Recently the BC government announced that it will implement changes to the way individual residential properties will be bought and sold in this province. One of the key changes will be the introduction of a mandatory rescission period for buyers which is colloquially referred to as a “cooling-off period.” Cooling Off Period Announcement This means that after making an offer to purchase AND having that offer accepted by the seller, the buyer will have a certain period of time (likely a week) to re-think the decision to buy and if he chooses, to rescind the purchase contract. It is not clear whether there would be any consequences to the buyer rescinding, such as a monetary penalty (perhaps $500 or $1,000) or no consequences at all. A nominal penalty would likely have the effect of preventing a buyer from tying up multiple properties with offers, knowing that he could cancel any or all of them with impunity. This would clearly be unfair to sellers.
Ostensibly, the rationale for a cooling-off period is that buyers in the current hot real estate market are being forced into making spur-of-the-moment decisions on very expensive properties (the average house price in the Lower Mainland is currently $1,474,000)! In many cases, the competition is so intense that “no subject” offers are being made, well above the asking price. Subject conditions allow a buyer to carry out due diligence on the purchase within a week or ten days from the acceptance date to mitigate the risk of unexpected surprises -which are almost always bad. Typical subject conditions would include a home inspection, title review, confirmation of mortgage financing, and if the property is stratified, a review of the strata plan, bylaws, financial statements, FORM B information certificate, insurance, depreciation report, etc. If a subject condition is not waived or removed within a stipulated time, the contract is terminated. Case law requires the buyer to make reasonable efforts to remove the subject conditions in his offer. However, during a rescission period, the buyer can back out of the contract for any reason or no reason at all. The government is also looking into whether it should limit or regulate “no subject offers.”
In its materials, the government has pointed out that there is an existing precedent for cooling-off periods. There has been a seven-day rescission period for buyers in all pre-sale contracts in BC for many years as mandated by the Real Estate Development and Marketing Act (“REDMA”). There are good reasons for this including:
- inequality of bargaining power, experience and resources between the buyer and the seller (developer);
- complex contracts drafted in the developer’s favor by a wide margin;
- lengthy disclosure statements which can be in the hundreds of pages;
- most buyers are NOT represented by their own realtor;
- long closing periods increase the risk of interest rate increases, a decline in market value, or possibly the reduced ability of the purchaser to close (i.e. job loss, divorce, illness etc.) These are discussed in more detail in our blog The 7 Risks of Buying a Pre-Sale Condo
However, in a typical purchase agreement between individuals, none of those considerations apply. 1) the parties are usually of similar experience and resources, 2) the standard contract of purchase and sale is less complex and not one-sided, 3) the property disclosure statement is shorter and simpler, 4) most purchasers have their own realtor and 5) the closing period is much shorter. So the precedent of a rescission period under REDMA is not particularly relevant to the situation of individual purchasers buying from each other. Interestingly, the BCFSA notes on its website that no other Canadian jurisdiction has such a legislated cooling-off period.
The government has also indicated that it will be looking into the issues of what they pejoratively call “price baiting” whereby a lower than market price is advertised to attract multiple bids. I have seen numerous occasions where this practice not only did not result in a sale, it didn’t even generate a lot of bids. It is a gamble that doesn’t always pay off.
Finally, the concept of “blind bidding” is being examined as well. That’s a situation where the seller gets multiple offers and chooses not to disclose the details of the offers to competing bidders. That is simply a judgment call by the seller and his realtor. By disclosing the price to competing bidders, an increased price might be had just like at any auction house. On the other hand, a competitor might overshoot what is needed with his bid by not knowing the price that other bidders are offering. Like “price baiting.” blind bidding does not always produce the best results for a seller.
Are any of these measures actually necessary?
The present system of buying and selling in BC has functioned for decades and we still have one of the most robust real estate markets in the world. Will a cooling-off period even benefit a buyer? If he backs out of the contract within the seven-day rescission period, where does that leave him? Basically, he’s right back to square one in terms of trying to find a home to buy!
All of these proposed changes are designed to address purchases in a rising market. What happens when the market cools off and buyers are able to use the rescission period to back out of purchases when the price is declining? That situation, although infrequent has happened from time to time since 2001.
Should both the buyer and the seller have rights of rescission as they do in England? There either party can back out of the contract of purchase for no reason right up to the completion day! In fact, it’s quite common that a seller will back out of a sale at the last minute, having received a better offer (there is even a term for that called “gazumping!”)
One of the main reasons why real estate prices in BC, particularly the Lower Mainland remain stubbornly high is that demand exceeds supply. People from all over Canada and much of the rest of the world want to live here. That almost inexhaustible demand simply cannot be met no matter how much housing density the government allows. Tinkering with the system of buying and selling is not going to fix that.
As Jordan Peterson has remarked, when trying to fix a complex problem or system, it’s far easier to make it worse than better. If we look at the BC government’s track record in improving housing affordability and supply with its ill-advised Speculation and Vacancy Tax, the Land Owner Transparency Act and the Condo and Strata Assignment Integrity Act, we can see that such measures have had no effect whatsoever in terms of making housing more affordable or plentiful. Why should cooling-off periods or any of the other proposed changes be any different?