficient notice to the other party that the new closing date is being relied on. It is not sufficient to state “all other terms and conditions to remain the same” (Ambassador Industries v Kastens 2001 BCSC 484).

If timing of the contract is critical to a party, anytime the contract is amended or extended, the time is of the essence clause should be reasserted for further assurance that the timing of the deal remains an essential part of the contract.

Waiving Time is of the Essence

Like all other terms, time being of the essence can be waived.

If by words or conduct a party waives the time is of the essence clause, timing of the contract will cease to be strictly enforceable.

In such case the party is given a reasonable time to perform her contractual obligations (Whittal v Kour 1969 CanlII 701 (BCCA) cited in Salama Enterprises (1988) Inc v Grewal 1990 CanLII 1677 (BCSC)).

 

The Moral of the Story

In today’s hot market where property values are sky high, a purchaser needs to make sure that she and her lawyer get everything done on time! A purchaser stands to lose not only her dream home but potentially a substantial deposit as well.

A realtor who cavalierly assumes that a seller “will be reasonable” in the face of a request for a last minute, short term extension may be in for a rude awakening when the seller digs his heels in and refuses to agree to it (perhaps a back-up offer is in the wings), resulting in the realtor’s client losing the deal and forfeiting her deposit in the process! (guess who’s getting sued after that happens?)

Remember the words of William Shakespeare which are apropos in every real estate transaction:

“It is better to be three hours too soon, than a minute too late!”

 

P A Z D E R LAW CORPORATION,    

Real Estate Lawyers           

© 2018

DISCLAIMER:  The foregoing is for information purposes only and does not constitute legal advice.  The reader is urged to consult a lawyer prior to acting or relying on the information contained herein.  Such information can change over time due to many factors. In addition the reader’s own particular legal or financial circumstances may affect his or her ability to make use of this information.

Everything you ever wanted to know but were afraid to ask about SUBJECT CONDITIONS in Real Estate Agreements

contract-with-reading-glasses
First off, “what is a subject condition?”

It is a condition in a contract of purchase and sale which must be removed or waived by the benefitting party before a certain date, failing which the contract will terminate.  

The benefitting party is usually the buyer, but it could also be the seller or both the buyer and seller.

Subject conditions are essential because they allow a party to carry out their due diligence (inspections, documentary reviews, searches and other confirmations) PRIOR to the contract becoming binding.

Typical subject conditions for a buyer could include: 

 – Financing;

 – Building inspection;

 – Review of title, strata plan, by-laws, strata minutes, Form B, insurance, financial statements, parking arrangements, depreciation or other engineering reports;

 – Confirmation that: a. GST or PTT are not applicable, b. no underground oil tanks are located on the property, c. the water is potable, d. the septic system is approved and properly functioning, d. the zoning is appropriate for intended use, e. insurance is available on the property, f. the property was not subject to a stigmatizing event (such as a murder, suicide, paranormal event or other).

Too often subject conditions are carelessly thrown into contracts of purchase and sale without regard to their wording or significance. The importance of subject conditions should not be overlooked as a poorly drafted subject clause may give a party room to walk away from a deal or prevent a contract from even forming.

Typically when entering into a contract of purchase and sale each party has the same goal in mind, namely to complete the transaction. Once the price is agreed on the contract is a done deal, right? WRONG! While the negotiation of the purchase price is always important it is not all that matters. 

In the standard form Contract of Purchase and Sale, those conditions that your real estate agent lists under Terms and Conditions play a very significant role. In fact, a party’s obligations under the contract do not commence until those subject conditions are removed.

A typical subject condition might be: “Subject to the Buyer obtaining and approving a building inspection. To remove a subject condition, the benefitting party must waive or declare fulfilled the condition AND give written notice of the removal of the subject clause before the deadline stipulated in the contract.

Duty of Good Faith

In removing a subject condition, a party has a duty to act in good faith and make all reasonable efforts to remove their subject conditions and complete the contract (Dynamic Transport Ltd v O.K. Detailing Ltd., 1978 CanLII 215 (SCC), [1978] 2 SCR 1072). To act reasonably and good faith is to not act in a capricious or arbitrary manner (Mason v Freedman, 1958 CanLII 7 (SCC), [1978] SCR 483 at 487).

Subject conditions can on occasion play a critical role in aiding a party to get out of his or her contract. Unless the subject condition is waived or fulfilled by written notice the contract is terminated. 

However, as noted above, a party cannot refuse to remove a subject condition for an illegitimate reason.

For example, a Seller cannot refuse to remove her subject to legal review clause merely because she has found another Buyer who is willing to pay more money for the property (Zhang v. Amaral-Gurgel 2017 BCSC 1561).

For a hesitant or risk adverse party, the impulse may be to draft the subject clauses as subjectively in an attempt to give that party the ability to walk away from the contract. However, if the wording of the subject conditions are too subjective it may prevent a contract from even forming. To form a contract there must be some degree of certainty as to the essential terms of the contract. The more subjective a subject clause is, the more uncertain the criteria of the terms are. Therefore, instead of a binding contract, the parties may only have an offer to purchase and a binding contract will not be formed until the subject conditions are removedThis may give either party the ability to walk away before the subject conditions are removed.

Most parties when entering into a contract are not looking for a way out. To promote efficiency and certainty, subject conditions should be drafted objectively. Objective conditions are usually dependant on the happening of an external event, for instance “subject to the Buyer obtaining mortgage financing with an institutional lender.” The criteria of this condition is clear and precise as to when and how it will be fulfilled.

Is a “satisfactory” subject condition enforceable?

Often, a real estate agent will insert the word “satisfactory” to give the party some wiggle room as to the acceptableness of the conditionTake for example, “subject to arranging satisfactory financing.” The term satisfactory implies a subjective standard, leaving concern of the certainty of the clause. However, the Court of Appeal in Griffen v Martens (1988), 1998 CanLii 2852 (BCCA) stated that the purchaser has to use “his best efforts” to obtain financing as the meaning of “satisfactory” means “satisfactory to a reasonable person with all the subjective but reasonable standards of a particular purchaser.” Thus the term satisfactory invokes an objective standard of a reasonable person so the clause is not the subject to the whims and fancies of a particular individual. Therefore, there is a sufficient degree of certainty to the condition

The moral of the story

In today’s hot real estate market, most everyone want the deal done quickly –BUT in a professional and enforceable manner

Properly drafted subject conditions can aid in this goal (although, admittedly in many cases, particularly in Vancouver, buyers are forced to make offers with no conditions at all due to the many bidders all vying for the same property).*

A real estate transaction is one of the biggest transactions most people ever make, so it is not in anyone’s best interest that the deal collapses because of a poorly worded subject condition clause!

When in doubt, feel free to call us for advice 24/7.**  So far we’ve successfully closed over 30,000 purchase and sale agreements!

*In such cases, it is often possible to put in some of the buyer’s due diligence items by way of warranties or representations by the seller.  Also, if the buyer wants to spend the extra money without knowing whether he will be the successful bidder, most of the subject conditions can be carried out BEFORE the offer is made, in which case the offer need not contain any conditions.  However, after losing out on a few such offers, the buyer may become hesitant to continue this expensive and somewhat time consuming procedure.

© 2018 Pazder Law Corporation

1460 – 800 W. Pender St., Vancouver, BC, V6C 2V6, 

tel(604) 682-1509www.pazderlaw.com

Kenneth Pazder (ext. 245)Melissa Valana (ext. 258)

 

DISCLAIMER:  The foregoing is not intended as legal advice, but is presented for information purposes only. Statutory law and case law changes from time to time and it is always advisable to consult experienced, competent legal counsel prior to entering into a major contract such as a purchase or sale of real estate.

How to avoid buying a Stigmatized House

There are many stigmatized properties all over the world.

These properties are “stigmatized” due to circumstances or events which transpired in or around them. For example:

  1. The home could have been the scene of a murder;
  2. It might have been occupied by a serial killer or sex offender;
  3. The former resident was a member of an organized crime group or gang;
  4. The property was robbed or vandalized on prior occasions as it was used to carry out criminal activities;*
  5. The property is alleged to be haunted or plagued by other paranormal phenomena;
  6. The former owner committed suicide on the property;

In BC a seller of property is not legally obliged to disclose any of the above circumstances to a potential buyer.

This is because such circumstances do not at law constitute a material latent defect.

As noted by the judge in the decision referred to below:

A vendor has an obligation to disclose a material latent defect to prospective buyers if the defect renders a property dangerous or unfit for habitation. A latent defect is one that is not discoverable by a purchaser through reasonable inspection inquiries. See McCluskie v. Reynolds (1998), 65 B.C.L.R. (3d) 191 (S.C.), and Cardwell et al v. Perthen et al, 2006 BCSC 333 [Cardwell SC], aff’d 2007 BCCA 313 [Cardwell CA].

This term is also defined in the standard Property Disclosure Statement in use in most residential real estate transactions in BC:

material latent defect means a material defect that cannot be discerned through a reasonable inspection of the property, including any of the following:

(a) a defect that renders the real estate

(i) dangerous or potentially dangerous to the occupants,

(ii) unfit for habitation, or

(iii) unfit for the purpose for which a party is acquiring it, if

(A) the party has made this purpose known to the licensee, or

(B) the licensee has otherwise become aware of this purpose;

(b) a defect that would involve great expense to remedy;

(c) a circumstance that affects the real estate in respect of which a local government or other local authority has given a notice to the client or the licensee, indicating that the circumstance must or should be remedied;

(d) a lack of appropriate municipal building and other permits respecting the real estate.

However, the aforesaid standard Property Disclosure Statement approved by the Real Estate Board does not contain any mention of circumstances which would or could render a home a stigmatized property.*

Thus the doctrine of caveat emptor (buyer beware) is applicable when purchasing a property in this province.

In the recent case of Wang v Shao (BCSC 2018 377) contains an extensive summary of the law concerning the disclosure of stigmatizing circumstances by sellers.

In said case the seller failed to disclose that her husband, Raymond Huang was the victim of a targeted murder likely by a criminal organization just outside the gates of the property.

Although the judge found that this did NOT in itself constitute a legal reason for the buyers to renege on the purchase, he ruled that the vendor’s partial answer as to why she was selling (her daughter was being transferred to another school where she could improve her English skills) amounted to a fraudulent misrepresentation.

At paragraph 217 the judge stated:

[217] As Ms. Shao acknowledged, the inquiry about why the owner was selling is a general question, rather than a specific inquiry about deaths at or near the property, or latent defects. However, having put the question to the plaintiff through her agent, Ms. Shao was entitled to an accurate answer, rather than one calculated to conceal Mr. Huang’s death as a reason for the plaintiff’s decision to sell the property. Ms. Shao did not ask if the daughter’s change of school was the only reason why the plaintiff was selling the property because she believed the representation made by the plaintiff through Mr. Yee. For Ms. Shao, the representation was material, and she relied upon it as an inducement for her purchase of the property.

In other words, an incomplete although technically or partially true representation can amount to a fraudulent misrepresentation in some circumstances –like these.

The vendor sought then to rely on the “entire agreement” clause in standard BC real estate contracts as stated below, but the judge gave short shrift to that argument:

[38] Clause 22 of the agreement of purchase and sale, which is Exhibit 3 in these proceedings, is the “entire agreement” clause. It provides, in part, that:

There is no representation, warranty, collateral agreement or condition, whether direct or collateral or expressed or implied, which induced any party hereto to enter into this Agreement or on which reliance is placed by any such party, or which affects this Agreement or the property or supported hereby, other than as expressed herein.

This clause is vitiated by fraud and it is not open to the defendant to rely upon it in the circumstances. See Ballard v. Gaskill (1955), 14 W.W.R. 519 (B.C.C.A.).

As this case was just reported a few days ago, it is not clear whether the vendor will appeal the decision, as there is about $600,000 on the line depending on the final outcome.

In my view the case could have gone either way, as the failure to disclose was not that blatant and the representation that was made was partially true.

The moral of this story is that it is much better to make NO REPRESENTATION than a half or incomplete representation which can be construed as fraudulent or misleading. Had the seller said nothing about her reasons for selling this would have been an open and shut case –the plaintiff would have lost.

THUS, HOW CAN A PROSPECTIVE PURCHASER AVOID BUYING A STIGMATIZED PROPERTY?

First, advise your realtor that you don’t want to buy a stigmatized home and let him or her know what that subjectively means to you. Ask the realtor to make inquiries with the vendor’s realtor.

Second, do a GOOGLE search of the property to see if the subject property comes up with a story about an unsavory event or circumstance. I have never tried it, but there is a website called www.housecreep.com which purports to have over 25,000 listings of stigmatized properties across North America.

Third, write a representation into your offer to purchase which covers off any of the circumstances which are important to the purchaser (“the vendor warrants and represents that to the best of his knowledge, information and belief that the subject property was a) not the scene of a murder, b) not previously occupied by a sex offender, member of a gang or organized crime, serial killer or other criminal, c) not a former marijuana grow-op, drug lab or place for the manufacture, storage or distribution of illicit substances, guns or explosive devices or illegal products or services, d) not used for other criminal activities, e) not haunted or subject to other paranormal phenomena.”)

Even in these days of “no subject offers” vendors don’t seem to mind making warranties and representations about the property –but they often balk at any “subject conditions” which could allow the buyer the opportunity to lawfully walk away from the purchase.

Fourth, if time permits, which is usually not the case, talk to the neighbors who invariably know what is going on next door.

Given that any kind of purchase in BC involves a lot of money, the more due diligence you can do the less chance you have of being surprised.

And as I have said many times before, in real estate no surprise is ever a good surprise.

*With respect to a property that was formerly used for criminal activities such as a grow op or meth lab, if such activities rendered the home dangerous, unfit for habitation or otherwise defective, that could well be construed as creating a latent material defect in the home (as is often seen in former grow-ops which may have mold, mildew, unsafe electrical wiring etc. which may not always be discerned by a routine building inspection). For that reason the standard PDS used in the real estate industry does contain a question to be answered by the seller as to whether he was aware that the property was formerly used to grow marijuana or to manufacture illegal drugs.

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

 

Real Estate Tip #1: Never Assume Anything

I often advise my clients and their agents to never assume that anything in an MLS Listing is accurate. There is a disclaimer on the bottom of every listing to the effect that the information contained therein is believed to be accurate but not guaranteed.

In many cases, the information is not accurate and as much of it (i.e. size, condition, age, views, GST status etc.) is NOT replicated in the Offer to Purchase, the buyer can seldom rely on it in a law suit when he finds out that the information was wrong after moving into the property (see para. 18 of the standard Contract of Purchase and Sale which purports to exclude all warranties, representations etc. not included in the contract).

The next step for the buyer is usually to sue his realtor for not pointing that out or writing an offer to incorporate the relevant information.

Can that be avoided? Yes. Don’t assume that the listing is accurate. Personally check out any information which is important to the buyer.

In the recent BC Supreme Court case of Laidar Holdings Ltd. v. Lindt & Sprungli (Canada) Inc., 2018 BCSC 66, assumptions were again at the crux of this fairly complicated law suit which resulted in a judgment of almost 500 paragraphs.

A commercial tenant leased some space in Vancouver without verifying that the zoning was appropriate for its particular intended usage.

Its real estate brokerage (in Toronto) wrote the offer up “assuming” that his Vancouver realtor had checked the zoning. The Vancouver realtor “assumed” that the Offer to Lease would contain a provision for the tenant to verify the zoning (it did not). The tenant’s lawyer “assumed” that realtors had already dealt with the zoning issue (there was no indication that the tenant’s lawyer had input into drafting the Offer to Lease).

The tenant signed the lease and later found out that the city of Vancouver would not permit its intended retail space usage.

The tenant then walked away from the lease and was sued by the landlord. The tenant counterclaimed that the lease was invalid and it also sued the realtors as well for not verifying the zoning in advance.

The tenant was held liable for breaching the lease and its Ontario real estate brokerage was held liable for 70% of the tenant’s claim against it (30% was held to be the tenant’s own responsibility).

Zoning is an important consideration in ANY purchase of real estate (particularly commercial) and it is fairly easy to ascertain in advance of making an offer OR it can be included in an offer as a “subject condition” to be removed by the buyer along with other items of due diligence.

The Moral of the Story: Don’t make assumptions regarding real estate matters. There is too much money on the line.

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