As I mentioned in previous blogs, there are at least 7 major risks associated with buying a pre-sale strata property in BC, summarized as follows:
1. Market Value (can go down by the time the project is completed)
2. Interest Rate (can go up by the time the project is completed)
3. Financing (rate holds can be lost by the time the project is completed, buyer may no longer qualify for any number of reasons)
4. Completion date (is a moving target. It can be moved up or backwards almost indefinitely by the developer –but not the buyer)
5. Size and layout (can be changed by the developer)
6. Finished product (may be substandard and there is little that can be done about it)
7. Legal consequences (if buyer doesn’t close he loses his deposit and possibly more. If the developer doesn’t close the buyer gets his deposit back –that’s it!)
The recent case of the Westbourne Residences project at 5th Avenue and 13th Street is a perfect example of risk number 7 above.
This developer alleges that it ran into unexpected costs and delays and it has now approached the buyers asking for an increase of 15% from the original price so it can complete the project later this year.
If that doesn’t work, the developer has offered to return the buyers’ deposits plus 50% or re-sell the unit when it’s ready and give the original buyer 40% of the net increase in the sale price (after various adjustments, incentives etc.)
The buyers have been given until February 28, 2018 to decide or have their purchase agreements terminated.
The subject strata development has likely appreciated about 25-30% since the pre-sale buyers signed the contracts, so essentially the developer is asking the buyers to split the price appreciation with it.
To my knowledge the developer has not provided any documentary evidence to the buyers to substantiate these cost overruns nor any explanation as to how the 15% price increase was arrived at.
The contract of purchase and sale in this case is pretty standard for developers and contains the usual clause which says that if the developer fails to complete the sale, the buyer’s sole remedy is to get his deposit back.
This clause has not yet been tested in the BC courts, so on its face, it permits the developer to simply change its mind and not complete the sales with virtually no liability to the buyers.
Simply getting one’s deposit back (even with a 50% increase) does not nearly compensate a buyer, who will have to attempt to buy another strata unit at a price 25-30% higher than the one he or she just lost.
Let’s imagine that the proverbial shoe was on the other foot.
If the buyer defaulted, the developer would be legally allowed to keep the deposit AND to sue the buyer for any further losses (regardless of the buyer’s reason for not completing).
We saw this situation several times in 2007-08 when the market corrected and developers were suing buyers for not closing (as the prices had declined). To my knowledge, none of the developers were willing to “split the difference.”
That hardly seems fair.
While this scenario does not happen often, in my view, it should not happen at all.
Pre-sales are governed by REDMA (the Real Estate Development and Marketing Act).
Thus far the government has given the developers a free hand to draft their own one-sided presale contracts, which essentially foist all of the risk onto the buyers.
It is long overdue that a prescribed contract should be mandated which fairly attributes risk between the developer and the buyers.
In this regard, I urge all readers of this article to email Selina Robinson, the BC Minister of Municipal Affairs and Housing (selina.robinson.MLA@leg.bc.ca) and suggest that the NDP government adopt a fair presale purchase contract under REDMA. There is certainly precedent for this as the Residential Tenancy Act of BC requires the use of a prescribed form of rental agreement to prevent abuses by landlords.
A pre-sale purchase is a very big investment for most people and to have it blow up in their faces with virtually no remedy against the seller (other than perhaps a law suit which few individuals can afford) is in my view, unacceptable from a public policy perspective.
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