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Box =’s UBC CAN

Outline of Steps Taken in a Residential Conveyance – PLTC page 65 and Law Society Checklist

Outline of Legal Issues That Arise Regularly – PLTC page 133

Real Estate Licenses The Real Estate Services Act sets out a policy for licensing agents in order to protect the public. It states that a person can’t provide real estate services for remuneration without a license (RESA s. 3). Real estate services include: rental property management services, strata management services, trading services. RESA s. 1 is cast very broadly in order to encompass the licensing of more services. If you do provide services without a license, you will not be able to enforce the contract for commission (RESA s. 4).

I. Introduction [2.1]

Real estate licensees may be licensed to provide trading services, strata management services, and rental property services. A licensee may be engaged by the seller to provide an estimate of the value of the property, advertise the property, show it to prospective buyers, and negotiate the terms of sale. For the buyer, a licensee may locate properties of interest, advise on their merits, negotiate the purchase terms of sale and hold a deposit.

A. Applicable Legislation [2.2]

Section 3 of the Real Estate Services Act requires that a person who provides real estate services in expectation of remuneration must be licensed. The Real Estate Council of British Columbia enforces the licensing, investigates complaints and imposes disciplinary sanctions under the Act. The Superintendent of Real Estate has the authority to investigate and make orders regarding unlicensed activities and make orders where the licensee has acted in a way that is seriously detrimental to the public interest.

II. Licensing and Terminology [2.3]

Listing agreements set out: what property, how long the listing will last, the rights powers of agent and responsibilities and how the agent gets paid. Types of listing agreements: 1) multiple listing service: an agreement amongst all agents in an area where the property is put up on the MLS service and all realtors who are part of the MLS can see the listing and are empowered to show the property. It gives contractual authority to the agent to communicate with other agents and use them to help sell the property. Only the agent who enters into the agreement with the vendor has privity of contract and not all MLS agents. Other agents have privity with the vendor’s agent and will contract for how to split commission. 2) General or open agreement – less common – it means the vendor can hire an agent and agree to pay commission on completion but it is open to hire other agents as well and then only pay commission to the agent who actually sells the property. 3) Exclusive listing agreement – the vendor hires one agent to the exclusion of all others – the agent you hire has the only right to sell the property and they get paid commission no matter who is responsible for the sale. 4) Dual agency representation

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agreement – means the agent is representing you and the other party, the signor understands that the agent can’t keep secrets from anyone and allows the agent to get full commission.

A. Listing Agreements [2.3]

A listing agreement is a contract between the seller and the real estate brokerage. The seller agrees to list the property with the brokerage and to pay a commission on certain terms, such as upon a binding purchase contract being entered into. A listing agreement can be either an exclusive listing or a multiple listing. An exclusive listing authorizes one particular brokerage and no other to sell the property. If the sale is made by another brokerage, the seller still has to pay commission to the listing brokerage (Black Gavin & Co v Chalmers). In practice, where one brokerage has an exclusive listing and another has a potential buyer, they will usually co-operate and split the commission. A multiple listing requires the brokerage to register the property on the Multiple Listing Service (MLS) this informing all other members about the property. Under a multiple listing, any member of the MLS can show the property, and the listing brokerage agrees to share the commission with any brokerage able to find a buyer (co-operating brokerage). The seller is only liable to the listing brokerage for commission (Winners Development v Goddard & Smith International Realty). The standard multiple listing agreement authorizes the licensee to do things but generally does not require that they do. A brokerage must have a written service agreement is they are to provide trading services as per Real Estate Council Rule 5-1 (called the listing contract). Rule 5-1(4) also establishes that a written service agreement must include, at a minimum, the name of the client and the licensee name of the brokerage, the address of the real estate, the date on which the agreement is effective, the date it expires, a description of services to be provided, the remuneration to be paid and a provision respecting the use of personal information.

D. Listing, Selling and Other Categories of Licensees [2.6]

A multiple listing agreement authorizes the listing licensee to offer a share of the commission to a co-operating licensee who assists in obtaining a buyer for the property. Real estate licensees are subject to the general rules of agency including the legal obligations flowing from the agency relationship. Real estate licensees owe their principals a duty to act in the best interests of their clients, to perform their services with care and skill, to obey their principals’ lawful instructions and to act only within the scope of the authority given by the client. Further, the licensee is viewed as the fiduciary of the principle and owes duties arising out of this relationship including confidentiality, disclosure and loyalty. For example: you can’t put yourself in a conflict of interest or make secret profits.

In real estate transactions, a licensee’s authority does not usually extend to signing offers or acceptances or contract amendments. To do these things, the licensee needs to have given specific authority in writing (Peacock v Wilkinson).

E. Who is the Principal? [2.7]

1. Seller’s Licensee [2.8]

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It is widely agreed that the seller’s licensee’s principal is the seller (D’Atri v Chilcott). Thus the seller is legally entitled to expect that the seller’s licensee will faithfully serve to promote the seller’s interests (Knoch Estate v Jon Picken).

2. Buyer’s Licensee [2.9]

When a licensee works with a buyer, the assumption is that the licensee represents the buyer, unless specific alternate arrangements are made in the form of an “assumed buyer agency”. The seller’s written permission is now required to characterize the buyer’s licensee as the seller’s sub-agent (not the same as pre- 95).

3. Buyer’s Agency [2.10]

Buyer’s licensee may need to search a title and verify the information received from the listing licensee or contained in the property disclosure statement, as well as provide an analysis of comparable properties. The duties of the buyer’s licensee may be modified by the terms of the contract, particularly with respect to the physical condition of the property. The buyer may agree to rely on his physical inspection of the property together with the report of any home inspection services to verify the information provided by the seller or listing licensee.

4. Exclusive Buyer’s Agency Contract [2.11]

Paragraph 6 of an exclusive buyer’s agency contract provides for payment of remuneration directly by a buyer, offset by any amount offered by a listing licensee to a buyer’s licensee who assists in obtaining a buyer for the property. This serves two purposes: it enables the buyer to assess the total cost of a proposed purchase after taking into account net commission costs and it prevents a buyer’s licensee from obtaining two commissions. The failure of a buyer’s licensee to advise of the amount of the listing licensee’s commission can result in dismissal of the buyer’s licensee’s claim for commission.

5. The Dual Agent [2.12]

A dual agent is in a very difficult legal position, as the licensee owes competing duties to both clients. A licensee should avoid dual agency unless the seller and buyer agree to limit the licensee’s legal obligations. Dual agency can arise from either conduct or agreement (Crescent Restaurants Ltd v ICR Brokerage). The dual agent must – (1) secure the consent of both parties to the brokerage acting as a dual agent; and (2) disclose all material facts to both parties.

6. Limited Dual Agency Agreement [2.13]

BC Real Estate Association has prepared an agreement to be signed by a seller and a buyer who have agreed that the designated agent at one brokerage will act for both of them. This agreement limits the scope of the duties owed separately to each party and relieves the licensee of certain legal responsibilities that would otherwise apply. In De Jesus v Shariff, the court of appeal held that a purported limited dual agent who is also a seller cannot deal impartially with the parties, a requirement of the limited dual agency agreement.

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7. Designated Agency [2.13A]

A designated agency model allows transaction to be done in-house where competing parties in a transaction are represented by licensees at the same brokerage without triggering the need for limited dual agency. Under designated agency, the designated agent for each party can provide exclusive agency representation to their respective clients. The brokerage assumes contractual but not agency duties to the buyer of seller who engaged it. The brokerage contractually agrees to appoint one of its licensees to be the “designated agent” for that client and agrees to appoint another to be the designated agent of the other party. The agent appointed will provide that party will the agency duties of loyalty, confidentiality and disclosure.

F. Rental Property Management Services [2.13B]

Rental property management services are defined as trading services in relation to the rental of the real estate, collecting rents or security deposits for the use of the real estate, and managing the real estate on behalf of the owner by making payments to third parties, negotiating or entering into contracts, supervising employees or contractors hired or engaged by the owner, or managing landlord and tenant matters. The Rules do not apply to a licensee who provides rental property management services on their own behalf or on behalf of some other family members. Unless waived by a prospective client, a brokerage must have a written service agreement in order to provide rental property management services. These agreements must include the circumstances in which the agreement may be terminated, the scope of the authority of the brokerage, timing, frequency and nature of accounting statements and other records, how deposits are to be dealt with, and a description of the records to be kept by the brokerage. A brokerage must keep certain records including the tenancy agreement, any accounting statements that are provided to the clients, any invoices for expenditures incurred on behalf of the clients, a record of the tenants at each rental property managed by the brokerage, and a record of the security deposits, pet damage deposits and other deposits paid by each tenant.

G. Strata Property Management Services [2.13C]

Strata management services are defined in the Act as collecting or holding strata fees, contributions, levies or other amounts levied by, or due to, the strata corporation. A person who provides strata management services in expectation of remuneration is required to be licensed under s.3 of the Act. Unless waived, a brokerage must have a written service agreement including an indication of whether the brokerage will be holding contingency reserve fund money, operating fund money, special levy money or other amounts on behalf of the strata corporation; the circumstances in which the agreement may be terminated, any authority for the brokerage to transfer amounts between accounts, the scope of the authority of the brokerage, the timing, frequency and nature of accounting statements and other records to be provided, a description of the records that are to be kept, provisions respecting the use and disclosure of information respecting the use and disclosure of information. Records that must be kept by the brokerage include any accounting statements, any invoices and any monthly statements provided by the savings institution. After termination, the brokerage must promptly transfer control to the strata corporation or another brokerage.

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Case Law

Knoch Estate v Jon Picken Ltd

It is widely agreed that the seller’s licensee’s principal is the seller. Thus, the seller is legally entitled to expect that the seller’s licensee will faithfully serve to promote the seller’s interests.

Several cases have held that dual agency can arise from conduct or agreement. The weight of authority suggests that a licensee can act as a dual agent, in which case the

licensee owes fiduciary obligations to both principles.

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Duties in Real Estate *See PLTC page 1 for duties of buyer/seller lawyer

*See PLTC page 38-41 for guide to steps in receiving instructions from clients

An agent can be seen as a fiduciary and as such has a duty not to harm. They must exercise the standard and skill of their profession and owe a duty to all parties in the transactions (Bango v Holt). They have an obligation to act honestly and cannot deceive any of the parties (Knoch Estate). If an agent makes a representation to a party to the transaction then they’re responsible for that. As such, they have ot have performed their diligence in order to ensure that the representations is as correct as they can determine. The agent’s client will also be liable for the agent’s representations. These duties are implied and in addition to the contractual obligations that have under the agency agreement. Some of the statutory rules also deal with these problems – for example Rule 5-6 states that if an agent makes a representation, they have to put it in writing. If they have a relationship with someone in the transaction, they have to disclose that (Rule 5-10). If they’re making money off the transaction other than commission, they have to disclose that as well (Rule 5-9).

III. Duties Arising from Contract and Tort [2.14]

A. Duty to Obey Instructions of Principal [2.15]

A real estate licensee is under a duty to carry out the instructions of the principal (Glasner v Royal LePage Real Estate Services). The obligation extends only to instructions that are reasonable and lawful, and that fall within the ambit of the agency agreement. In Glasner, the court suggested that where the licensee disagrees with the principal’s instructions, the proper course is for the licensee to cease acting for the principal.

B. Duty to Exercise Care and Skill [2.16]

A real estate licensee owes a duty to the licensee’s principal to exercise reasonable skill, care and diligence in performing his or her duties. The duty to exercise care and skill arises whether the licensee is acting under a contract or gratuitously. In the latter case, the duty has its basis in tort. Where the licensee is acting under a contract, the duty to exercise care and skill may have its basis in contract or in tort. The duty to exercise care and skill applies to every aspect of a real estate licensee’s role: valuing property, advising the parties on important features of the transaction, preparing marketing material and preparing the purchase contract.

1. Property Valuation [2.17]

When a licensee prepares a comparative market analysis of a property’s value to obtain a listing, the standard of care is that of a reasonably skilled professional licensee dealing with property in that community. This is above the standard expected of the average, informed, reasonable person, but below that of a qualified professional appraiser of residential property. The mere fact of an overvaluation does not of itself show negligence (Baxter v F.W. Gapp). While a real estate licensee has a

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duty to render competent services, this does not necessarily entail a duty to obtain “the best possible price” for the principal (Phelan v Realty World-Empire Realty).

2. Verifying Material Facts [2.18]

The listing licensee’s duty to exercise reasonable skill and care includes a duty to verify material facts about the listed property. Buyer’s licensees similarly owe a duty to their principals to know the product that their buyers are buying. A listing licensee’s obligation to disclose material facts does not include a duty to inspect the premises for structural defects or physical soundness, unless the licensee has some reason to doubt the information the seller has provided (Gilchrist v Centre City Real Estate). Similarly, a licensee does not warrant the truth of a seller’s representation in a property disclosure statement. Buyers also have a duty to take care and to act reasonably, including reviewing all documentation and verifying matters that are of importance to them concerning the property.

3. Marketing Materials [2.19]

A listing licensee’s duty of reasonable care and skill encompasses any marketing materials he or she prepared for the listed property.

4. Preparation of Purchase Contract [2.20]

A licensee’s duty to exercise care and skill has been applied to preparation of the purchase contract.

5. Diligence [2.21]

Not only must the listing licensee exercise skill and care in acting for the principal, but diligence is also necessary. If the licensee is not diligent, the seller may be justified in canceling the listing.

6. Duty of Skill and Diligence [2.22]

As a fiduciary, a licensee must serve the client with skill and diligence. A real estate licensee’s duty to exercise care and skill does not extend to advising on the legal rights of the parties. Real estate licensees holding themselves out as specialists may be held to a higher standard of care.

7. Standard of Care [2.23]

Unless the licensee’s conduct is particularly egregious, the court will likely require expert evidence of the usual or customary standard of reasonably prudent licensees in the real estate industry (Walls v Ross).

IV. Duties Arising from Fiduciary Nature of Relationship [2.24]

The relationship between a real estate licensee and the principal is invariably construed as a fiduciary and confidential one (Ocean City Realty v A&M Holdings). A fiduciary relationship can also arise in the absence of a full agent-principal relationship, where the party to a transaction places trust or confidence in a licensee. The onus of proving that the licensee met his or her fiduciary duty is on the licensee. “The onus is upon the gent to prove that the transaction as entered into after full and fair disclosure of all material circumstances and of everything known to him respecting the subject matter of the contract

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which could be likely to influence the conduct of his principal. The burden of proof that the transaction was a righteous one rests upon the agent, who is bound to product clear affirmative proof that the parties were at arm’s length, that the principle had the fullest information upon all material facts and that having this information he agreed to adopt what was done” (Ocean City). The licensee’s fiduciary duty does not cease upon the licensee finding a willing buyer, rather it extends to the date when the sale completes (Ballie v Charman). A fiduciary owes a number of obligations to the principal. A fiduciary must not make a secret profit or act fraudulently. Fiduciaries must not put themselves in a position where their personal interests and their obligations to their principals conflict. They must make full disclosure of all material facts relating to the transaction (DeJesus v Shariff). A fiduciary does not, however, have an absolute obligation to be right (Phelan v Realty World-Empire Realty).

A. Duty Not to Act for Two Principals without Consent [2.25]

The weight of authority suggests that a licensee can act as a dual agent, in which case the licensee owes fiduciary obligations to both principals. A dual agent, however, must secure the consent of both parties to so act and must disclose all material facts to each. It is common practice in BC for a licensee to obtain the consent of both parties and to limit the agent’s obligations by use of a “limited dual agency agreement”.

B. Duty Not to Make a Secret Profit [2.26]

A fiduciary is precluded from making a secret profit as a result of the relationship with the principal. The duty of the fiduciary not to make a secret profit is a strict one, for which proof of loss by the principal is not required. The only viable defence is a full and complete disclosure of all material facts by the fiduciary to his principal or beneficiary, and a consequent informed consent by his principal or beneficiary, to the fiduciary’s acting in his own interest with a view to his obtaining a profit (Baille v Charman).

C. Duty Not to Put Interests in Conflict with Principal’s Interests [2.27]

A fiduciary is under “a duty not to put himself in a position where his personal interest and his obligations to his principal conflict” (Re Crackle). The licensee’s obligation not to put his interest in conflict with that of his principal without the fullest disclosure extends to all representatives in a brokerage, actively engaged in promoting the sale of the property or not (Kramer v Cooper).

D. Duty of Full Disclosure [2.28]

The duty of disclosure is not confined to those instances where the agent has gained an advantage in the transaction or where the information might affect the value of the property, or where a conflict of interest might exists (Ocean City Realty). The licensee’s obligation to make full disclosure includes “everything known to him respecting the subject-matter of the contract which would be likely to influence the conduct of his principal” (Ocean City Realty). The test is an objective one to be determined by what the reasonable person in the licensee’s position would consider likely to influence the principal’s conduct (Ocean City Realty). Any doubt in the licensee’s mind should be resolved by

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disclosure to the principal. The duty to make full disclosure to a seller may extend to the buyer’s licensee where a fiduciary relationship is established.

V. Duties to Third Parties [2.29]

Even where there is no principal-agent relationship, the real estate licensee owes a duty to exercise care in giving advice to those reasonably relying on that advice. The party bringing a claim against a real estate licensee for negligent misrepresentation must establish the usual elements of such a claim: a duty of care, a breach of that duty by negligent misrepresentation, that the plaintiff reasonably relied on the representation; and that a loss resulted (Hedley Bryne liability).

A. Nature of Misrepresentation [2.30]

For a claim against a licensee to succeed, the misrepresentation must, in most cases, be a positive representation. A statement in marketing materials prepared by the listing licensee can give rise to a claim for negligent misrepresentation. Liability can also arise when the real estate licensee misstates material information that he or she is expected to know. Liability for negligent misrepresentation can also arise where the licensee passes the seller’s misrepresentation on to the buyer without taking reasonable steps to verify the information.

1. Material Facts Licensee is Expected to Know [2.31]

Where a real estate licensee misrepresents information material to the transaction that he or she is expected to know, liability may be imposed.

2. Verifying Material Facts from Seller [2.32]

Where a listing licensee receives information from the seller that amounts to a “material fact”, the licensee is under a duty to make inquiries to validate that fact. A listing licensee’s obligation to disclose material facts does not include a general duty to inspect the premises for physical soundness or to discover structural defects. Unless there is some reason to doubt information provided by the seller about the physical soundness of the premises, the listing licensee does not have a duty to independently verify that information (Gilchrist v Centre City Real Estate).

B. Reasonable Reliance [2.33]

A party to a transaction seeking to establish Hedley Bryne liability on the part of a licensee must show that he or she relied on the licensee’s misrepresentation, and that the reliance was reasonable. A licensee can avoid liability for inaccurate information with an appropriate disclaimer.

VI. Statutory Duties [2.34]

A. Real Estate Services Act: General [2.35]

The Real Estate Services Act, Regulation and Council Rules impose many additional duties on real estate licensees. Section 35 defines “professional misconduct” and “conduct unbecoming a licensee”. Among

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other things, professional misconduct includes contravening the Act or demonstrating incompetence in performing any activity for which a licence is required.

If an agent breaches rules or provisions of RESA, the Real Estate Council is responsible for discipline. The Council is subject to rules of fairness, natural justice and is regulated by statue (RESA). It has certain powers under statue to conduct inquiries into complaints, to hold hearings and has some capacity to subpoena witnesses. An appeal of a decision of the Council goes to Financial Institution Tribunal and then to the BC Court of Appeal. Council remedies include: fines, suspensions, revoking of license and other remedial education.

B. Rules of the Real Estate Council [2.36]

The Council Rules set out additional professional obligations of licensees. The duties set out in Rule 3-3 include: acting in the best interests of the client, acting in accordance with the lawful instructions of the client, using reasonable efforts to discover relevant facts respecting any real estate that the client is considering acquiring, avoiding any conflict of interests, and if a conflict of interest does exist, promptly and fully disclosing the conflict to the client. Licensees must act honestly and with reasonable care and skill (Rule 3-4). Licensees must no publish real estate advertising that the licensee knows or reasonably ought to know contains a false or misleading statement or misrepresentation concerning real estate, a trade in real estate or the provision of real estate services (Rule 4-7). Unless the right is waived by the prospective client, a brokerage must have a written service agreement for the provision of trading services. Written service agreements are also required for the provision of rental property management services and strata management services (Rule 5-1). Where a licensee receives a signed acceptance, the must promptly deliver a copy to each of the parties in the transaction and the licensee’s brokerage (Rule 5-4). A licensee is prohibited from inducing any party to a purchase contract to break the contract for the purpose of entering a contract with another party (Rule 5-5). A real estate licensee is prohibited from inducing a buyer to buy by promising that the licensee will resell the property, unless the licensee delivers a signed statement to that effect to the buyer (Rule 5-6). Similarly, unless a signed statement is delivered, a licensee cannot induce a party to a trade in real estate to acquire or dispose of real estate by making a representation or a promise to that party that the licensee will acquire, or resell or otherwise dispose of, the real estate or any other real estate; procure a lease or an extension of a lease; procure financing or an extension of financing; or purchase or sell rights under financing unless, at the time of making the inducing representation, the licensee delivers to that person a statement signed by the licensee (Rule 5-6(2)). A licensee who is providing trading services to a client disposing of real estate must disclose to all other parties to the trade any material latent defect in the real estate known to the licensee unless the parties have already received written disclosure of the material latent defect from the client disposing of the real estate. A “material latent defect” means a material defect that cannot be discerned through a reasonable inspection of the property, including certain specific material latent defects (Rule 5-13).

C. Disclosure Requirements [2.37]

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Council Rule 5-8 requires disclosure to generally be in writing in advance of any contract. If disclosure relates to a client, Rule 5-8 requires the disclosure to generally be separate from a service agreement. Rule 5-8 also requires that is there is any substantive change in information that the licensee is required to disclose, they must do so promptly.

1. Disclosure to Principal [2.38]

Council Rule 5-10 provides that before acting for a person in a transaction providing trading services to or on behalf of a party to a trade in real estate, a real estate licensee must disclose several facts to that person. The licensee must disclose the nature of the services he or she will provide and whether he or she is acting for any other party to the transaction, and whether he or she is being paid by any other party and if so, the nature of the relationship with those parties. Rule 5-10 does not require the disclosure to be written, although the Code of Ethics of BC Real Estate Association does. The BCREA has produced a brochure that includes a discussion of disclosure. The standard contract of purchase and sale includes an “agency disclosure” clause. The completion of the agency disclosure clause and execution of the contract amounts to an acknowledgement by the principal of the agency relationship that has been previously established.

2. Disclosure where Licensee is acquiring or disposing of the Property [2.39]

Council Rule 5-9 requires licensees to disclose their interest in any trade in real estate. A licensee must disclose to the owner of real estate certain information if the licensee or an associate of the licensee is to acquire the real estate. Similarly, where a licensee or an associate is disposing of real estate, the licensee must make a disclosure to the person acquiring the real estate. The definition of “associate” in Rule 5-7 is quite broad. Disclosure must be made in writing and be separate from a service agreement (Rule 5-8). Where the disclosure is in relation to an acquisition by a licensee or associate, the disclosure must also include the amount of remuneration or other money anticipated to be received by the licensee, an associate or another buyer or tenant. Rule 5-9 disclosure requirement applies regardless of whether the property is listed with the licensee or at all. However, where the property is listed with the licensee or his or her brokerage, mere compliance with the Rule may not be sufficient disclosure to enable a licensee to enforce a subsequent purchase contract. A statement in the purchase contract that the licensee has an interest in the purchasing company is not sufficient; disclosure must be made in the prescribed form before the offer is presented. As to the effect of non-compliance with the legislation, the purchase contract would be voidable at the instance of the seller.

3. Other Disclosure Obligations [2.39A]

Council Rule 5-11 relates to disclosure to a client of direct or indirect remuneration – other than remuneration paid directly by a client – and remuneration arising from referrals. Council Rule 5-12 relates to disclosure to a principal of direct or indirect benefits.

D. Proceeds of Crime (Money Laundering) and Terrorist Financing [2.40]

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The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is designed to deter the flow of money from organized crime or terrorist organizations into the Canadian economy. Part 1 and s.7 of the Regulations require suspicious transactions reported to FINTRAC. A transaction may be suspicious where the client purchases a property using mainly cash or without inspecting it. The PCMLTFA impose on real estate developers certain record keeping and reporting requirements.

E. Personal Information Protection Act (PIPA) [2.41]

PIPA is designed to regulate the way private sector organizations collect, use, keep, secure and disclose personal information. Subject to a few exceptions, PIPA requires an organization to obtain each person’s consent to the collection of any personal information about them. The Act also gives a person the right to know why an organization collects personal information about them and to expect that information to be kept secure and accurate. The Act gives wide powers to the Privacy Commissioner of BC who may initiate an investigation with or without complaint. An individual who commits an offence under the Act may be liable for a fine of up to $10,000 and in the case of a person who is not an individual, $100,000. Where the Commissioner has made an order against a person, or a person is convicted of an offence, a person who has suffered actual harm as a result of the breach may sue the wrongdoer for damages. Real estate licenses regularly collect personal information about clients. For instance, a listing licensee will likely learn, among other things, the seller’s full name, home address and phone number, and, if the seller has a mortgage, the details of the seller’s indebtedness and so on.

Case Law

Phelan v Realty World

A real estate licensee owes a duty to the licensee’s principal to exercise reasonable skill, care and diligence in performing his or her duties

Where the licensee is acting under contract, the duty to exercise care and skill may have its basis in contract or in tort. The duty is the same in either case.

Gross overvaluation may be strong evidence of negligence or incompetence but the courts will consider any explanation for the overvaluation

Thus, while a real estate licensee has a duty to render competent services, this does not necessarily entail a duty to obtain “the best possible price for the principal”.

A fiduciary does not, however have “an absolute obligation to be right”

Saberi v Angell Hasman & Associates Realty Ltd

In Saberi, the court held that the plaintiff buyer did not reasonably rely on the listing information provided by the defendant listing agent, who had provided the plaintiff with an MLS listing information sheet on which she had mistakenly overstated the square footage of the property. Rather, the decision had been based in part on the buyer’s visual inspection of the boundaries

Saberi suggests that disclaimer language in marketing material, warning the buyer not to rely solely on the information provided, may help a licensee.

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Ocean City Realty v A&M Holdings Ltd

The duty of disclosure is not confined to “those instances where the agent has gained an advantage in the transaction or where the information might affect the value of the property or where a conflict of interest exists. The licensee’s obligation to make full disclosure includes “everything known to him respecting the subject-matter of the contract which would be likely to influence the conduct of the principle

The test is an objective one to be determined by what the reasonable person in the licensee’s position would consider likely to influence the principal’s conduct. Any doubt in the licensee’s mind should be resolved by disclosure to the principal.

In Ocean City Realty the court found that the listing licensee should have disclosed to the seller an agreement she made with the buyer to pay him part of her commission. The licensee’s failure to do so was a breach of her fiduciary duty to disclose, which disentitled her to her commission.

Baillie v Charman

The duty to exercise care and skill arises whether the licensee is acting under a contract or gratuitously. In the latter case, the duty has its basis in tort. Where the licensee is acting under a contract, the duty to exercise care and skill may have its basis in contract or in tort

In Baillie v Charman the trial judge held that a higher degree of skill was demanded of both licensees as they “held themselves out to be not only realtors in the ordinary sense but ones who specialized in the carriage trade of higher-priced waterfront properties.

The licensee’s fiduciary duty does not cease upon the licensee finding a willing buyer. Rather, it appears that the duty extends to the date when the sale completes

In Baillie v Charman the buyer’s licensee was found to owe fiduciary obligations to the sellers as a result, in part, of writing a letter to the listing licensee intended to influence the sellers to lower the selling price. The licensee later assumed the role of buyer himself and resold the property at a profit. In doing so, the buyer’s licensee was found to have breached his fiduciary obligation to the sellers. He was disentitled to his commission and had to account for his profits.

The Court of Appeal in Baillie noted that the duty of a fiduciary not to make secret profit is a strict one, for which proof of loss by the principal is not required. The only viable defence is a “full and complete disclosure of all material facts by the fiduciary to his principal or beneficiary, and a consequent informed consent by the principal, or beneficiary, to the fiduciary’s acting in his own interest with a view to his obtaining a profit”.

Krawchuck v Scherbak

In Krawchuck v Scherbak, a first time homebuyer purchased a house in 2004, which, unknown to her, had serious foundation problems and ongoing plumbing defects. The listing agent acted as dual agent for the buyer and sellers. The sellers had sought the licensee’s advice when filing out the property disclosure statement. The sellers disclosed that there had been structural problems 17 years earlier, but that the foundation had settled and was no longer a concern. The sellers omitted to mention that they had detected significant shaking in 1991 while doing renovations

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and that there were sewer backups due to plumbing defects. The Ontario Court of Appeal held that the sellers and the licensee were liable in negligent misrepresentation for conveying incomplete and inaccurate information about the house. The court held that the licensee had a duty to make further inquiries into the sellers’ disclosure that the foundation issues had been resolved years earlier, and should have urged the buyer to retain a home inspector.

Case deals with a licensee’s duty to verify the accuracy of the seller’s representations in the property disclosure statement that foundation problems had been resolved.

H.W. Liebig & Co v Leading Investments Ltd

Where there is a listing agreement, its wording is of prime importance in determining when a commission becomes payable

“Sale” means “completed sale”

Bango v Holt

In Bango v Holt, the court characterized the duty to third parties in this way: “it is well established in this province that a quasi-fiduciary relationship between potential purchaser and real estate company does arise under the doctrine of Hedley BRyne & Co v Heller & Partners. As Ruttan J’s statement suggests, the principle is applied most commonly to statements made by the listing licensee to the buyer.

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Real Estate OrganizationsVII. Real Estate Organizations – Nature and Jurisdiction [2.43]

A. Statutory Organizations [2.44]

The Real Estate Services Act authorizes the making of regulations, rules and bylaws that regulate licensing and also the conduct of the Real Estate Council’s business affairs. The regulations are prepared and approved by the Lieutenant Governor in Council.

1. Licensing [2.45]

The Real Estate Services Act prescribes four levels of licensing: brokerage, managing broker, associate broker and representative. An individual may be licensed at any level; however, a partnership or corporation may only be licensed as a brokerage. A brokerage is a licensee on behalf of which other licensees must provide real estate services. In other words, the real estate services of the brokerage must be provided by its managing broker and any associate brokers or representatives who are licensed to and engaged by the brokerage. A brokerage must have a managing broker, and partnerships or corporations that apply for a brokerage license must identify the person proposed to act as the managing broker. The managing broker is responsible for the control and conduct of the brokerage’s real estate business, including the supervision of the associate brokers and representatives who are licensed in relation to that brokerage. A licensee who meets the educational and experience requirements to be a managing broker but who is providing real estate services under the supervision of a managing broker are referred to as associate brokers. A representative is an individual licensee providing real estate services under the supervision of a managing broker. The vast majority of licensees are licensed as representatives. In most cases, licensees have written contracts or employment agreements with the brokerages in relation to which they are licensed. The Real Estate Services Act permits a licensee to be an employee of the brokerage or to enter into an independent contractor relationship with the brokerage. This is a significant change from the previous requirement that all representatives be employed by a brokerage. Certain classes of persons who trade in real estate are exempted from the licensing requirements, such as a person acting under the authority of a court, a trustee in bankruptcy, or a lawyers acting in the course of the person’s practice. An applicant for a licence must meet certain qualifications set out in the Act, for example “good reputation” and meeting the educational and experience requirements. Applicants for a brokerage license must also be in “sound financial circumstances” and have been licensed for two of the previous five years.

2. Superintendent of Real Estate [2.46]

The Superintendent is appointed by the Lieutenant Governor in Council and overseen by the Ministry of Finance. The Superintendent has the authority to investigate and make orders regarding unlicensed activities and to make orders where a licensee has acted in a way that is seriously detrimental to the public interest (s.48).

3. Real Estate Council [2.47]

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The Real Estate Council of BC is a body constituted under s.73 of the Real Estate Services Act and comprises 16 members. Section 73 of the Real Estate Services Act sets out the objectives of the Real Estate Council as administering the Act, and the regulations, rules and bylaws; maintaining and advancing the knowledge, skill, and competency of its licensees; and upholding and protecting the public interest in relation to the conduct and integrity of its licensees. The Real Estate Council is responsible for issuing and renewing all licenses under the Real Estate Services Act. The Council establishes the educational and experience requirements in the rules, assesses all applications, and may conduct an investigation or hold a hearing before a license is issued. The Council may refuse to issue a license or may issue the license with conditions. The Council can carry out investigations into complaints regarding the conduct of licensees and may hold a hearing to consider the complaint against the licensee. The Council is authorized to suspend or cancel a licence. The Council may make bylaws to establish what information is required on an application for a licence, the licensing application fees, fees to be paid by licensees for the issuance of a licence, and assessments on licensees to cover the operating and administrative expenses of the Council (s.85). The Council may also make bylaws relating to the conduct of Council members, qualifications for election to the Council and matters such as establishment of committees (s.84). Whether or not it has received a complaint, the Real Estate Council can conduct an investigation (s.37) to determine whether a licensee has committed professional misconduct or conduct unbecoming a licensee (s.35). Professional misconduct includes a breach of the Act, wrongful taking or deceptive dealing as defined by the Act, and incompetence. The Council may also apply to the court for an order authorizing the seizure of records or other evidence if they have reasonable grounds to believe that the licensee committed professional misconduct or conduct unbecoming (s. 38). After the Council has gathered the necessary evidence they will issue a notice that a hearing will be held by the disciplinary committee (s.40). When waiting would be detrimental to the public interest, the Council may suspend the license of impose conditions without holding a hearing (s.45). After a hearing, the Council must dismiss the matter or impose a prescribed penalty, including a reprimand or a requirement to complete certain education or training and also including the suspension or cancellation of a license (s.43). The discipline committee can require the licensee to pay all or part of the expenses related to the investigation and disciplinary hearing, and a penalty of up to $20,000 if the licensee is a brokerage and up to $10,000 for all other licensees. The discipline committee may also make an order freezing funds. The Council gives written reasons for its decision. An appeal from a decision lies with the Financial Services Tribunal and must be filed within 30 days of the decision. The Council has disclosure obligations similar to those of the Crown in criminal prosecutions (Romashenko v Real Estate Council of British Columbia). When a lawyer considers the actions of a licensee, he or she should also determine whether the licensee’s actions are in breach of the Real Estate Services Act and may wish to recommend a complaint to the Real Estate Council in addition to civil proceedings. Where the same transaction results in both disciplinary proceedings and a civil lawsuit, a licensee is not automatically entitled to an adjournment of the Council’s proceedings pending the conclusion of the lawsuit.

4. Insurance Corporation [2.48]

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The Real Estate Errors and Omissions Insurance Corporation is a body constituted under s.99 of the Real Estate Services Act. The Corporation administers an insurance scheme to indemnify licensees against liability arising out of the negligent performance, or non-performance of their duties. The scheme ensures that parties to a real estate transaction will be compensated when they suffer a loss because of the negligence of a licensee.

5. Compensation Fund Corporation [2.48A]

It provides protection for members of the public who have entrusted a real estate licensee with money that was misappropriated or wrongly converted, intentionally not paid over, or accounted for, or obtained by the fraud of that licensee or individual. Participation is mandatory for all licensees.

B. Industry Associations [2.49]

1. Real Estate Boards [2.50]

A real estate board is a member-based trade association of licensees who carry out their activities under the Real Estate Services Act within a particular geographical area. Examples include: BC Northern Real Estate Board, Chilliwack & District Real Estate Board, Kamloops & District Real Estate Board etc. Their objectives include promoting interest in real estate marketing, improving the relations between their members and the public, and promoting post-licensing education and development. The boards also maintain a Code of Ethics and set standards of business practice. A board has the power to discipline its members for breaches of the Code of Ethics, the standards of business practice and the bylaws and regulations of the board. A real estate board cannot suspend or cancel a licensee’s license, only the Superintendent or the Real Estate Council may do so. The board may however suspend a member from the board, impose a fine or other penalty.

2. British Columbia Real Estate Association (BCREA) [2.51]

BCREA is an umbrella organization that has as its members the 11 real estate boards. BCREA has two principal mandates: government lobbying and continuing education for licensees.

3. Real Estate Institute of British Columbia [2.52]

The Institute is a professional society established to uphold professional competence and integrity in the real estate industry. It emphasizes the education of licensees and continuing profession development. It’s members usually hold either a degree or diploma in urban land economics.

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Remuneration In a residential context the agent usually holds the deposit so that they can take their commission out of it. In the standard Contract of Purchase and Sale, the deposit provision is usually vague enough that agents will usually hold the deposit if anything goes wrong, unless both parties agree otherwise. In a commercial context, it is usually a lawyer who holds the deposit. Commercial agreements are usually more specific about what happens to a deposit if problems arise, they often include language giving the person holding the deposit “irrevocable authority” to release the deposit. If you want to determine how the agent will be paid you should look to the contract as the agreement will set out the rate of commission and trigger for claiming commission.

VIII. Licensee Remuneration [2.53]

A. Entitlement to Remuneration [2.54]

To recover remuneration, usually in the form of commission, an individual must be licensed under the Real Estate Services Act. There is no requirement however that the licensee have a listing in order to receive a commission. The licensee need only establish the existence of an agreement, express or implied to pay commission. Typically the promise is contained in a listing agreement but it need not be. The right to remuneration arises if the licensee can: 1) establish an agency relationship; and 2) show the licensee’s efforts were the effective cause of the sale (Block Bros. v Halverson).

1. Effective Cause [2.55]

To be entitled to a commission when there is no listing agreement or when the listing is unclear, the licensee must show that the licensee’s efforts were the effective cause of the sale. The court has asked whether the sale would have taken place if the licensee had not been involved in the transaction (McCully Real Estate Ltd. v Steele).

2. When Remuneration is Payable [2.56]

The determination of when a commission becomes payable depends on the nature of the agreement between licensee and principal. Where there is no listing agreement for example, commission becomes payable only if the transaction is completed. Where there is a listing agreement, its wording is of prime importance in determining when a commission becomes payable. Where the listing agreement provides that commission is payable “on completion”, the courts have held that if the sale is not finally concluded, even though a binding purchase contract has been entered, no commission is due (Luxor (Eastbourne) Ltd v Cooper). The seller should consider negotiating a change to the effective cause provision if the agreement provides, as many listing agreements do, that the commission is payable even if the purchase does not complete due to no fault of the seller.

3. Failure of Transaction [2.57]

When the parties sign a purchase contract but the transaction does not complete, the licensee may still be entitled to commission. Again, the wording used in the agreement for commission is critical. Also

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important is whether it is the seller or buyer who refuses to complete. The listing contract used most includes a clause to deal with the situation in which a seller fails to refer a prospective buyer to the licensee and a sale takes place after the listing period expires – essentially the clause says that the seller must advise the licensee. When suing for commission after the expiry of a listing, legal counsel for the claimant must distinguish between a claim for debt and one for damages.

B. Amount of Remuneration [2.59]

Remuneration of licensees in BC is often based on a percentage of the sale price. Typically, one rate will be payable on the first $100,000 of the sale price and a lower rate will be payable on the balance. Commission rates are often lower for exclusive listings than for multiple listings. Commissions are negotiable. Licensees are prohibited from receiving commission paid on the basis of a “net listing” – that is, a calculation based on the difference between the listing price and the sale price. A portion of the multiple listing commission is paid to the local real estate board as a fee for the use of the multiple listing service. The remainder is divided on an agreed ratio between the listing and selling licensees. When the commission arrangement is not clear, the amount of commission payable to the licensee will not be quantified on the basis of the extent of the licensee’s actual labour, but based on the value of the service to the principal.

C. Removal of Licensee Remuneration from Brokerage’s Trust Account [2.60]

The Real Estate Services Act requires that all monies received by a licensee in connection with a real estate transaction be deposited to a brokerage trust account (s.27). Exceptions are (1) where there is a separate written agreement providing otherwise among all principals to the transaction or (2) earned remuneration which is paid into a brokerage commission trust or (3) earned remuneration which is paid into another brokerage account. It is customary for a buyer to place any deposit payable in a transaction with one of the brokerages in trust, usually the selling brokerage. Unless there is a written agreement to he contrary, the brokerage holds that money as a stakeholder as not as an agent. The deposit is held on two conditions: that it will form part of the purchase price on completion and that it will be returned to the buyer if the offer is refused or the seller fails to complete. In the event the sale completes, the brokerage can, where authorized by the seller, apply the deposit monies towards the brokerage’s commission. In fact, once a seller becomes entitled to receive deposit monies, the Act may create a lien in favour of the brokerage over deposit monies.

D. Disentitlement to Remuneration [2.61]

A real estate licensee is not entitled to remuneration where the licensee is not licensed under the Real Estate Services Act and may not be entitled if the licensee breaches a fiduciary obligation. In addition, the licensee may be disentitled to remuneration where the terms of the listing are not met.

1. Breach of Fiduciary Duty [2.62]

The remedy for a breach of a fiduciary obligation may be a loss of the right of the licensee to recover a commission.

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2. Terms of Listing Not Met [2.63]

Failure to meet the terms of the listing agreement will deprive a licensee of any commission. That is so even if the deviation is seemingly minor.

3. Where No Privity of Contract [2.64]

The Real Estate Services Act prohibits a managing partner, associate broker or representative from accepting any commission or other remuneration for a real estate service except through the brokerage in relation to which they are licensed. It is only the real estate brokerage that is a party to the agreement. As such a representative cannot sue without involvement from the brokerage since they are never a part of the actual contract. Referral fees however have been found acceptable so long as the unlicensed individual merely introduces the parties to a real estate transaction.

4. Where Provider of Real Estate Services Not Licensed [2.65]

A licensee cannot recover a commission unless licensed and individual licensees can accept remuneration only through their brokerages. The Council has interpreted Rule 6-1 to permit the payment of a former licensee so long as they were licensed at the time they provided real estate services.

5. Priority for the Remuneration over the Claims of Unsecured Creditors in the Insolvency of a Brokerage [2.66]

Commission trust agreements create a contractual requirement for an employing brokerage to hold any monies received or receivable in trust for the licensee to whom the commission is payable upon completion. Money in a brokerage trust account that is intended as remuneration for licensee may be withdrawn from the brokerage trust account when it has been earned in accordance with the rules. Council Rule 5-15 sets out the circumstances in which a licensee’s remuneration can be paid out of a trust account (that is, when it was been “earned” for the purposes of s.31 of the Act).

6. Lack of Legal Capacity [2.67]

Like any other contract, an agreement to pay commission may be unenforceable if any of the contracting parties lack legal capacity.

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Title *See PLTC Page 3 for information on title system and Land Title Act

II. Title [7.2]

A. Title to Land [7.3]

Buildings are normally defined as fixtures and therefore are included as part of the land. However, a building or a portion of it may be owned separately from the land underlying it.

1. Land Title Act [7.4]

Most land in BC falls within the provincial land title system and is governed by the Land Title Act. The Land Title Act creates a method of title registration. The Torrens system provides that registration raises an indefeasible title, good against the world, without concern for past defects in the chain of title and subject only to the specific exceptions set forth in the statue creating the system. The land registration system created by the Land Title Act is a modified Torrens system. The Act creates certain rights and obligations; however, rights and obligations created under the common law remain except where they are specifically modified by the Land Title Act. If a person is deprived of an estate or interest in land as a result of the conclusiveness of title under the Land Title Act, and that person would have been entitled to recover if the Act did not exist – a claim may be made against the assurance fund.

2. Land Outside the Land Title Act [7.5]

The Land Title Act does not govern federal land unless that land has been specifically brought into the system.

B. Title to Personal Property [7.6]

Although BC has a Personal Property Registry that records security interests claimed over personal property of debtors, the province does not have a registration system for personal property comparable to the land title system, in the sense that there is no registry in which transfers of ownership must be filled; thus, there are no guarantees of title or ownership. However security interests in personal property may be registered under the Personal Property Security Act in the Personal Property Registry. Registration in accordance with the statutory requirements in most circumstances perfects the security interest and establishes priorities against third parties.

III. Land Title Office Procedure [7.7]

A. The Search [7.8]

The legal description of land is required in order to conduct a search in a land title office. A legal description can be obtained by providing the civic address to a title search company or to a company that provides instant legal descriptions.

1. Computerized Titles [7.9]

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A title on computer is assigned a parcel identifier number to facilitate computer searching. The computerized title contains both pending applications and registered documents.

2. Titles Not Yet on Computer [7.10]

If not yet on computer, the legal description may be found in an index book maintained by the land title office for the land title district in which the property is situate. The entry consists of a list of registration numbers for titles and for all charges registered against the title.

3. Absolute Fee [7.11]

In addition to computerized and manual indefeasible titles, some “absolute fee titles” are maintained in the land title office. These predate the idea of indefeasible titles. Most absolute titles are old complex titles or because there have been no dealings on the title. Examples include Crown lands, properties registered in the name of trustees where no action has been taken to transfer the property into the names of the current trustees and remainders of large parcels where the owner has not conducted a survey. Section 174 of the current Act allows voluntary or compulsory conversion of absolute to infeasible fees.

B. Registration [7.12]

All land title offices use a pending registration system. In a pending registration system, a document submitted for registration is endorsed with the date and time of filing, and assigned a number.

IV. Indefeasible Title – What it Means [7.13]

In BC we have a modified Torrens system which means that you can rely on registry and you don’t have to prove title every time you transfer. The system is based on two provisions in the Land Title Act. The first is s. 23 which outlines the effect of indefeasible title. S. 23 outlines that title can’t be defeated by a prior claim. Therefore a title certificate is conclusive evidence of title except for any registrations or exceptions contained in the original Crown grant (LTA s.23(2)(a)).

A. Exceptions to Indefeasibility of Title [7.14]

1. Land Title Act – Section 23(2) [7.15]

Section 23 sets forth the effect of an indefeasible title issued by a land title office. The indefeasible title is “conclusive evidence at law and in equity, as against the Crown and all other persons, that the person named in the title in indefeasibly entitle to an estate in fee simple to the land described in the indefeasibly title” subject to certain limitations such as: reservations, federal or provincial taxes, municipal taxes. A lease for a term not exceeding three years, highways and public easements, expropriations, registered charges, incorrect boundaries, fraud, restrictive conditions, rights of reverter.

2. Land Title Act – Sections 23(3) and (4) – Adverse Possession [7.16]

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These sections provide that if the indefeasible title is the first tile issued for the parcel of land, the title of the registered owner may be subject to a claim of adverse possession.

4. Land Act [7.18]

The Land Act sets forth the reservations and exceptions in e very disposition from the Crown in right of the province, for example exceptions to the title of minerals and thermal resources, petroleum and gas. Section 50 also contains reservations relating to water, public works.

5. Property Law Act [7.19]

The Property Law Act (s.36) allows the Supreme Court to declare an easement for the benefit of adjoining land where there is an encroachment by a building or a fence.

6. Notice [7.20]

The indefeasible title may be relied on even where there is notice of an unregistered interest, except where the owner has obtained title or taken a charge by knowingly participating in a fraud.

7. Family Law Act [7.21]

*See PLTC page 6 for details on the importance of Family Law Act

The Family Law Act does not require that an asses be used for a “family purpose” in order for a spouse to claim an interest. Family property now includes all property owned by one of both spouses at the date of separation unless the asset is excluded under s.85. The new legislation establishes the date of separation as the event that triggers entitlement to an interest in family property.

8. Floating Charges [7.22]

The Land Title Act prohibits registration of an un-crystallized floating charge on land at the land title office. The charge must be registered in the Personal Property Registry under the Personal Property Security Act by filing a financing statement. Once the charge is crystallized it may be registered in the land title office.

9. Builder’s Lien Act [7.23]

A lien claimant may preserve his or her claim of a lien against land by registering the claim in the land title office. The claim may be effective notwithstanding a change in ownership.

10. Fixtures, Crops and Manufactured Homes [7.24]

Under the PPSA, security interests may be taken in chattels which are or become fixtures, crops or manufactured homes. A notice of such security interest may be filed in the Personal Property Registry and the land title office.

11. Statutory Liens and Other Statutory Provisions [7.25]

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a. Unregistered Interests [7.26]

Such a lien may result from failure to pay taxes.

b. Notations [7.27]

Many statues provide for a notation to be made against the title.

c. Effect of Interest Created [7.28]

The provisions of a document that create a lien, charge, encumbrance or notation on title should be reviewed in order to determine the actual interest created as well as its effect. Registration of a document does not necessarily guarantee its enforceability.

12. Fraudulent Preferences and Conveyances [7.29]

If title to land was obtained as a result of a fraudulent preference or conveyance, title may be subject to scrutiny under the provisions of the Fraudulent Preference Act or the Fraudulent Conveyance Act unless the purchaser was a bona fide purchaser for value and had no knowledge that the transfer was fraudulent.

B. Registered Charges [7.34]

Unlike the case of registered ownership of land, the Land Title Act does not provide for indefeasible title to charges. Accordingly, the Act does not create a system of title to charges that are good against the world without concern for past defects in the chain of title. Registration of a charge under s.26 of the Act constitutes a rebuttable presumption of ownership to the estate, interest or claim created by the registered document.

C. Use [7.35]

The uses to which a parcel of land may be put are subject to any restrictions contained in the original Crown grant and the provisions of any restrictive covenants, statutory building schemes, land use contracts or easements registered against the title to the land.

Case Law

Watters Estate v British Columbia (New Westminister Land Title District, Registrar) (AKA Graham v Smith)

In each case, a settlor who was the registered owner in fee simple of property created an alter ego trust. No transfers to the trustee were registered under the Land Title Act during the settlor’s lifetime (in part to avoid the payment of the property transfer tax). After each settlor’s death, their respective executors/administrators applied to register title to the property. The Registrar of Land Title refused registration on the basis that the bare legal title held by the deceased was not “good safe-holding and marketable title” (GSHMT) as required by the LTA. On

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appeal the chamber judge held that each deceased had GSHMT. The judge directed the registrar to register indefeasible title.

The Court of Appeal focused on the role of the registrar in determining GSHMT, noting that the concept is not defined in the LTA.

The found that the deceased’s title was not marketable, because the deceased had agreed not to deal with the property “without the written direction of the Trustees” and a purchaser seeking to deal with the property who became aware of the trust could not be forced to complete the transaction.

The court held that each deceased retained bare legal title only after the creation of the alter ego trusts, which was not GSHMT.

The court went on to point out that where an application is made for the registration of a trust interest and the applicant cannot establish GSHMT, s. 180 of the LTA provides the mechanism for registration.

Generally speaking, a “good title” is described as one that can be sold to a reasonable purchaser or mortgaged to a reasonably prudent person, or one that is free from litigation, palpable defects and grave doubts.

This would not apply to a title subject to a Certificate of Pending Litigation or a caveat. The concept of safe-holding title emphasizes that the owner will not be liable to be disturbed in

his or her possession or full enjoyment, regardless of his or her ability affirmatively to prove his or her title.

“Marketable title” has been described as a title that a reasonable purchaser would be willing to accept or a title that a court would be willing to compel the purchaser to accept, as sufficient when asked to decree specific performance of a contract of purchase and sale. In order to give an opinion with respect to “good, safe-holding and marketable title” it is necessary to make broader inquiries than merely to search title at the land title office. An example of a title that is not marketable is one that is subject to a restrictive covenant permitting only uses inconsistent with the existing zoning of the property. See Watters Estate for the BC Court of Appeal’s recent comments on good, safe-holding and marketable title.

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Purchase Contract*See PLTC page 12 for details on purchase agreements

The three P’s of the contract are: parties, property and price. These are essential and if one is missing you don’t have a contract. Sometimes they will not be completely certain, in which case the courts will have to figure it out by looking to the intention of the parties. 1) Parties: they must be described in sufficient detail to identify them. The seller is anyone with interest in the land (if multiple parties, then all must be included). If owed by 2 people and only one of them is named in the contract then that person is selling their interest (ex: 50% as tenants in common). If the owner is a company then the exact same company must be listed on title as the seller. The buyer must be equally certain. Sometimes using “name and/or/nominee (someone to be named later) may not be certain enough if problems arise later. It is also important to determine if the purchase price will be staying in Canada or not for tax purposes (see Income Tax Act s. 116 for non-residents). This means that the purchaser has an obligation to take reasonable steps to determine if the vendor is a resident or non-resident. If the seller is a non-resident then the purchaser is obligated to withhold a portion of the purchase price for 30 days after closing of transaction. A s.116 certificate is required from the CRA to show that no taxes are owed, otherwise the purchaser has to provide all withheld money to CRA. If the purchaser doesn’t do this, they are liable for any taxes owing by the vendor. 2) Property – using the legal description for the property is the most certain way of describing property. The next best way is to use the civic address but this can be less accurate. Finally, you can use a descriptive address but it’s very risky (ex: 3rd house from corner). 3) Price – certainty in price is required, at least enough to accurately figure out what will be owed. For commercial transactions the purchase price is often adjusted (set out adjustments to be made to price). For residential transactions they more often rely on customary adjustments.

Other things that are usually included in a purchase contract include – 4) a deposit that is paid as a partial payment of the purchase price, a guarantee of performances and to provide access to remedies. A deposit is paid on the terms set out in the contract, which will outline when it is to be paid, to whom (in trust) – often paid out to the lawyer doing the conveyance on an undertaking to complete purchase. If the purchase doesn’t complete then the lawyer is supposed to send the deposit back to whoever was holding it in trust. The standard contract doesn’t set out what happens to the deposit if something goes wrong, which can lead to litigation. 5) Terms and conditions – you can insert conditions that hold the contract in suspension until they are fulfilled. This can include what condition the property will be in. If the contract states that “each condition, if so indicated, is for the sole benefit of the party indicated” it is assigning the right of who can waive the effectiveness of the condition. 6) Completion and possession date – if these dates are different, it should be kept in mind who bears the risk of things happening to the property or in the property in the property in between the dates. 7) Included items – the only things that go with the land are fixtures. In order to determine if something is a fixture or not, you need to ask whether it can be removed with minimal damage to the property. If you are unsure whether something is a fixture, you should write it in to ensure it will pass with the property. 8) Viewed – states that property will be in the same condition on the possession date as on the date it was viewed. This is a covenant and representation that the seller will keep the house in proper repair. If it is struck out and “as in” is written in, then no representation is being made about the condition of the property (more

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common in commercial context). 9) Title – this is in reference to the state of the title that is being purchased. It should be broad enough to include things that are registered on title and things that are unregistered but affect title (ex: LTA s. 24 – lease for less than 3 years). In a commercial context it will be important for the lawyer to search to determine if there are any statutory liens on the title. If there is a discrepancy between the title agreed to and actual title, the purchaser has three possible options: i) walk away from the deal because it is not what was contracted for, ii) close the deal and due the vendor for remaining encumbrance or iii) specific performance, don’t close until encumbrance dealt with and force the vendor to deal with it. The purchaser’s lawyer should always check title on the closing date to ensure that it complies with this provision and make sure its in the state you contracted for. 10) Tender – everything that has to be delivered has been delivered. Tender conditions have to be complied with perfectly. In a commercial context you have to make sure that it is clear that tender can be made on the lawyers and that that will be effective tender. 11) Time – “time is of the essence” is usually inserted and means that if a time is specified in the contract it must be met perfectly. If both sides miss the time, the contract continues and obligations still exist. One party has to reset the time and parties may agree to a new time but note that “time is of the essence” may not apply to the new time unless stated explicitly. Seller may also terminate the contract and the amount paid by the buyer will be “absolutely forfeited to the Seller” meaning the seller can keep the deposit and may be able to come for damages as well. 12) Buyer financing – allows for the use of an undertaking system to close the deal and occurs if the buyer is relying on financing. If you try this method you are essentially making a counteroffer that the other party can walk away from. 13) Costs – the buyer bears the costs of conveyance and the courts have interpreted this to mean that the buyer is also responsible for preparing documents. 14) Risk – In equity, once the contract is signed you’ve given away the beneficial interest in the property including risk. However provisions in statue have reversed this position – the buyer is still the beneficial owner but the seller is deemed a trustee and has a positive duty to maintain the property. This means that is something happens before completion, the seller is responsible for repair. 15) Representations and Warranties – limits representations and warranties about the property to only those written in the contract and can create survival of these reps and warranties after the purchase contract is completed. Keep in mind the doctrine of merger which states that lesser promises are subsumed into greater.

II. Creation of the Purchase Contract [3.2]

A. Purchase Contract [3.3]

The purchase contract governs the rights and obligations of the parties with respect to the transaction. In addition, it is common with certain types of properties for the vendor to execute a property disclosure statement (PDS).

B. Review of Purchase Documentation [3.4]

*See PLTC page 13

Upon receiving instructions for the transaction, the lawyer should immediately obtain and review all documents that constitute the agreement between the parties, including the purchase contract, any

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addenda to the purchase contract, and all documents referred to in the purchase contract and addenda. Such documents may include the PDS, a Real Estate Development Marketing Act disclosure statement, tenancy agreements, unusual encumbrances, a building or construction contract, a survey certificate and plans and specifications. The lawyer should review the purchase documentation to determine whether the purchase contract is enforceable and then advise the client accordingly. If the purchase documentation is defective, the lawyer should advise the client of the various alternatives available and the risks associated with each of these alternatives. Alternatives may include: 1) attempting to amend the contract (bearing in mind the risk that the other side may take the position that the attempt to amend constitutes repudiation) or 2) leaving the contract as it is (bearing in mind the risk that the other side may choose not to complete the contract if the defect is material). The client’s decision to follow a particular alternative will depend on: 1) the nature and degree of the defects in the purchase documentation, 2) whether the client wishes to complete the transactions, and 3) the client’s perception of whether the other party wishes to complete the transaction. The lawyer may be held liable to the client in negligence for failing to advise that the purchase contract is unenforceable if the client suffers damages as a result of having completed the transaction (Enns v Panju).

C. Formation of the Contract [3.5]

Purchase documents should be reviewed to determine whether all the elements essential to the contract are present and certain, and whether in all respects the contract is a binding document.

1. Offer and Counteroffer [3.6]

*See PLTC page 13

An offer is made when a potential purchaser presents a purchase contract to a vendor. If the vendor signs the purchase contract without alteration and communicates his or her acceptance to the purchaser within the time limited for acceptance, the offer is accepted. Any alteration of the purchase contract before acceptance constitutes a counteroffer that requires acceptance either within the original time limited for acceptance or within a newly specified time for acceptance of the counteroffer (North Vancouver (District) v Tracy). A counteroffer before acceptance of any prior offers automatically terminates the prior unaccepted offer or counteroffer (Black Gavin & Co v Cheung). If an offer or counteroffer is not accepted within the time limited for acceptance, no binding agreement is formed. Consequently, in cases where the parties have exchanged several offers and counteroffers, it may not be possible for the lawyer to determine, simply by examining the purchase contract, whether a binding agreement in law has been formed.

2. Acceptance [3.7]

The answer to whether there has been proper acceptance of the purchase contract must be found in the wording of the purchase contract. The Contract of Purchase and Sale provides that there will be a binding contract of purchase and sale upon acceptance of the offer or counteroffer in writing, and upon notification to the other party of such acceptance.

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3. Amendment After Acceptance [3.8]

A binding purchase contract may be amended by agreement between the parties.

4. Certainty on Essential Terms [3.9]

*See PLTC page 14

A purchase contract will be unenforceable if it is not certain on its essential terms. In recent years, the courts have relaxed some of the strict certainty requirements imposed by earlier cases. Today, the courts are less concerned with finding uncertainty in an agreement and are more inclined to search out the facts supporting a bargain. Traditionally, the critical terms have been the “three Ps” – parties, property and price (Hanley v Bradley). The lawyer should review the purchase contract to ensure that the three Ps are sufficiently certain and that other essential terms, such as the completion date and the particulars of an vendor financing, have been properly addresses and are sufficiently clear on the face of the document to be enforceable without further amendment or interpretation. Even uncertainty on important matters beyond the three Ps can render a contract void for uncertainty. The parties may wish to amend the purchase contract to clarify essential terms or to rectify discrepancies. In some situations however, a request by one party to clarify essential terms or to rectify discrepancies in the purchase contract may cause the transaction to collapse. Accordingly, the lawyer should consult with the client before suggesting any amendments to the purchase contract. Depending on the circumstances, rather than amending the purchase contract, it may be more appropriate: 1) for the lawyer to send a confirming letter to the other party’s lawyer, 2) for the client to approach the other party directly )perhaps with the assistance of the licensee), or 3) to allow the transaction to complete without alerting the other party to any defects.

5. Written Contracts [3.10]

Section 59(2) of the Law and Equity Act which governs the enforceability of contracts, states that these provisions do not apply to: 1) a contract to grant a lease of land for a term of three years or less, 2) a grant of a lease of land for a term of three years or less, or 3) a guarantee or indemnity arising by operation of law or imposed by statue. Section 59(3) provides that a contract respecting land or a disposition of land is not enforceable unless: 1) there is, in a writing signed by the party to be charged or by that party’s agent, both an indication that it has been made and a reasonable indication of the subject matter, 2) the party to be charged has done an act, acquiesced in an act of the party alleging the contract or disposition, that indicates that a contract or disposition not inconsistent with that alleged has been made; or 3) the person alleging the contract or disposition has, in reasonable reliance on it, so changed the person’s position that an inequitable result, having regard to both parties interests, can be avoided only by enforcing the contract or disposition. In interpreting the now-repealed Statue of Frauds, the courts have held that the written evidence of a contract can be in the form of an exchange of telegrams, telexs or letters. In other words, no particular form is required as long as the minimum information is in writing. Also note that s. 59(7) states that a writing can be sufficient for the purpose of this section, even though a term is omitted or is wrongly stated. If there is inadequate, or no, written evidence of a contract, the issue is whether there has been an act, under s.59(3)(b) to indicate that a

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contract or disposition not inconsistent with that alleged has been made. Under s.59(4), an act of a party alleging a contract or disposition includes a payment or acceptance by him or her of a deposit or part payment of a purchase price. Furthermore, case law suggests that if the real intentions of the parties can be collected from the language within the document, the court will give effect to those intentions by supplying the necessary inferences and rejecting whatever is repugnant to the real intentions (Marquest Industries Ltd v Willows Poultry Farms Ltd). However, the contract will be unenforceable if a missing term is so essential to the contract that without it the court cannot determine the parties’ real intentions and so cannot supply any inferences (First City Investments Ltd v Fraser Arms Hotel Ltd.).

6. Closing Procedure [3.11]

*See PLTC page 21

Provided that certain conditions are satisfied (including the exchange of appropriate undertakings between the lawyers acting for the respective parties), the Contract of Purchase and Sale essentially provides that: 1) the vendor may wait to pay and discharge existing financial charges until immediately after receipt of the purchase price, and 2) the purchaser may wait until after the transfer and new mortgage documents have been filed for registration in the appropriate land title office before paying the purchase price to the vendor. The Contract of Purchase and Sale permits the purchaser to pay the purchase price to a lawyer upon the CBA standard undertakings in order to clear title. A lawyer who may be unable to comply with these undertaking should promptly advise the client that he or she may be unable to act unless these provisions are amended.

III. Parties

*See PLTC page 17

At common law, the general rule was that a purchase contract signed in the name of or on behalf of a corporate entity that did not then exist was not enforceable. However, in circumstances where the conduct of the parties indicates an intention to be bound by the pre-incorporation contract, a new contract between the parties could be inferred containing terms identical to those of the pre-incorporation contract (Heinhuis v Blacksheep Charters). The common law rule was altered by s.20(3) of the Business Corporations Act which provides that a company can adopt a pre-incorporation contract within a reasonable time after its incorporation. It is therefore prudent practice for a lawyer to determine whether a corporate purchaser has been incorporated prior to a purchase contract being executed and, if not, to ensure the company is incorporated and adopts the contract within a reasonable time as contemplated in the Business Corporations Act. Moreover, if a person enters into a contract in the name of or on behalf of a company before it is incorporated, that person warrants that the company will come into existence within a reasonable time and that the company will adopt the contract within a reasonable time after in comes into existence, failing which, such a person could be liable for breach of such warranties.

A. The Purchaser [3.13]

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The information contained in the purchase contract will not be sufficient for preparation of the conveyancing documents. The lawyer should verify the following information with the purchaser: 1) the full name of the purchaser. 2) the address of the purchaser to be shown on title to the property, 3) in the case of an individual purchaser, the occupation of the purchaser, 4) in the case of a corporate purchaser, the incorporation number of the purchaser, and 5) the fair market value of the property. If there is more than one purchaser, the lawyer should determine the names of the purchasers who will appear on title to the property, and whether the purchasers intend to hold their interests in the property as joint tenants or as tenants in common. Some parties, by reason of their infancy, incompetence or illiteracy, may not be capable of entering into a binding contract.

B. The Vendor [3.14]

A title search of the property is required to confirm that the registered owner of the property is the party who has signed the purchase contract as vendor. If the party who signed the contract as vendor is not the registered owner, the lawyer or purchaser should make the appropriate inquiries to ensure that the party who signed the contract as vendor had the authority to bind the registered owner to transfer title to the property to the purchaser by virtue of a trust, agency, or other relationship. These in inquiries are made to ensure compliance with s.6 of the Property Law Act, which requires a vendor to ensure that title is registered in the vendor’s name and prohibits the vendor from suing on a purchase contract without having ensured same. If the property is registered in the name of more than one party as joint tenants or tenants in common and only one of the registered owners has signed the contract as vendor, the lawyer or the purchaser should either have all the parties sign the agreement or confirm that the signing party was authorized to sign the contract on behalf of all the owners and that all the owners will sign the conveyancing documents. If the vendor is a corporation, a corporate search will indicate whether the company has been struck from the records of the Registrar of Companies; if so, or if the company has been struck and subsequently restored, the question of whether the land has escheated to the Crown should be considered.

C. Assignment [3.15]

Unless assignment is specifically prohibited by the terms of the purchase contract, a purchaser is entitled to assign his or her interest in the contract to a third party without obtaining the vendor’s consent provided that written notice is given to the vendor. The general right to assign a purchase contract is qualified by the principle that the vendor’s position cannot be prejudiced by an assignment. For example, where the creditworthiness of the purchaser is an essential component of the vendor’s mortgage back, the purchase contract may not be assignable. When preparing an assignment agreement, the lawyer should consider the following issues: 1) whether, and under what circumstances, the purchase contract permits the purchaser to assign the contract, 2) whether the original purchaser is to continue to be liable under the purchase contract despite the assignment, and if so, how to document the purchaser’s continuing liability (note that if the original purchaser is not specifically released by the vendor, it will, in the ordinary course, continue to be liabel to perform its obligations under the contract despite assignment, 3) whether there should be a separate purchase contract between the purchaser and the assignee, as opposed to an assignment of the purchase contract ot the assignee, 4) whether the

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satisfaction or waiver of subject conditions under the purchase contract and the should be dealt with before or after the assignment, and the effect that will have on the assignment, 5) whether payment of the consideration for the assignment should be on execution of the assignment, on subject removal, on closing, or on some combination thereof, 6) how to deal with reimbursement of deposit funds paid by the original purchaser, 7) how to deal with subject conditions of the assignee, 8) the ability of the assignee to further assign the purchase contract, 9) whether to have a separate master agreement between the purchaser and the assignee that will not be shown to the vendor, and a separate simple assignment agreement to show to the vendor, 10) the appropriate time to give notice of the assignment to the vendor, 11) whether GST/HST will be payable by the assignee a consequence of the assignment and 12) whether the assignor should obtain an indemnity from the assignee.

D. Agents and Trustees [3.16]

If the purchase contract has been executed by a corporation, a partnership, an agent or attorney, or a trustee or executor, the lawyer should consider obtaining documents to verify the executing parties’ authority to execute the contract. Some commercial transactions may involve the sale of shares of a nominee company that holds the registered interest in the property in order to avoid tax under the Property Transfer Tax Act.

IV. Property [3.17]

*See PLTC page 18

The Contract of Purchase and Sale provides for the insertion of both the legal description and the civic address of the property. The lawyer should check to ensure that both descriptions refer to the same property. As a general rule, the courts will look to the instrument to give effect to the intention of the parties (First City Investments Ltd v Fraser Arms Hotel Let.). Therefore, provided that a civic address accurately describes the property, the court may be prepared to overlook an incorrect legal description in the purchase contract or vice versa. The court will consider all of the circumstances in order to determine which property is involved (Dynamic Transport Ltd v O.K. Detailing Ltd). In any event, if the description of the property is unclear in the purchase contract, the lawyer should take immediate steps to clarify the description, provided that the client intends to complete the transaction.

V. Price [3.18]

*See PLTC page 18

A. General [3.19]

The third element of the purchase contract that requires absolute certainty is the price. The parties should be certain whether the purchase price on the face of the purchase contract includes to excludes GST/HST. Payment of the purchase price often begins with a deposit upon tender or acceptance of the offer. The purchaser often increased the deposit upon subject removal. The balance of the purchase price is usually paid or credited on the completion date.

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B. Deposit [3.20]

*See PLTC page 19

There are three purposes to a deposit – 1) a partial payment of the purchase price, 2) a guarantee of the purchaser’s sincerity and 3) to provide immediate access to a remedy – if the purchaser defaults it is the first source of remedy that the vendor can claim over. The handling of a deposit is generally dealt with by the terms of the agreement but there are also some common law principles that apply to it. The main principle is that simply calling something a deposit grants it a special character. Unless a contrary intention is expressed in the agreement, on default of the purchaser the vendor will be entitled to the deposit. During the conditional period that the deposit is held, if the purchaser decides not to complete after the due diligence period, the deposit is usually refunded. Once the conditions have been fulfilled and the purchaser decides to go ahead, the deposit is not refundable. The size of the deposit is supposed to be a genuine pre-estimate of the damages that the vendor will suffer if the purchaser breaches the agreement. “The deposit, if the purchaser is in default, is forfeit to the vendor as liquidated damages without prejudice to any other remedy that the vendor may have”. Clause is clear that the vendor can still come after the purchaser if the deposit is not sufficient to cover damages. In order to be a deposit the money must be held in trust in some way, usually by a realtor or lawyer.

The lawyer for the vendor should confirm that the deposit has been paid to the party responsible for holding the deposit in accordance with the terms of the purchase contract. The purchase contract may specify for whose benefit interest earned on the deposit funds will accrue. Where there is no such provision, the interest earned on deposit funds may be subject to dispute. Before entering into the purchase contract, the parties should consider how the deposit is to be treated in the event of a default by the purchaser. The Contract of Purchase and Sale provides that on default by the purchaser, the vendor may, at his or her option, retain the deposit on account of damages, without prejudice to the vendor’s other remedies. If the parties cannot agree on the disposition of the deposit funds in the event of default by the purchaser, the parties should instruct the real estate licensee to apply under s.33 of the Real Estate Services Act to have the monies paid into court. Tang v Zhang set out the general principles regarding deposits: 1) on a general level, the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention, 2) where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law, 3) a true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract and is not dependent on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price, 4) the deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act, 5) a contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but

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may be construed to mean that if damages are proven, the deposit will be applied against them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.

C. Payment of Balance of Purchase Price Upon Completion [3.21]

The purchase contract may specify one or a combination of the following methods of payment on the completion date: 1) cash, 2) new mortgage, 3) assumption of vendor’s financing, 4) vendor financing by way of vendor take-back mortgage or agreement for sale.

1. Cash [3.22]

The Contract of Purchase and Sale permits payment by cash, certified cheque, bank draft, or a lawyer’s or notary’s trust cheque. However, the right of any party to pay the purchase price in cash should be avoided.

2. New Mortgage [3.23]

If the purchaser intends to obtain mortgage funds to complete the purchase, the purchaser’s lawyer should ensure that the terms of the purchase contract permit the filing of the transfer and mortgage documents before the purchaser is required to pay the balance of the completion funds to the vendor. The Contract of Purchase and Sale permits the deal to close on this basis by incorporating, in the exchange of CBA standard undertakings by the lawyers for the purchaser and vendor.

3. Mortgage Assumption [3.24]

At common law, the vendor’s covenant to pay is not released upon the purchaser’s assumption of the mortgage unless the lender specifically waives its rights against the vendor or unless there is a “novation” (that is, a determination that if effect there is a new contract between the assignee and the lender). The common law position was altered by ss. 20, 21, 22, and 24 of the Property Law Act regarding transactions entered into or made after November 30, 1998. The statutory rights and obligations regarding mortgages and agreements for sale have been summarized by the Law Society of BC: 1) when property is sold and the purchaser assumes an existing mortgage, the original borrower will be released from liability three months after the term of the mortgage expires. The lender, however may preserves its position against the original borrower by demanding payment of the mortgage (s.23), 2) The original borrower, upon selling the property, may request the lender to release him or her from liability. If the lender provides its written approval, the vendor ceases to be liable. The lender cannot refuse unreasonably to grant its approval (s.24), 3) the lender, in the event of default under the mortgage, will have a direct right of action against the purchaser even if privity does not yet exist between them (even if the purchaser has not entered into an agreement with the lender assuming liability under the mortgage) (s.22). The provisions dealing with releasing the original borrower from liability are limited to residential mortgages. The Law Society recommends a number of practice procedures: 1) lawyers acting for purchasers should advise their clients of the legislation. It may be wise to ensure that the lender will accept the purchaser in place of the original borrower. At the very least,

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the purchaser should be advised that the lender might choose not to renew an assumed mortgage if the lender is dissatisfied with the purchaser’s creditworthiness, 2) lawyers acting for vendors should advise clients of their continuing liability under an assumed mortgage unless the provisions of the Property Law Act apply. In the absence of special circumstances, it should be part of standard practice when the vendor’s property is sold to seek from the lender the release of the vendor from liability, 3) lawyers acting for lenders should advise clients of the legislation so that their administrative practices can be altered, if necessary. Lenders will want to review, at an early date, anew owner’s creditworthiness. At the very least, the lender must be vigilant when a mortgage is due for renewal, 4) the purchase contract should provide that the purchaser will do all things necessary to assist in obtaining the release of the vendor from liability under an assumed mortgage. For example, the purchaser should promise to provide full financial information and authorize a credit check.

4. Vendor Financing [3.25]

a. Mortgage Back [3.26]

If the vendor is accepting a mortgage of the purchased property on closing, the purchase contract should reflect that part of the purchase price is deferred until a specified date and will bear interest (if applicable) at a stated rate, and will be secured by a mortgage of the property. It is not sufficient to state, as is often done, that part of the purchase price “will be paid by the purchaser granting a mortgage of the property to the vendor”. When a vendor take-back mortgage is intended, the purchase contract should contain as much detail as possible about the financing. A deficiency, however, will not necessarily be fatal, and the courts, in enforcing the contract, will look to the intention of the parties. Details should include the amount to be financed, the term, the rate of interest the frequency of compounding, the monthly payments or the amortization period, and the form of the mortgage. Special financing terms must be specified in the purchase contract. Thus, the vendor should consider the following terms when negotiating a vendor take-back: 1) a “due on sale” clause requiring the purchaser to pay the full amount of the mortgage upon sale of the property by the purchaser, at the option of the vendor, 2) a clause giving the vendor the right to cure any defaults under any prior mortgage and to gross up the principal secured under its mortgage by the amount required to cure such defaults, 3) a “prior mortgage” clause giving the vendor the right to foreclose if payments under the prior mortgage are in default, even if payments under the vendor’s mortgage are in good standing, and 4) the appointment of a receiver. Conversely, the purchaser should consider including the following terms: 1) a clause giving the purchaser the right to prepay all or part of the amount owing under the mortgage before the maturity date of the mortgage, without notice or penalty, 2) a clause allowing the purchaser to obtain future financing from a lender, in priority to the vendor take-back mortgage, if the property is currently charged with a first mortgage of a lesser tern than that of the vendor take-back mortgage; and 3) a clause allowing the purchaser to obtain financing, in priority to the vendor take-back mortgage, for the purpose of renovating or constructing additional improvements, provided that all of the proceeds of such financing are used to construct improvements on the property. If possible, the form of the vendor take-back mortgage should be appended to the purchase contract.

b. Agreement for Sale [3.27]

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An “agreement for sale” is defined in s.16 of the Law and Equity Act. The definition excludes contracts under which the purchase price is payable less than six months after the contract was entered into and the purchaser is not, during that six-month period, entitled to possession of the land. If the vendor is selling under an agreement for sale, the lawyer should address the same issues as when the vendor is financing the sale with a take-back mortgage.

D. Timing [3.28]

The Contract of Purchase and Sale is silent as to the time for completion. In that case, courts have held that the time limit for completion is 3:00pm (the time the land title office’s physical front desk closes) unless the sale involves only cash (no registered charges) in which case any time up to midnight has been deemed appropriate. A purchase contract should provide that “time is of the essence”. The BC courts have established that: 1) if it has been agreed that time is of the essence; the failure of a party to perform on time will constitute a breach, giving the other party the right to pursue his or her remedies immediately except in restricted circumstances in which it would be unjust or inequitable, 2) if by words or conduct a party waives the requirement for strict compliance with time limits, time will no longer be of the essence and the other party will have a “reasonable time” to perform, 3) if the time for performance is to be extended, a provision to the effect that time will remain of the essence for the new completion date should appear in the extension agreement, 4) if neither party is ready, willing and able to complete according to the terms of the contract, time ceases to be of the essence, even though it is expressed that way in the contract. However, if one of the parties under these circumstances gives notice to the other, setting a new completion date and making time of the essence as of the new date, he or she will not be entitled to succeed in a claim for specific performance. Since April 1, 2004, the land title office has accepted electronic filings of key documents in land registrations. E-filings are a useful tool in ensuring the client meets its “time is of the essence” obligation, as well as an effective risk management technique for lawyers. It is important to determine in every transaction whether time is of the essence, it is difficult to determine whether failure to perform amounts to a breach or repudiation of the agreement and it may be necessary, before commencing action, to allow an additional “reasonable” period of time for performance. Indefinite or informal extensions of time should be avoided; casual statements to the opposing party may result in a waiver of the requirement that time is of the essence. Careful notes should be kept of any statements made in this respect, and all extensions should be made in writing, restating that time is of the essence.

VI. Representations and Warranties [3.29]

*See PLTC page 25

A condition goes to the root of the contract and if untrue gives you the right to rescind. A warranty is something that doesn’t go to the root of the contract and may express some lesser obligation of the parties. It usually only gives rise to a claim for damages. When thinking about whether the warranty gives you the right to terminate, you should ask: 1) is it a vital fact or collateral issue, 2) is the matter of such importance that the party would not have entered into the contract unless ensured of strict or substantial performance of the promise.

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A. General [3.30]

During the course of negotiating the terms of a purchase contract, the vendor or the vendor’s licensee may make certain representations (statements of fact) and warranties (promises about the truth of those facts). Most often, the purchase contract contains a number of representations and warranties about the property and/or the vendor. As a general proposition, the purpose of representations and warranties is to allocate between the vendor and the purchaser the risk of future problems relating to the property. At one end of the negotiating spectrum, the vendor’s ideal position would be to sell the property on an “as in” basis. At the opposite end of the spectrum, the purchaser would want extensive representations and warranties about all aspects of the property and the vendor; representations and warranties provide the purchaser with recourse against the vendor if there is a problem relating to the property about which the vendor has made a statement. Usually, the negotiated result is somewhere in between.

B. Property Disclosure Statement [3.31]

*See PLTC page 27

There are three types of PDS: residential property (not including residential strata property), strata property and rural property. Listing licensees who belong to a real estate board invite their vendors to complete a PDS for disclosure to prospective purchasers. Although it may be a condition of the multiple listing agreement that the vendor complete the PDS, it is not a statutory requirement. If the purchaser intends to rely on the vendor’s statement in the PDS the purchase contract should specifically incorporate the vendor’s statements in the PDS by reference as representations and warranties for the benefit of the purchaser (Malenfant v Janzen). Even if the PDS is not specifically incorporated into the purchase contract, the vendor’s statement may still be actionable if it is determined that such statements induced the formation of the purchase contract, or are considered collateral warranties. The PDS prompts the vendor to disclose a wide variety of matters about the property. The PDS is a tool designed to better inform purchasers about their purchases and consequently reduce the number of lawsuits. With appropriate wording in the purchase contract, such as that contained in the Contract of Purchase and Sale, the parties may make PDS part of the contract.

C. Representations to Survive Completion [3.32]

Without an expression of the parties’ intention, representations and warranties relating to title may “merge” or expire on completion of the conveyance, leaving the purchaser without recourse against the vendor. The SCC held that there is no presumption of merger. The proper inquiry is to determine whether the facts disclose a common intention to merge the warranty in the deed; absent proof of such intention, there is no merger. The parol evidence rule makes it difficult for the purchaser to rely on oral representations and warranties. Therefore, any representation or warranty that is important to the purchaser should be included in the purchase contract and specifically stated to survive the completion of the transaction. The lawyer acting for the vendor should ensure that the vendor carefully considers each representation and warranty requested to those within the vendor’s knowledge and belief.

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Assuming that some or all of the representations and warranties are to survive the completion, the vendor’s lawyer should consider trying to negotiate a time limit on the vendor’s liability.

D. Security for Representations [3.33]

Representations and warranties are only useful to a purchaser when the vendor can be located and fixed with responsibility for them, and where execution against the vendor will be fruitful. Accordingly, the purchaser should consider obtaining security in the form of a letter of credit, holdback, or set-off under a vendor take-back mortgage.

E. Warranties: Partially Completed or New Construction [3.34]

If the property is new or partially completed, the purchaser’s lawyer should consider adding clauses to the purchase contract to provide for: 1) a pre-completion inspection of the property and the making of a deficiency list; 2) delivery by the vendor of a copy of the final occupancy permit on or before the completion date; 3) delivery by the vendor of a statutory declaration about builders’ liens on the completion date, preferably with some detail as to the contents, 4) a holdback relating to builders’ lien issues, 5) a covenant requiring completion of unfinished work and establishment of a deficiency holdback if necessary, 6) warranties as to defects, 7) representations as to the quality of construction materials used, and 8) GST/HST. New homes in BC where building permits were granted after July 1, 1999, are required to have the benefit of a warranty supplied by a government-approved private sector home warranty insurance company under the Homeowner Protection Act. The Homeowner Protection Act provides at s.22(2) that home warranty insurance for a new home must provide coverage for: 1) defects in materials and labour for a period of at least two years after the date on which the warranty begins; 2) defects in the building envelope, including defects resulting in water penetration, for a period of at least five years after the date on which the warranty begins; and 3) structural defects for a period of at least ten years after the date on which the warranty begins. To the extent that a new home is not covered by home warranty insurance a residential builder or an owner builder and a vendor of a new home are both deemed pursuant to s.23(1) to have agreed with the owner, to the extent of labour, materials and design supplied, used or arranged by the residential builder, owner builder or vendor that the new home 1) is free from defects in materials and labour and will remain so for a period of at least 2 years after: a) the date an occupancy permit with respect to the new home was first issued, or b) if no occupancy permit has been issued with respect to the new home, the date the new home was first occupied; 2) is free from defects in the building envelope, including defect resulting in water penetration, and will remain so for a period of at least 5 years after, 3) is free from structural defects and will remain so for a period of at least 10 years after. If the purchaser intends to hire an inspector to inspect the property, the contract should provide for a right to enter the property for such purposes and specify the permitted hours for such inspection and any required advance notice period. When drafting a covenant about the completion of unfinished work and establishment of a deficiency holdback, it is in the vendor’s interest to require the purchaser to sign a conclusive list of deficiencies before completion. The portion of the holdback allocated to each deficiency item should be set out on the list, and the contractual provision should provide for that amount to be released to the vendor when the applicable deficiency is rectified. This will avoid the entire holdback being held up if only one or two items on the

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deficiency list remain outstanding. The purchase contract should set out which party’s lawyer will hold the deficiency holdback funds and should provide that the holdback funds will be invested by the party holding it, with interest for the benefit of the vendor. In general, at common law there are no implied warranties if a building is complete at the time the contract is made (Fraser-Reid v Droumtsekas). Implied common law warranties will provide some protection to a purchaser who signs a purchase contract before completion of construction. How the two implied warranties (statutory and common law) will work together is uncertain. The common law implies the following warranties: 1) that the work will be done in a good and workmanlike manner, 2) that the material will be suitable, and 3) that the home is fit for human habitation. The court in Cardwell v Perthen elaborated on the requirements necessary to establish an implied warranty of fitness, holding that “in addition to the home being incomplete and new, it is essential that the vendor has assumed a contractual obligation to carry out the further work which is not capable of being inspected when the contract for sale is made in order to trigger the implied warranty of fitness”.

VIII. Conditions Precedent [3.41]

A condition is a term of the contract which provides that a party or parties obligations are dependent on some future event, circumstance or decision. Nothing can happen until these conditions are fulfilled. If a condition is too ambiguous and can’t be fulfilled then the contract can’t be fulfilled. A true condition precedent is one that neither party can fulfil, it happens before closing and is something that a third party outside the contract has all the power to fulfill. A closing condition is a condition that won’t close until it is fulfilled. The purpose of a condition is to hold the contract as an enforceable agreement but an event has to happen before the mail obligation to transfer occurs. This creates an obligation to try to do something to make the condition occur. There is a risk in a contract with conditions because you are creating additional obligations that the parties could use to interpret against each other.

A. General [3.42]

A condition precedent is “an act or event, other than a lapse of time that must exist or occur before a duty to perform something promised arises”. A true condition precedent is a condition that is precedent to the existence of any contracted obligation and is to be contrasted with other kinds of conditions precedent where the condition is only precedent to the performance of certain contractual obligations. When the vendor and the purchaser wish to sign a binding agreement but understand that the obligation of one or both of the parties to compete the transaction is to be suspended until the happening of some event, the purchase contract will contain conditions precedent or “subject to” clauses that must be satisfied or waived by the applicable party or parties by a specified date. These clauses are most often for the benefit of the purchaser, requiring such matters as mortgage financing, the sale of other property, the inspection of the purchased property, completion of renovations or construction, municipal approvals or third party consent to a mortgage assumption to be arranged, obtained or achieved. However, occasionally the purchase contract contains conditions precedent that are for the benefit of the vendor and, less often, the conditions precedent are stated to be mutual.

B. Subjective Conditions Precedent [3.43]

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A condition precedent that is wholly subjective, in the sense that it provides the benefitting party with the opportunity to indulge a whim, fancy, like or dislike in deciding whether or not to complete the transaction, will prevent the formation of a binding contract until the condition is satisfied or waived. Until that time, in the context of a subjective condition precedent that is for the benefit of the purchaser, the contract constitutes nothing more than an offer to sell by the vendor that the vendor can revoke at its discretion, in which the subject clause was not a condition precedent because it imposed no obligation on the purchaser until its president gave approval. The rationale for this rule is that the condition precedent is so imprecise and lacking in objective standards that it depends entirely on the subjective state of mind of the purchaser as to whether the condition is satisfied and, therefore, whether the purchaser must proceed with the transaction. If such a subject condition contains separate, non-refundable consideration paid by the benefitting party to the other party, the contract constitutes an irrevocable option in favour of the benefitting party. If the purchaser wishes to commit the vendor and at the same time include a wholly subjective condition precedent for the purchaser’s benefit, the solution is to create a binding option to purchase exercisable by the purchaser, or to obtain the vendor’s agreement not to revoke, and to support either the option or the vendor’s agreement by separate non-refundable consideration.

C. Uncertainty [3.44]

Occasionally, the courts have held a condition precedent to be so uncertain that the entire agreement is either void or voidable if the uncertain condition is material or fundamental to the contract. In many ways, however, it is difficult to differentiate between uncertainty and subjectivity. In fact, in classifying a condition precedent as uncertain or ambiguous, the degree of subjectivity seems to be the deciding factor (Griffin v Martens). Provided that the agreement is not being constructed by the court, to the surprise of the parties, or at least one of them, the courts should try to retain and give effect to the agreement that the parties have created for themselves. If the clause is for the sole benefit of the purchaser, the purchaser is not released from the requirement that he or she use his or her best efforts to obtain satisfactory financing. The words “satisfactory financing to the purchaser” may turn the interim agreement into an option.

D. Non-Subjective Conditions Precedent [3.45]

Conditions that are drafted unambiguously and provide an objective standard against which to evaluate whether they have been satisfied merely suspend performance of an otherwise complete contract. For example, a condition precedent that depends on obtaining the consent of a third party, or the obtaining of some municipal approval, will suspend the benefitting party’s obligation to complete pending the occurrence of that event.

E. Satisfaction or Waiver of Conditions Precedent [3.46]

If the condition is not for your benefit you will be unable to waive it. Equitable rule is that the party who has the benefit of a condition can waive it (Law and Equity Act s.54) if: 1) the condition precedent benefits the only person waiving it, 2) the contract is capable of being performed without the fulfilment

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of the condition precedent (financing is not an essential term – therefore you can perform the contract if financing condition can’t be fulfilled) and 3) where time for fulfillment of condition precedent is stipulated, then waiver must occur before that time, if no time stipulated then waiver within reasonable time. If all three of the above are fulfilled then the party are bound to fulfill the contract.

1. Obligations of the Parties [3.47]

A common misconception is that a “conditional agreement” or a purchase contract with conditions precedent yet to be satisfied or waived, is not a binding agreement (Dynamic Transport v O.K. Detailing). However, it is important for the parties to understand that, with the exception of conditions precedent that prevent the formation of a binding agreement, such an agreement is still binding – the obligations of the party who benefits are contingent upon satisfaction or waiver of those conditions (Boult Enterprises v Bissett). The most important corollary of this is that the party benefitting from the condition precedent is not entitled simply to sit back and wait until the time for satisfaction or waiver passes. The benefitting party should act in in good faith and use his or her best efforts to do what is necessary to secure performance of the contract. However, it has been held that there is a distinction between “best efforts” and “reasonable efforts”. A best efforts clause in a contract imposes a higher obligation than a reasonable efforts clause. Best efforts includes doing everything known to be usual, necessary, and proper for ensuring the success of the endeavour. The concept of reasonable efforts only requires a party to do what is reasonable in the circumstances (Atmospheric Diving Systems Inc v International Hard Suits).

2. Waiver [3.48]

A condition precedent may be waived only as provided in the agreement or in the circumstances set out in s.54 of the Law and Equity Act. Note that s.54 applies only to a contract where performance of a contract is suspended. If the offer or agreement is made subject to certain conditions, it is questionable whether there is any agreement at all pending the satisfaction or waiver of the stipulated conditions and therefore, the applicability of s.54 in such circumstances is also questionable.

3. Obtaining Consents and Approvals from Third Parties [3.49]

If satisfaction of the condition precedent is dependent upon obtaining a consent or approval from a third party, rather than upon the purchaser or the vendor being satisfied as to some factual matter or upon the occurrence of some other event, the consent or approval should be adequate or sufficiently binding on the third party to permit reliance by the client in removing the condition and creating a binding obligation to compete the transaction. For example, if third party financing is required, a commitment letter should be obtained and the purchaser should be satisfied that the conditions precedent to the lender’s obligation to advance funds are either already satisfied or at least, achievable, before giving notice to the vendor that the condition precedent has been satisfied.

4. Delivery of Notice of Satisfaction or Waiver [3.50]

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Upon satisfaction of, or the election to waive, a condition precedent, written notice should be delivered to the other party to confirm this fact, even if the contract is silent as to whether notice is required and/or as to the means of communication. Properly drafted contracts stipulate the timing and means of notification and the consequences of failure to deliver notice. In the absence of such provisions, consider whether delivery of notice or communication to the licensee for the party is sufficient and the consequences of failure to deliver notice. The adequacy of notice to a licensee depends on the course of the previous dealings between parties. If, for example, all negotiations have been conducted through the licensees, notice to a licensee may be adequate. In case of doubt, written notice should be given to all parties, including the licensees and solicitors involved. Similarly, it is prudent practice to deliver written notice to the other party advising that the condition precedent has not been satisfied or waived by the benefitting party within the specified time. Otherwise, the subsequent conduct of that party may imply that they intended to be bound even if they did not formally waive the condition or declare it satisfied within the required time (Sky Ranches Ltd v Nelson). The Contract of Purchase and Sale resolves many of these issues by providing that “unless each condition is waived or declared fulfilled by written notice given by the benefitting party to the other party on or before the date specified for each condition, this Contract will be terminated thereupon and the Deposit returnable.

F. Drafting Considerations: Conditions Precedent [3.51]

Unless the parties intend the formation of the contract to be subject to satisfaction or waiver of the condition precedent, in drafting the purchase contract it is preferable to avoid the phrase “this offer is subject to…” in favour of “the purchaser\s/vendor\s obligation to complete the purchase/sale of the property is subject to (insert condition) on or before (month, day, year). Most of the legal problems surrounding conditions precedent can be avoided if the clause is expressed clearly. Ambiguity in drafting creates uncertainty which can lead to litigation. Thus, for example, a “subject to financing” clause should specify the minimum principal amount, maximum interest rate, minimum amortization period, and term of the proposed mortgage. A “subject to sale” clause should state the price and essential terms upon which the purchaser must sell his or her own house. These will allow the vendor or, if necessary, a court to assess whether the purchaser made reasonable efforts to satisfy the condition and help to avoid issues of uncertainty. If the purchaser wants a “free look” at the property, then the condition precedent can be drafted to give the purchaser absolute discretion; however, such a condition must be supported by separate, non-refundable consideration flowing from the purchaser to the vendor. The purchaser might consider whether, in fact, what it wants is a true option to purchase. Whether seeking an option to purchase or a broadly worded, subjective but binding condition precedent, the purchaser should consider first whether such an agreement is acceptable to the vendor. If a conditional agreement is acceptable at all, the vendor will prefer to have narrowly worded conditions relating to specific matters. It is important always to consider what event will trigger the satisfaction of the condition precedent. For instance, if the purchase contract contains a condition subject to obtaining rezoning by a particular date, the drafter should set out the type of zooming to be sought and the level of approval that must be obtained. If the purchaser’s obligation to complete the transaction is subject to obtaining development approval by a particular date, is the development approval achieved upon issuance of conditional development approval or upon issuance of the final development permit? Often, it is prudent to support

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a condition precedent with covenants that allocate responsibility for taking the steps required to satisfy the condition. For instance, if the purchaser’s obligation to complete is subject to obtaining, by a certain date, third reading of a zoning amendment bylaw to permit single family uses, the purchase contract should also specify who is responsible for making the necessary applications, pursuing the applications and paying the costs. If the purchaser is to do so, the purchase contract should provide that the vendor will cooperate and sign all necessary documents relating to the application and may provide that the purchaser will retain conduct of and discretion on the timing for submitting the application. It is also common, when the purchase contract contains a number of conditions precedent, for the dates for removal of those conditions to be staggered and for the purchase contract to provide that the deposit be increased or become partially or wholly non-refundable upon satisfaction or waiver of each condition. This can be a useful strategy for a purchaser and can give the vendor greater comfort if the overall subject period is long. Finally, some purchasers “build in” the ability to extend the date for satisfaction or waiver of the condition precedent for one or more periods of specified length, upon payment of a non-refundable extension fee. The purchase contract should specify whether the extension fee is applicable or not applicable to the purchase price.

G. Practice Considerations [3.52]

Bearing in mind the potentially fatal effect on the purchase contract of an improperly written condition precedent, lawyers should review purchase agreements carefully to identify any potential problems, raise those problems with the client, and explain the legal consequences. Clear instructions from the client should be obtained before raising problems with the other party or with their lawyer because alerting a reluctant party to a possible escape route in the purchase contract can have unintended results.

IX. Insurance [3.53]

In order to prevent “gaps” in insurance coverage, the purchase contract should require the vendor to insure the property up to and including the completion date or until the sale has completed. Advise the purchaser to arrange new insurance on the property rather than assume existing insurance carried by the vendor. The purchaser will want to avoid assuming an insurance policy under which the insurer might refuse to pay because of some act, omission or misrepresentation of the vendor. The purchaser’s lawyer should review carefully the purchase contract to determine when the risk to the property passes to the purchaser and should advise the purchaser to arrange insurance effective from that time. In the ordinary case, it is prudent for the purchaser’s insurance to run from the day before the completion date or the time when risk passes, so that there is no doubt that the purchaser is covered as soon as he or she acquires an insurable interest in that property. Some situations create special insurance risks. For instance, it is not unusual for the vendor to agree to give the purchaser possession of the property before the completion date, or for the purchaser to allow the vendor to remain in possession of the property after the completion date. In the former case, the vendor should ensure that the purchaser places insurance on the purchaser’s possessions and for third party liability (tenant policy) from the date of early possession or effective immediately after the completion date.

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X. Tenancies [3.54]

A. Existing Tenancies [3.55]

If a purchaser buys a tenanted home for personal use, the vendor must give at least two months’ notice in writing to the tenant to vacate the premises if the purchaser so requests (Residential Tenancy Act, s. 49(2) and (5)). The notice cannot be given until all the conditions precedent in the purchase contract have been satisfied (s.49(5)(b)) and the notice will not be effective until the day before the day in the month, or in the other period on which the tenancy is based, that rent is payable under the tenancy agreement or, if the tenancy agreement is a fixed-term tenancy, not earlier than the date specified as the end of the tenancy (s.49(2)(b) and (c)). One common mistake is to confuse personal use intended by the purchaser (in respect of which the vendor can give two months notice) with demolition intended by the purchaser (in respect of which the vendor cannot give notice). Only the purchaser can give a termination notice to a tenant if the purchaser intends to demolish the building on the property, because notice cannot be given until the necessary demolition permits have been obtained – and as the permits cannot be obtained until the purchaser owns the property, notice cannot be given until after closing. The notice must be at least two months and is not effective until the day before the day in the month, or the other period on which the tenancy is based, that rent is payable under the tenancy agreement or if a fixed term tenancy, not earlier than the date specified as the end of the tenancy. The purchase contract may state that the purchaser will accept title subject to existing tenancies. If the purchaser wishes the tenancies to remain, the purchaser should be satisfied about the legality of those tenancies in order to avoid any fines or other sanctions under the bylaws. However, particularly before subject removal, the purchaser should exercise caution in making such inquiries of the municipal hall since the municipality could take action in respect of an illegal tenancy, creating unexpected problems for the purchaser or even the vendor if the transaction does not proceed. If the purchaser does not want the tenant to vacate, it may be desirable to have the lease or tenancy agreement formally assigned to, and assumed by, the purchaser in a separate assignment and assumption agreement delivered on closing. The agreement would typically contain representations, warranties and covenants by the vendor about the status of the tenancy agreement and an indemnity in respect of breaches of the lease which occur before closing. If such an agreement is contemplated or desired, it should be referred to specifically in the purchase contact. The form should be attached to the purchase contract or a reasonably detailed description of the terms should be set out in the purchase contract with a statement that the agreement will be in a form required by the purchaser. This will avoid both legal uncertainty in the purchase contract and disagreements over the form at closing. Whether or not a formal assignment of the tenancy agreement is used, the vendor should be required to give notice (or provide the purchaser with a signed notice to deliver to the tenant) on the completion date advising of the change of ownership. The notice should contain details about the new place of payment and the new payee for future rent payment. This notice is required in order to make the assignment effective as against the tenant. If the vendor remains on the premises as a tenant, the best practice is for the purchaser to enter into a fixed-term tenancy agreement with him or her. Such an agreement can be contained in the purchase contract, if it expressly provides that the applicable provisions survive closing. The agreement or provisions of the purchase contract should specify that the fixed term will end on its

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expiry in order to result in the vendor’s right to occupy being determined on expiry of the term under s.44. The primary benefit of a written tenancy agreement is the ability to implement a fixed-term with a pre-determined expiry date and to avoid the automatic month-to-month over holding provisions of the legislation which apply in the absence of such an agreement. Lawyers should consider negotiating the method of rent adjustments before the contract is signed. Take care, however, to comply with the statutory restrictions on rent increases. If the purchaser is acquiring a strata title property with a view to renting it, review the bylaws of the strata corporation to check that there is no prohibition or fetter on the ability of the purchaser to rent the unit. The purchaser should be alert to the fact that the bylaws can be changed, although rental restriction bylaws are not effective until one year after a tenant occupying the strata lot when the bylaw is passed ceases to occupy the strata lot, unless the bylaw is passed by the owner developer of the strata lot prior to the first conveyance to a purchaser. Furthermore, rental restriction bylaws are not effective in respect of a strata lot that has been designated as a rental strata lot on the proper rental disclosure statement until the date the rental period expires.

B. Early Possession by Purchaser: Creating a Tenancy [3.56]

A potential problem of providing early possession to the purchaser or post-closing possession to the vendor involves whether the right of occupation amounts to a residential tenancy and therefore gives rise to rights and remedies under the Residential Tenancy Act. If the purchaser in occupation fails to complete the purchase or the vendor refuses to move out at the stipulated time, the other party’s ability to eject them may be limited. The applicable clause in the purchase contract should refer to the right of occupancy as a licence to occupy and not as a tenancy and should state that the licence terminates automatically on the particular date with no right to overhold.

XI. Amendment of Purchase Contract [3.57]

Any amendment to the purchase contract should be in writing and signed by all parties; indeed many custom forms of purchase contracts specifically require this, although the real estate board does not. In order to maintain the ability of each party to insist on performance by the other party when required, it is important to provide in the amendment that time continues to be of the essence, particularly if the date for subject removal or completion is being extended. When the completion date is extended, lawyers should consider whether the possession and adjustment dates should also be extended. If the extension of the completion date is short, the parties can agree that the adjustment date will not change, particularly if the statements of adjustments have already been prepared and signed. This is purely a matter of contract, and usually determined by convenience. When consideration is paid for an extension, the amendment should specify whether the money is a non-refundable extension fee or an increased deposit and whether it is to be applied on account of the purchase price. If notice of an event must be given by one of the parties, such as the satisfaction or waiver of a subject condition, an amendment to the purchase contract is not required, even though it is the common practice of real estate licensees to use one.

XII. Closing Procedures and Documents [3.58]

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In residential real estate transactions the standard form purchase contract deals with the closing procedure. In commercial real estate transactions the conditions of closing should be carefully considered, agreed upon, and included in the purchase contract, long before closing. If possible, the parties should settle closing details before signing the purchase contract, particularly in respect of the documents to be tendered. The comments concerning specific assignment agreements for leases apply equally to all substantive closing documents. To avoid legal uncertainty and pre-closing disagreements over the form of the documents, the forms should either be attached as schedules to the purchase contract or described in sufficient detail to allow the form to be detrimental. A “catch-all” statement that they shall be in the form (reasonably) required by the vendor or the purchaser. The purchase contract provides a “road map” for closing which, ideally, should be nothing more than a purely mechanical exchange of funds, documents and other material. Therefore, the purchase contract should describe, in as much detail as possible, the documentation that must be tendered at the closing, the place and time of closing, the method of payment of the purchase price and the mechanics of registering the conveyancing documents at the land title office.

Case Law

First City Investments Ltd v Fraser Arms Hotel Ltd

A purchase contract will be unenforceable if it is not certain on its essential terms. In recent years, the courts have relaxed some of the strict certainty requirements imposed by earlier cases

The contract will be unenforceable if a missing term is so essential to the contract that without it the court cannot determine the parties’ real intentions and so cannot supply any inferences.

As a general rule, the courts will look to the instrument to give effect to the intention of the parties

A deficiency, however, will not necessarily be fatal and the courts, in enforcing the contract, will look to the intention of the parties.

Ko v Hillview Homes Ltd

In Ko, the court (citing several BC Court of Appeal authorities) noted in obiter that even uncertainty on important matters beyond the “three Ps” can render a contract void for uncertainty. The decision in that case turned on the lack of any specificity in the contract about an addition to be added to the building, leading not only to uncertainty regarding the property (of which the building would form part) but also resulting in a non-binding agreement to agree.

Hanif v TJM Management Consultants

In Hanif, the court held that a date for the transfer of title did not need to be specified in an “agreement for sale” to create sufficient certainty for an enforceable agreement

The general right to assign a purchase contract is qualified by the principle that the vendor’s position cannot be prejudiced by an assignment.

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An “agreement for sale” is defined in s. 16 of the Law and Equity Act. See Hanif for a discussion on s.16 and an instance where the Court of Appeal determined that the agreement at issue was an agreement for sale within the meaning of s.16 of the Act.

Coal Harbour Properties Partnership v Liu

S. 6 of the Property Law Act requires a vendor to ensure that title is registered in the vendor’s name and prohibits the vendor from suing on a purchase contract without having ensured same.

Coal Harbour was cited for the proposition that s.6 does not render a contract unenforceable where the named vendor has the power to compel the registered owner to transfer title to the property.

In Coal Harbour, the contract was held to be enforceable because the partnership’s execution of the purchase contract, as the named vendor, bound one of its partners, the sole registered owner, to transfer title.

In Mariner Towers Limited v Imani-Roashanagh the court cited Coal Harbour with approval, indicating that both the corporate arrangements of the vendor and the disclosure of these arrangements in a contract of purchase and sale accepted by the purchaser were a complete answer to allegations that the contract should be declared invalid under s.6.

In Coal Harbour, the trial judge held that where legal title to property was held on behalf of a partnership vendor by one of the partners as a nominee for the partnership, the vendor was not entitled to sue on the purchase contract or retain the purchaser’s deposit in the event of a default by the purchaser under the purchase contract because the vendor was not in a position to convey registrable title to the purchaser on closing. The Court of Appeal reversed the trial decision holding that the partnership’s execution of the sale contract bound the partners to transfer title to the property to the purchaser. The court held that the parties of the partnership, including the partner that held title to the property as nominee for the partnership, were a party to the sale contract, and therefore, the partnership was entitle to retain the deposit as a consequence of the purchaser’s default.

A vendor is prohibited from suing on a contract of purchase and sale unless the vendor has complied with s.6 of the Property Law Act by ensuring title is registered in the vendor’s name.

In Coal Harbour, the court held that a partnership’s obligation under a sale agreement to execute and deliver a transfer of a strata lot title will be discharged if the transfer is effected by one of the partners.

Hanley v Bradley

Traditionally, the critical terms have been the “three Ps” – namely parties, property and price (see Hanley)

Case law suggests that if the real intentions of the parties can be collected from the language within the document, the court will give effect to those intentions by supply the necessary inferences and rejecting whatever is repugnant to the real intentions.

Grewal v Singh

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In Grewal, the court held that if there is a mechanism for determining who is to be listed on the transfer document, mere inclusion of the words “and/or nominee” after the purchaser does not make the identity of the purchaser uncertain and the contract void. The question is whether the contract indicates that there is a person who intends to be bound. If so, “or nominee” does not create uncertainty.

Tang v Zhang

In Tang, the court set out the following general principles with regard to deposits: 1) On a general level, the question of whether a deposit or other payment made to a seller in

advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention,

2) Where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law,

3) A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract and is no dependent on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price,

4) The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act,

5) A contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.

Salama Enterprises Inc v Grewal

If it has been agreed that time is of the essence, the failure of a party to perform on time will constitute a breach, giving the other party the right to pursue his or her remedies immediately except in restricted circumstances in which in would be unjust or inequitable

It has been held that where a joint obligation to complete a subdivision has not been fulfilled through no fault of the parties, it may be unjust for a vendor to rely upon “time is of the essence” clause. However this has been questioned where nothing done by the vendor contributed to the delay and it has been suggested the applicability of Salama is very limited.

Salama has been found to be inapplicable to option agreements. In an option, the agreement automatically expires and there is thus no forfeiture to be relieved from.

Norfolk v Aikens

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If neither party is ready, willing and able to complete according to the terms of the contract, time ceases to be of the essence, even though it is expressed to be of the essence in the contract. However, if one of the parties under these circumstances gives notice to the other, setting a new completion date, he or she will not be entitled to succeed in a claim for specific performance.

The introduction of the closing procedure provisions contained in the Contract of Purchase and Sale was a response to the decision in Norfolk v Aikens, which illustrated the inadequacies of the prior standard form purchase contract when the purchaser is relying on mortgage funds to complete the transaction and when the vendor has an existing mortgage that must be discharged.

A purchaser’s lawyer who accepts an undertaking from a vendor’s lawyer to discharge a mortgage on the property, contrary to the terms of the agreement of purchase and sale and without appropriate instructions, is in breach of his or her retainer.

The old form of the standard CBA Contract of Purchase and Sale did not specifically permit closings based on undertakings, although this was addressed in the Norfolk addendum at paras. 13 and 14. It specifically provides for closing on the basis of the CBA standard undertakings. It is anticipated that lawyers will continue to use their own form of undertakings provided they are similar to the CBA standard undertakings or alternatively use the CBA standard undertakings. However, where lawyer for the vendor and purchaser cannot agree on the terms of the undertakings, the transaction will close on the basis of the CBA standard undertakings as set out in the contract.

It is only with the purchaser’s informed consent and authority that the risk of any resulting loss is shifted from the purchaser’s lawyer to the purchaser.

Norfolk appears to support the position that even after a breach by the defendant, a plaintiff cannot succeed on a claim for specific performance unless he or she was ready, willing and able to complete on the date fixed for completion in the contract of purchase and sale.

Cardwell v Perthen

The doctrine of caveat emptor continues to endure in some circumstances, including in the case of patent defects.

In some cases the onus remains on the buyers to satisfy themselves of the quality of the property being sold. Once a buyer has obtained a home inspection, then, absent fraud or concealment, reliance shifts to the home inspector.

The court in Cardwell, elaborated on the requirements necessary to establish an implied warranty of fitness, holding that “in addition to the home being incomplete and new, it is essential that the vendor has assumed a contractual obligation to carry out the further work which is not capable of being inspected when the contract for sale is made in order to trigger the implied warranty of fitness.

For a helpful review of the authorities on patent and latent defects see Cardwell.

Mark 7 Development v Peace Holdings Ltd

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If a subject condition contains separate, non-refundable consideration paid by the benefitting party to the other party, the contract constitutes an irrevocable option in favour of the benefitting party.

In Mark 7 it was held that completely refundable deposit could not constitute sufficient consideration to create an enforceable option.

Griffin v Martens

In Griffin, an interim agreement for the purchase of land was “subject to purchaser being able to arrange satisfactory financing”. The agreement was not void for uncertainty. “Satisfactory” means “satisfactory to a reasonable person with all the subjective but reasonable standards of the particular purchaser”.

The words “financing satisfactory to the purchaser” may turn the interim agreement into an option.

Boult Enterprises Ltd v Bissett

A common misconception is that a “conditional agreement” or a purchase contract with conditions precedent yet to be satisfied or waived, is not binding (Dynamic Transport). However, it is important for the parties to understand that, with the exception of conditions precedent that prevent the formation of a binding agreement – the obligations of the party who benefits are contingent upon satisfaction or waiver of those conditions.

Fraser v Van Nus

The party benefitting from the condition precedent is not entitled simply to sit back and wait until the time for satisfaction or waiver passes. The benefitting party should act in good faith and use his or her best efforts to do what is necessary to secure performance of the contract.

In Fraser, the agreement contained a liquidated damages clause. The court found that on default the vendors elected to cancel the agreement and claim the $50,000 deposit; this stipulated sum acted as a limit on the damages recoverable.

“Whether a stipulated sum of damages for breach operates as a limit of the damages recoverable is in each case a question of construction of the contract. Thus, where the document itself or the commercial practice governing its use so indicates, the sum does not operate as a limit”

The general rule is that in the absence of an indication to the contrary the parties will be taken to have intended that the stipulated sum operates as a limit on the damages recoverable.

As a result of this case, lawyers usually include a clause in the purchase contract that expressly preserves the right of the vendor to retain the deposit and claim additional damages.

Bergen Developments Ltd v Louie

The benefitting party should act in good faith and use his or her best efforts to do what is necessary to secure performance of the contract (Van Nus). However, see Bergen in which the

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Court of Appeal held that the purchaser was required to “in good faith make every reasonable effort to obtain the rezoning, in the circumstances of that case”.

Atmospheric Diving Systems Inc v International Hard Suits Inc

The distinction between “best efforts” and “reasonable efforts” is discussed in Atmospheric. The case remains an often-cited authority for the distinction between the two and concludes

that a “best efforts” clause in a contract imposes a higher obligation than a “reasonable efforts” clause. “Best efforts” includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavor. The concept of “reasonable efforts” only requires a party to do what is reasonable in the circumstances.

Dynamic Transport Ltd v O.K. Detailing Ltd

Provided that a civic address accurately describes the property, the court may be prepared to overlook an incorrect legal description in the purchase or vice versa. The court will consider all of the circumstances in order to determine which property is involved.

A common misconception is that a “conditional agreement” or a purchase contract with conditions precedent yet to be satisfied or waived, is not a binding agreement.

A party who takes no action to satisfy a condition for his or her own benefit to avoid responsibility for the contract may be in breach of that obligation.

Each party is under an obligation to do all that is necessary on its part to secure performance of an agreement for the purchase and sale of land.

G-8 Properties Inc v Fort St. John Retail Limited Partnership

When a subdivision was not completed by the last closing date, the defendant attempted to terminate the contract and take deposits.

Court found that it was inequitable to allow the defendant to rely on time of the essence provision to terminate

In light of contract ambiguity and the lack of evidence as to whether events triggering the extensions in the agreement had occurred, it was permissible to look at the parties’ subsequent conduct, which supported the conclusion that events the parties considered to be beyond their control had occurred and that extensions were in effect. However, in the circumstances it could not be said that time remained of the essence. Satisfying the subdivision condition was clearly in the common interest of both parties and required the input of both. It would therefore be unjust and inequitable in the circumstances to allow the defendant to terminate the contract immediately and to rely on the time of the essence clause, where delay was caused in part by an attempt by the defendant to ensure favourable terms.

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Real Estate Tax*See PLTC page 74-77

J. The Non-Resident Vendor and the Section 116 Clearance Certificate [4.27]

It is important to determine if the purchase price will be staying in Canada or not for tax purposes (see Income Tax Act s. 116 for non-residents). This means that the purchaser has an obligation to take reasonable steps to determine if the vendor is a resident or non-resident. If the seller is a non-resident then the purchaser is obligated to withhold a portion of the purchase price for 30 days after closing of transaction. A s.116 certificate is required from the CRA to show that no taxes are owed, otherwise the purchaser has to provide all withheld money to CRA. If the purchaser doesn’t do this, they are liable for any taxes owing by the vendor.

1. Canadian Income Taxation Imposed on the Non-Resident Vendor [4.28]

A non-resident is required to include in “taxable income earned in Canada” for a taxation year, any excess of taxable capital gains over allowable capital losses that result from the disposition of “taxable Canadian property” or interests therein.

a. Taxable Canadian Property [4.29]

Section 248(1) describes in detail the properties included in the term “taxable Canadian property” The more common items are: 1) Canadian real estate (which includes a leasehold interest, but not a security interest derived by virtue of a mortgage, hypotec, agreement for sale or similar obligations), 2) certain property used or held in carrying on business in Canada and 3) shares of Canadian private corporations, interests in partnerships and interests in trusts if within the last 60 months more than 50% came from Canadian real estate, resource properties or options in or interests in such properties. Under s.248(1) “taxable Canadian property” includes an interest therein whether or not such property is in existence. The ITA specifically provides that a non-resident trader in real property situated in Canada is considered to be carrying on business in Canada. The rule will also apply where a non-resident disposes of Canadian resource property.

b. Disposition of Taxable Canadian Property [4.30]

Dispositions of “taxable Canadian property” include deemed dispositions such as those arising upon the death of a non-resident taxpayer and deemed proceeds, such as the fair market value of a property disposed of in a non-arm’s length transaction, in which the proceeds would otherwise be a lesser amount

c. Exemptions for Non-Residents [4.31]

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A non-resident who disposes of a direct or indirect interest in Canadian real property may be entitled to rely on an exemption in a reciprocal tax treaty to avoid Canadian taxation. The appropriate tax treaty should be reviewed for a possible exemption, particularly if an indirect interest in real property is sold (ex: shares of a corporation owning real property). A non-resident vendor is not permitted to rely on the reserve provisions of the ITA to defer any gains otherwise realized on the disposition of property.

d. The Non-Resident and Section 216 Rental Property [4.32]

A non-resident who receives rent from real property is subject to a withholding tax in the amount of 25% of the gross rent paid. In computing the withholding tax payable, the non-resident is not permitted to claim any deductions. Section 216(1) permits a person not resident in Canada to file a return of income and pat Part I tax, on a new basis for rent on real property in Canada in lieu of the non-resident withholding tax payable. Generally, the non-resident may elect to be taxed under s. 216 by filing within two years after the end of the relevant tax year. Under s. 216(4) the vendor may have the withholding tax obligations apply to net rather than gross income if the non-resident undertakes to file a Canadian tax return within six months following the end of the relevant taxation year. Failure to do so will result in an assessment by the CRA for the withholding tax based on 25% of the gross rent. The non-resident vendor’s liability for tax on rent received from real property in Canada will be an issue when the non-resident disposes of that real property.

2. The Section 116 Clearance Certificate [4.33]

To ensure that the non-resident vendor pays Canadian tax owing on the gain resulting from the disposition of most “taxable Canadian property”, s. 116 requires a vendor to report the disposition to the CRA and to obtain a clearance certificate for the taxes potentially owing as a consequence of the transaction (if the property is a specified type of “taxable Canadian property”. If the vendor fails to comply with this procedure, the purchaser may become liable to pay an amount as tax on behalf od the vendor (s.116(5) and 5.3)). Consequently, the purchaser will hold back 25% of the purchase price relating to the land held on account of capital and 50% of the purchase price relating to depreciable property and land of a non-resident trader of land. The purchaser will remit these amounts to the CRA if the vendor does not provide a clearance certificate or if the purchaser is unable, after a reasonable inquiry (usually by statutory declaration of the vendor) to determine whether the vendor is a non-resident. The 50% amount is not usually held back in residential transactions because the buildings or property are not usually “depreciable property” and the non-resident is not usually a trader of land. Therefore, the 25% is normally held back on the price of the land and buildings.

a. How Does the Vendor Obtain a Section 116 Clearance Certificate? [4.34]

Under s. 116, a non-resident must disclose the following information to the CRA: 1) the name and address of the purchaser or purchasers, 2) a description of the property, 3) the estimated or actual proceeds of disposition and, 4) the non-resident vendor’s adjusted cost base property. A non-resident vendor may send notice under s. 116 by letter. However, the CRA prefers that non-resident vendors use form T2062 for capital real property and T2062A for other real property. To complete these forms, a non-resident vendor must disclose information in addition to that required under s.116. The CRA uses

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this information to ensure that the vendor has paid all Canadian taxes for all other Canadian transactions covered. Although the forms are often submitted weeks or months before closing, the amount on account of tax is generally not remitted until closing or after. The vendor’s solicitor will normally undertake to remit the tax from the holdback of the purchase price. This process is required because the CRA does not usually have the clearance certificate ready for closing, and the vendor often lacks the money, apart from the purchase price, to pay the tax. Calculation of the adjusted cost base or the capital cost of property, as the case may be, should be set out in a separate schedule so that the CRA may determine whether the amount remitted is sufficient. A CRA official will process the forms only after the Collections Division of the CRA has verified that the non-resident vendor has paid all outstanding Canadian taxes. Failing a negative response, the same CRA official will issue the s. 116 clearance.

b. Deadlines [4.35]

If notice under s. 116 is not made before the completion of the transaction, it must be made within ten days following the date of the transaction. Where a taxpayer does not file form T2062 or comply with s.116 prior to or within 10 days of the completion of the transaction, the CRA can impose a penalty of up to $2,500. Failure by the vendor to obtain a certificate may expose the purchaser to a tax of 50% of the purchase price of the property sold (depreciable property) or 25% of the purchase price (for non-depreciable capital property). Under the ITA, these amounts must be remitted by the purchaser within 30 days after the end of the month in which the property was acquired. Administratively however, where a clearance certificate has been applied for but not yet issues by the CRA, the CRA will normally issue a letter (comfort letter) permitting the monies held back to continue to be held in trust while the CRA continues to process the request; the practice generally to rely upon such letters, notwithstanding that they are not contemplated under the ITA.

c. Must a Vendor Always Obtain a Section 116 Clearance Certificate [4.36]

As a practical matter, the vendor should obtain a certificate where required because the purchaser will withhold a percentage of the purchase price without one. Payment of the taxes or the provision of security with an application may not be required if the vendor is able to convince the CRA that there is an appropriate treaty provision exempting from taxation part of the gains realized. A vendor seeking a clearance certificate who claims an exemption under a tax treaty must advise CRA of the treaty and the article in the tax treaty under which the vendor claims the exemption. The vendor must also provide the CRA with proof of residency in the treaty country or proof that the gain has been or will be reported in the vendor’s country or residence.

d. Agreement with the Purchaser [4.37]

The vendor might consider securing a covenant from the purchaser that the holdback funds will not be remitted to the CRA until on or just prior to the 30th day after the end of the month in which the property is acquired. Otherwise, the purchaser has the option of sending funds to the CRA within this period, even as early as the closing date. In fact, it has become the practice not to remit the holdback even after the 30 day period set out in the ITA. The CRA will provide a comfort letter indicating that it

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does not expect the purchaser to remit the holdback because the vendor has applied for a clearance certificate, provided the holdback funds continue to be held in trust. In addition, the non-resident vendor might consider a covenant that the funds held back by the purchaser, pending the delivery of a clearance certificate, will be invested in interest-bearing securities.

3. Vendor Financing [4.38]

Interest paid after 2007 to arm’s length creditors is generally no longer subject to withholding tax, provided that the interest is not participating debt interest. Participating debt interest is generally interest that is at least partly contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criteria or by reference to dividends paid or payable to shareholders of any class of shares of a corporation. However, interest paid to a non-resident may be subject to withholding tax if the interest is payable on a debt owed by the payer to a non-resident with whom the payer does not deal at arm’s length, effective interest paid after March 15, 2011.

E. Additional Concerns for the Non-Resident Vendor of Commercial Property [4.67]

2. Previous Section 216(1) “Net Rental Election” [4.69]

A vendor of rental property may choose to make a s.216(1) “net rental election” so that his or her rental income will be taxed on a net basis rather than on a gross basis subject to withholding tax. The election will entitle the vendor to take deductions for capital cost allowance, interest expense and other related deductions to reduce the net income otherwise subject to tax. Under s.216(5) the vendor may be required to recapture this capital cost allowance into income where the proceeds are sufficient; if so, this “recapture” will be income. This income may be exempt from Canadian taxation under the provisions of certain tax conventions.

B. The Property Transfer Tax Act [4.80]

1. General [4.81]

The PTTA provides for a property transfer tax based on the fair market value of the property at the time of registration. The tax is collected by the land title office with each application to register a taxable transaction. The rates of tax are: 1) 1% of the first $200,000 of the fair market value; and 2) 2% of the balance of the fair market value (PTTA, s.3(1)). “Fair market value” is defined in s.1(1) and was amended in the case of Shon Yee Benevolent Assoc of Canada v BC – it now requires the valuation of property to be made free of any trust. The PTTA includes an anti-avoidance rule that requires the fair market value of property to be determined without reference to any interest in the land already held by the transferee or by any individual or corporation related to the transferee. Exceptions are provided when tax has been paid on the fair market value of that interest or when the interest was registered before the PTTA was enacted in 1987. The purpose of the anti-avoidance rule is to prevent parties from artificially reducing the fair market value of the property by registering certain interests, including lease agreements for less than 30 years against title to the property.

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2. When Payable [4.82]

Taxes are payable under the PTTA at the time of application to register a “taxable transaction”. A tax return in a prescribed form and the tax payable must be submitted to the land title office at the time of application.

3. What is a Taxable Transaction [4.83]

A taxable transaction is defined in s.1(1) of the PTTA to include a transfer or grant by any method of the following” 1) an estate in fee simple, 2) a life estate in land, 3) a right to occupy land under a lease agreement or an agreement for sale, 4) a leasehold interest in land exceeding 30 years including options to renew and 5) an agreement for sale or the transfer of the purchaser’s right to occupy land if the agreement for sale is cancelled or determined in any manner. An application under s. 191 of the Land Title Act in respect to certain types of amalgamations may also be taxable.

4. Exemptions [4.84]

The PTTA provides for a number of exemptions from the payment of tax. Most of these exemptions are for administrative purposes or are of little commercial significance. Some of the exemptions are as follows: 1) transfers between certain related individuals, 2) transfers made by the registered trustee of a testamentary trust or of the deceased’s estate to a beneficiary, 3) a transfer of land to the survivor of a joint tenancy, 4) a transfer of a bankrupt’s interest in land to the trustee in bankruptcy, 5) a transfer under a registered agreement for sale in respect of which tax has already been paid, 6) a transfer of a lease with a term of 30 years or less remaining, 7) a transfer from a settlor to the Public Guardian and Trustee, 8) a transfer to a personal representative as part of the deceased’s estate, 9) a transfer for the purpose of facilitating subdivision if the transfers are from two or more owners of adjacent land, 10) a transfer under certain provisions of the Business Corporations Act of CBCA. Also in 1994, first time home buyers also became exempt from the payment of property transfer tax in respect of qualifying properties. First time home buyers are individuals who – 1) have not previously held a registered interest in a principal residence, 2) have continuously lived in BC for at least one year, 3) are Canadian citizens or permanent residents. Qualifying properties include: 1) properties acquired for and used as the purchaser’s principal residence for at least one year following registration, 2) properties of not more than 0.5 hectares and 3) properties with a fair market value not exceeding $425,000.

5. Effect of the Property Transfer Tax Act and Unregistered Transactions [4.85]

The PTTA imposes a significant tax on many residential and commercial land transactions involving land transfers. In some cases involving non-arm’s length transfers, the vendor executes a declaration of trust in favour of the purchaser and the trustee is not registered. The vendor then holds the title as “bare trustee” of the purchaser. Though these transactions are not subject to tax under the PTTA at present, the PTTA contains a framework for applying the tax to these transfers.

D. Section 116 Clearance Certificate [4.87]

1. How Does the Vendor Obtain a Section 116 Clearance Certificate [4.88]

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Section 116 provides for the collection of amounts of tax when a non-resident disposes of taxable Canadian property such as real property situated in Canada. Form T2064 or T2068 is a clearance certificate that will be issued either when no tax is payable by the vendor or such amount as may be reasonable under Part I (if depreciable property or land inventory). If the appropriate application for a clearance certificate is not filed before the date of the transaction, it should be filed within ten days following that date (s.116(1). The CRA will generally impose penalties on a vendor that does not file the application within 10 days of the transaction date. As an alternative to the immediate payment of tax, the CRA may accept security for the tax as an interim arrangement. Such security will generally be in the form of a letter of guarantee issued by a bank on behalf of the vendor. The CRA has a discretionary policy providing an exemption from the payment of amounts on account of tax for certain non-resident vendors that operate businesses involving land inventory. To qualify, the vendor must satisfy the CRA that similar property transactions have been reported by the vendor on income account and that the vendor is making regular instalment payments. If, at the time of filing the application for clearance certificate, the vendor and the CRA disagree as to the nature of the transaction (income or capital account) the vendor must provide representations or documentations to the CRA supporting the characterization of the transaction. If CRA is satisfied they will issue a “qualified business exemption” certificate of compliance without payment pursuant to s.116. For dispositions after 2008 a vendor is generally not required to obtain a clearance certificate if the provisions of a tax treaty between Canada and the vendor’s country of residence would result in a gain, if there were a gain on the disposition, being exempt from Canadian income tax. Where the non-resident vendor and the purchaser are related, a notification procedure must be complied with. Further, the purchaser is not liable to pay an amount as tax on behalf of the vendor in respect of such a disposition of treaty-exempt property, provided certain conditions are met. In this regard, the purchaser may wish to comply with notification procedures referred to even where the parties are not related given certain due diligence provisions.

2. Amount of Holdback [4.89]

Section 116(5) requires the purchaser to remit 25% of the purchase price if the property is capital property, to the Receiver General on behalf of the vendor if a clearance certificate is not provided by the vendor by the end of 30 days after the month of closing. Section 116(5.3) increases this percentage to 50% in the case of land inventory and depreciable property. In the context of a commercial transaction, it may be difficult for a purchaser to determine if land is held by the vendor as capital property or as inventory. In a commercial transaction with non-resident vendors it may be prudent for a purchaser to hold back 50% of the purchase price where the purchaser is unsure of the nature of the property held by the vendor.

3. Joint and Several Liability of the Purchaser [4.90]

There may be circumstances in which the proceeds of disposition received for the property exceed that which was reported when an application for the s.116 certificate was filed. If this is the case, the purchaser is normally obliged to pay to the CRA as tax on behalf of the vendor the lesser of – 1) 25% of the cost of the property acquired and 2) 25% of the excess of the cost of the property over the certificate limit, which amount the purchaser may recover from the vendor by withholding it when

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paying the purchase price to the vendor. If acquiring depreciable property or land inventory of the vendor, the purchaser may be liable for a tax on behalf of the vendor of 50% of the cost of the property under s. 116(5.3).

4. Liability of Purchaser when No Certificate is Obtained [4.91]

If a transaction was completed but a certificate was not obtained, the purchaser normally will be obliged to pay to the CRA 25% or 50% of the cost of the property (depending on whether it is depreciable property, land inventory or neither). This amount is recoverable from the vendor. The purchased will be required to remit the amounts owing within 30 days after the end of the month in which the property was acquired. When so remitting, the purchaser must identify remittances with sufficient particulars and to acquaint the CRA with the essentials of the transaction and should specify that the payment pertains to s.116.

5. Statutory Declaration as to Vendor’s Residence [4.92]

The purchaser is not obliged to pay anything under s.116 if he or she made reasonable inquiries about the residence of the vendor and had no reason to believe that the vendor was a non-resident. The CRA takes the view that reasonable inquiry requires the purchaser to take prudent measures to confirm the vendor’s place of residence. Generally, this may be accomplished by having the vendor sign a statutory declaration that the vendor is not a non-resident of Canada for purposes of s.116. The CRA has also indicated that a purchaser satisfies this obligation once he or she has obtained a letter from the vendor indicating that the vendor is a Canadian resident, provided that there is no reason to disbelieve the contents. Whether a vendor is a resident will depend on a variety of factors. There is a limited statutory definition of residence for both individuals and corporations in s.250. However, particularly for individuals, the determination of “residence” is a heavily fact-driven determination, which is generally made by reference to common law principles.

2. The Home Buyers’ Plan and Tax Credit [4.100]

Under this plan, an individual may withdraw up to $20,000 (now $25,000) from his or her RRSP without paying tax, if the individual uses the withdrawn money to purchase a qualifying home. Under the amended plan, only first-time home buyer are eligible. A purchaser will be a first-time buyer if the purchaser or his or her spouse has not owned and inhabited a home as a principal resident within the preceding four taxation years. A qualifying home is any housing unit located in Canada on which the individual has entered a contract of purchase and sale. The individual must intend to occupy the unit as his or her principal residence within one year of completing the purchase. Any amount withdrawn under the Home Buyers’ Plan must be repaid within 15 years. If the individual does not repay the amount required by the formula in any given year, then the amount that the individual should have paid is included in his or her income for that year. Each individual may withdraw up to $25,000, therefore co-purchasers such as a couple may each withdraw $25,000. The Plan also allows tax-free withdrawals for people with disabilities, whether or not they are a first time home buyer. The 2009 federal budget also introduced an income tax credit that provides up to $750 in federal tax relief for first-time home buyers or buyers with disabilities to acquire a more accessible or functional home.

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H. Goods and Services Tax/Harmonized Sales Tax [4.101]

1. General [4.012]

The GST came into effect on January 1, 1991. Effective July 1, 2010 BC harmonized its provincial sales tax with the GST to impost the HST rate of 12%. Following a province-wide referendum in 2011, BC eliminated HST and reinstated GST and PST on April 1, 2013.

2. What is Taxable [4.103]

Every “recipient” of a “supply” of Canadian real property is taxable on the full consideration for the supply at 5% unless the supply is an “exempt supply” or “zero-rated supply”. A supply includes a transfer of ownership, the transfer of possession under an agreement for sale, an exchange, a gift, a lease, a licence, the granting of an option to purchase, and the assignment of a lease or an agreement of purchase and sale. In general, sales of all residential properties that are new or have been substantially renovated are taxable based on the full consideration for the supply, subject to certain exemptions and rebates described below. Purchasers of new or substantially renovated housing in BC will be required to pay HST if under a written agreement both ownership and possession are transferred on or after July 1, 2010. Sales of newly constructed or substantially renovated homes to individuals in BC are grand-parented where the written agreement of purchase and sale was entered into on or before November 18, 2009 and both ownership and possession are transferred. Sales of grandparented homes will be subject to the 5% federal component of the HST and not subject to the provincial component of the HST. In general, GST/HST is payable on any chattels and personal property that are transferred with the real property. However, it is not payable on personal property (ex: stoves, fridges) if it is included in the sale.

3. Exemptions [4.104]

GST/HST is not payable on the purchase of real property in a number of circumstances. A prudent purchaser will request representations from a vendor as to whether the sale is GST/HST exempt. Where a vendor asserts that the sale is exempt and the purchaser has no information to the contrary, the purchaser should obtain a written statement from the vendor that the supply of real property is exempt under one of the provisions referred to in s.194 of the ETA. The statement should be in the form of a certificate obtained on the earlier of the completion date of the transfer of the real property or the possession date. If the statement is incorrect and the transaction is not exempt, the vendor and not the purchaser will generally be liable for the GST/HST. More specifically, s. 194 of the ETA provides that the recipient of the property will be deemed to have paid any GST/HST payable if “a supplier makes a taxable supply by way of sale of real property and incorrectly states or certifies in writing to the recipient of the supply that the supply is exempt”. Section 194 contains the proviso that if the purchaser “knows or ought to know that the supply is not an exempt supply”, the purchaser will remain liable. Unless the purchaser obtains sufficient information from the vendor to justify the purchaser’s reliance on the vendor’s certificate, the purchaser may be considered to have known, or it may be concluded that he or she ought to have known, that the transaction was not an exempt supply. The purchaser could then be assessed for the unpaid tax up to four years after a transaction. Examples of exemptions under s. 194:

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used housing exemption, building on leased land exemption, residential trailer park site exemption, parking space exemption, vacant land exemption.

4. Timing of Liability for the Goods and Services Tax/Harmonized Sales Tax [4.105]

a. General [4.106]

The general rule for a real estate transfer is that the tax is payable on the earlier of the date that the ownership is transferred or the date that possession is transferred, except in the case of residential condominium units, in which case GST/HST is payable on the earlier of the date of transfer of ownership or 60 days after the unit is registered as a condominium is possession has been transferred already.

b. Deposits [4.107]

In general GST/HST is not payable on a deposit until the date that it is applied as consideration towards a transaction. If a deposit in respect to the purchase of real property is subject to tax is forfeited to a vendor because the purchaser refuses to complete the transaction, then the forfeiture is considered to be a taxable supply and 5/105th of the deposit must be remitted by the vendor as GST (12/112th in BC). If the purchaser is registered for tax purposes, the purchaser may be able to claim an input tax credit for the amount of the GST/HST deemed to have been paid in respect of the forfeited amount. In advising a purchaser on the wording of a purchase contract if there is a holdback, it may be appropriate to include a clause stating that GST/HST on the holdback will not be paid until the holdback is released.

d. Registration [4.109]

Vendors who sell taxable real property in the ordinary course of business are required under the ETA to register unless they qualify as a “small supplier”. Small suppliers are relieved from the requirement is their taxable sales are less than $30,000 in the last year. Vendors not selling in the ordinary course of business are not required to have a GST/HST registration number, however they are required to collect and remit the HST/GST in respect of taxable sales of real property.

5. Used Residential Housing [4.110]

a. Purchaser [4.111]

A purchaser of used residential housing, including private dwellings and condominiums is generally not required to pay any GST/HST. Yet: 1) costs incurred in connection with the sale may be subject to tax even if the sale is exempt, 2) the exemption applies even if the housing is used partly for commercial purposes as long as it is primarily a place of residence, 3) the exemption does not apply to the sale of housing that had been used by the vendor in the course of commercial activity, 4) the purchaser is entitled to claim input tax credits if the property is purchased to be used in commercial activities but not otherwise.

b. Vendor [4.112]

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Although GST/HST is generally payable by the purchaser, it is often the vendor’s use of the property that determines whether the sale is exempt from GST/HST. Therefore a vendor should be asked to provide a statement or certificate to the purchaser confirming the GST/HST status of the property being sold. The vendor is also required to act as the agent of the federal government in collecting and remitting any GST/HST payable, unless the vendor is a non-resident.

6. Personal Use Real Property [4.113]

Generally, real property sold by an individual or a personal trust is exempt unless at the time of transfer the property was capital property of the vendor used primarily in business. The exemption is not available where, among other situations, the property was sold in the course of a business, or if the vendor obtained the parcel of land by subdividing it from another parcel and that other parcel was severed into more than two parcels. If an individual renovates personal-use property with the intention of continuing to use the real property for his or her own use after the renovations are completed, the individual must pay tax on supplies for the renovation.

7. Self-Supply of Residential Property [4.113A]

Section 191 of the ETA sets out the “self-supply” rules for residential real property. The self-supply rules apply to residential real property that is not sold but otherwise occupied as a place of residence (leased or rented or occupied) and serve to level the playing filed by taxing these properties on the same basis as newly constructed or substantially renovated properties that are taxable. The general self-supply rules apply to a builder that constructs or renovates a single-unit residential property, condominium or multi-unit residence and subsequently supplies the property by way of lease or similar arrangement for the use of a residence and deems the builder to have sold and re-purchased the property at its fair market value, generally once the first unit is rented. The same rules apply where a builder occupies the property as his or her place of residence. There are other “deemed” supplies under the “change in use” rules. These include circumstances in which: 1) a business converts capital real property from commercial use to residential use or some other exempt use, 2) a business converts capital real property from non-residential exempt uses (schools, hospitals etc) to residential use and 3) there has been a partial increase or decrease in the proportion of the property used for commercial as opposed to residential or other exempt purpose.

8. Who Collects the Tax? [4.114]

a. The General Rule [4.115]

Generally, the ETA requires the supplier of a taxable supply to collect GST/HST from the recipient of the supply. However, in certain circumstances, there is an exception to this rule with respect to the taxable supply of real property by way of sale. Specifically, unless the vendor is a “prescribed supplier”, a purchaser is responsible for paying and remitting tax if: 1) the vendor is a non-resident, 2) the purchaser is registered for GST/HST purposes and is not an individual – which case the vendor should obtain a certificate from the purchaser confirming that the purchaser is registered. The vendor should contact the CRA before the completion date to confirm that the number is valid and assigned to the purchaser.

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3) the purchaser is registered and is an individual and the property is not a residential complex or place of burial.

9. Agreement Does not Disclose Harmonized Sales Tax Status [4.119]

Situations arise in which the supply of real property is subject to GST/HST, but the agreement of purchase and sale does not indicate whether the price is inclusive or exclusive of GST/HST. If the transaction closes without the purchaser paying tax to the vendor and the CRA discovers this situation, it may reassess the vendor for its failure to collect GST/HST. The CRA’s general assessing practice is to assess the vendor. This situation may arise because the vendor did not consider whether the transaction was subject to GST/HST or the vendor mistakenly believed that the transaction was exempt. In any case, s. 224 of the ETA gives the vendor a right in limited circumstances to sue the purchase to recover the tax that the vendor should have collected. However, before a vendor can rely on s.224, the vendor must have “complied with section 223(1)” of the ETA in respect of the sale. Section 223(1) requires the vendor to indicate in the prescribed manner or in an invoice or receipt issued to the purchaser, or in an agreement in writing entered into with the purchaser either the total GST/HST payable or both the GST/HST rate and the items that are taxable. The courts have generally held that s. 223 and 224 represent a complete code on this issue and that a vendor has no common law right to recover from the purchaser. In addition, the courts have generally held that the failure by the vendor to stipulate that the GST/HST was in addition to the price means that the vendor has not conformed with s.223(1) and is accordingly not permitted to recover the tax from the purchaser. Another issue that may arise is whether, in addition to the GST/HST the vendor may recover any penalties and interest assessed against it by the CRA for its failure to collect tax. There is no mention of the right to collect penalties and interest in s.224; therefore the section does not confer on the vendor the right to sue the purchaser for the interest and penalties.

10. Rebates [4.120]

a. Vendor Rebates [4.121]

If the vendor is not a registrant at the time of the sale, the vendor may apply for a GST/HST rebate under s.257 of the ETA in an amount equal to the lesser of the “basic tax content” of the property (essentially the tax paid by the vendor on the lot and improvements) and the amount equal to the GST/HST paid by the purchaser for the purchase of the lot and improvements. In order to claim the rebate, the vendor must file the application within two years after closing. In this case, the vendor does not require any representations or warranties from the purchaser to complete the rebate form or to claim the rebate. However, the purchaser will require all the representations and warranties from the vendor relating to whether GST/HST is owing and who is to remit the tax.

b. Purchaser GST/HST New Housing Rebates [4.122]

A purchaser who is an individual may be eligible for a GST/HST new housing rebate if he or she has purchased a new or substantially renovated residential complex such as a house, mobile home or condo. Section 253 of the ETA sets out the circumstances under which a new housing rebate may be available

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to a purchaser to recover a portion of the GST or federal component of the HST. A purchaser may claim a housing rebate equal to 36& of the GST or federal component of the HST paid on property costing $350,00 or less. The maximum rebate is $6,300 which is reduced at the rate of $75.60 per $1,000 for new housing costing between $350,000 and $450,000. A rebate will also be available in BC for a portion of the 7% provincial component of the HST pursuant to s.256.21 of the ETA. The rebate is equal to 71.43% of the provincial component, up to a maximum of $26,250. Unlike the GST, there is no phase-out of this rebate, so homes priced over $525,000 will qualify for the maximum rebate if the necessary conditions are met. The GST/HST new housing rebate must be filed in the prescribed form, and must be filed within two years after ownership is transferred. A lawyer acting for the vendor may want to include the GST/HST payable as an adjustment on the statement of adjustments to be paid to the vendor by the purchaser with the sale proceeds. Alternatively, the vendor may agree to credit the GST/HST new home buyer’s rebate. If the vendor agrees, the purchaser can claim the GST/HST rebate directly from the vendor, as agent of the CRA, by deducting the HST/GST new housing rebate from the GST/HST paid on the closing date. However, GST form 190E must be completed by both the builder/vendor and the purchaser but does not include all the representations that a purchaser needs from a vendor in order to establish entitlement to the rebate or all of the representations a vendor needs from a purchaser if the vendor agreed to credit the purchaser with the rebate. Therefore, if a purchaser intends to apply for a rebate, a certificate in the form of Form 254-V should be completed on closing by the vendor together with GST rebate form 190E. Where the builder does not pay or credit the rebate to the individual, a rebate application is filed by the individual directly with the CRA. A GST/HST residential rental property rebate may be available to landlords who acquire a “qualifying residential unit”. In general, a “qualifying residential unit” is any self-contained residence if it can reasonably be expected that the unit first use will be as long-term residedential rental property. The amount of the GST new residential rental property rebate is computed in the same manner as the GST new housing rebate subject to a special allocation for purchases of multiple unit residential complexes. A similar rebate may be available for the provincial portion of the HST up to a maximum of $26,250 per qualifying unuit. In order to obtain the GST/HST new residential rental property rebate, an application must be filed within two years after the later of the month in which the GST/HST became payable by the applicant. In certain circumstances the GSY/HST new residential rental property rebate must be repaid (with interest) by the applicant if the qualifying residential unit is sold to a person within one year after it was first occupied as a place of residence.

11. Provincial Transitional Rules [4.122A]

a. Provincial Transitional Rebate [4.122B]

Individuals who pay HST on the purchase of the new or substantially renovated homes in BC may be entitled to claim a transitional housing rebate if at least 10% of the construction or substantial renovation was completed before July 1, 2010. The transitional rebate is in addition to the GST/HST new housing rebate.

b. Disclosure of HST [4.122C]

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The builder is required to disclose in the written agreement whether the provincial component of the HST would apply to the sale, and if so, whether the stated price in the agreement includes the applicable provincial component of the HST, net of the BC new housing rebate and the PST transitional new housing rebate, if applicable. Where a builder has failed to do so, the stated price in the written agreement is deemed under the transitional rules to include the provincial component of the HST.

12. Elimination of HST in BC [4.122D]

To facilitate the re-implementation of the GST/PST regime, the BC government has released legislation and guidelines. The New Housing and Transition Tax and Rebate Act is intended to provide certainty for purchasers of new housing regarding the application of tax during the transition from HST to PST.

9. Allocation of the Purchase Price [4.152]

a. Purchaser’s Preferences [4.153]

A purchaser normally will prefer to allocate the purchase price to depreciable property such as buildings rather than land so that the purchaser is able to write off the purchase price as quickly as possible through claims for capital cost allowance or in certain circumstances, through tax credits (investment tax credits) or through current deductions (scientific research). Nevertheless, a purchaser who has a significant non-capital loss or tax credit carry forward or who is not taxable (charity) will not typically be as concerned about claiming capital cost allowance and will not normally insist on a high allocation to depreciable property. In addition, an allocation to a building (over $50,000) may cause the asset to fall within a separate class for capital cost allowance purposes.

b. The Conflicting Interests of the Vendor Regarding Allocation [4.154]

A vendor usually prefers to maximize the portion of the total price assigned to land, thereby reducing the amount of capital cost allowance that might be recaptured. The vendor will also want to receive as much money as quickly as possible with little or no immediate or future adverse tax impact. Nevertheless the vendor may be indifferent to a higher allocation to depreciable property if: 1) the vendor has significant losses, loss carry-forwards or other write-offs and will not be taxable currently, 0r 2) the vendor is a non-taxable entity such as a registered charity or registered pension fund.

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Searches and Investigations*See PLTC page 44

A. Reporting Results to the Client [5.2]

When all searches and investigations have been made, the lawyer should report to the client as follows: confirm that the searches were done, summarize the results, and advise the client of the matters that remain outstanding and of the searches that will not be conducted unless otherwise instructed.

II. Matters Affecting or Noted on Title to Property [5.3]

The primary role of counsel is to ensure that the parties receive what they bargained for under the purchase contract and to explain to the clients their obligations under the purchase contract. The purchaser must obtain title without any charges other than those the purchase has agreed to assume; the vendor must deliver title in accordance with the purchase contract in order to obtain the sale price. A search at the land title office may not disclose all matters that affect title; matters that are disclosed may need follow-up inquiries.

A. Matters not Noted on Title [5.4]

1. Land Title Act, Section 23 [5.5]

Section 23 of the Land Title Act lists exceptions to the indefeasibility of the vendor’s title that ultimately will encumber the title to be issued to the purchaser. These matters are important to both purchaser’s and vendor’s counsel because the existence of statutory charges may put the vendor in breach of his or her obligation to deliver clear title. Note that the Contract of Purchase and Sale releases the vendor of the obligation to deliver title free from some, but not all, of these charges. The following investigations should be performed for s. 23 charges – 1) municipal charges, rates or assessments: a written statement of outstanding taxes and arrears must be obtained. In most areas this can be obtained from the local municipal office or city hall. If taxes for the current year have not yet been levied they can be estimated by checking the previous year’s taxes. Inquiries should also be made as to whether any local improvement taxes or similar charges have been established or are being established for the subject property. 2) Leases or agreements to lease for a term not exceeding three years when there is actual occupation of the property – the client must be advised that such leases are exceptions to clear title under the Land Title Act. The client must determine whether such tenancies exist. If there are such tenancies, but the purchaser is to be provided with vacant possession under the contract, the vendor should be advised to ensure that appropriate steps have been taken to provide vacant possession. If the property is subject to a lease, the client should ask the licensee or vendor whether there is a written lease, any damage deposit, the date of the last rent increase, whether tenants pay utilities and whether the suite is an “illegal suite”. Information about the legality of a suite can be obtained by the client from the relevant city or municipal authorities. 3) Incorrect boundaries – the land title office does not warrant the accuracy of plans filed with the land title office. If the client is concerned, or the lender requires it, a survey should be ordered to locate the boundaries of the property. 4) Other section 23 charges – In most cases, it is not necessary to make further investigations of other s.23 charges unless the events

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surrounding the transaction, such as the identity of the parties, the location or the history of the property arouse suspicion or the purchaser wants to obtain title to resources. If the lawyer has not undertaken such additional searches, the client should be advised of such.

2. Statutory Liens and Work Orders [5.6]

a. Statutory Liens [5.7]

There are no reported cases in which statutory liens have affected title to residential property once title has been issued to a bona fide purchaser for value without notice. If a non-developed or an individual is selling residential property, a statutory lien search is not normally necessary. If however, a builder or corporation is selling commercial property, it is wise to conduce at least the following searches: 1) Workers Compensation Boards regarding unpaid assessments, 2) social service tax – HST or GST etc, 3) corporation capital tax, 4) employment standards regarding unpaid wages.

b. Work Orders [5.8]

A variety of provincial statues entitle government authorities to order that remedial work to be carried out, primarily in the areas of health and safety. Outstanding work orders become the purchaser’s responsibility after closing, unless the purchase contract provides otherwise.

3. Unregistered Builders’ Liens [5.9]

Unregistered builders’ liens may arise as a result of work performed on the property at the request of the vendor or a tenant, however the purchaser may not become aware of them until after the transaction is completed. The purchase contract may indicate whether such liens could arise. Inquiries should be made of the purchaser as to whether the property has been newly constructed or renovated. If there is any possibility that there are unregistered builders’ liens at the time of completion, the purchaser should be advised of the risks involved. If the contract does not specifically allow for a holdback, the purchaser is not entitled to a builders’ lien holdback, except in the case of a purchase of a strata lot. The vendor or the vendor’s builder should be asked to sign a statutory declaration confirming that the lien period has expired or specifying the date on which it will expire. The purchaser should be advised of the risk of the vendor swearing a false declaration.

4. Personal Property Security Act [5.10]

The PPSA creates a single Personal Property Registry. Consider searching the registry to determine whether any financial charges have been granted by the vendor over personal property being purchased by the purchaser. Though security interests in fixtures generally will be registered against the title to the land by filing a notice with the land title office, security interests in fixtures generally will be registered in personal property (ex: refrigerators, water licenses) and need not be registered in the land title office.

5. Leases of Less than a Parcel of Land [5.11]

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It is not unusual to see leases of a portion of a parcel of land, particularly in commercial transactions. Section 73 of the Land Title Act prohibits the subdivision of land for transfer or lease for more than three years except for subdivisions for the purpose of leasing a building or part of a building. If acting for a party purchasing a property that includes such a lease, the purchaser should be advised of the possibility that such a lease creates no rights at all and that the tenant may cease to honour the lease. Similarly, the purchaser may elect not to honour the lease.

B. Matters Noted on Title [5.12]

1. Charges to be Discharged After Closing [5.13]

It is important to clarify at an early date whether the vendor or the purchaser has responsibility for discharging any charges. Review the purchase contract to determine if it provides for who will be clearing title and whether the sale proceeds may be used to clear title. Although it is common practice for the purchaser to attend to discharging financial encumbrances, the purchase contract often requires the vendor to deliver title clear of financial encumbrances. The Contract of Purchase and Sale provides that the closing will be carried out pursuant to the CBA standard undertakings, allowing undertakings to be used on closing, with the vendor’s lawyer using the sale proceeds to clear title. A purchaser’s lawyer who accepts an undertaking from the vendor’s lawyer to discharge a mortgage on the property, contrary to the terms of the contract of purchase and sale, and without appropriate instructions, may be in breach of his or her retainer. The purchaser’s lawyer may be liable for damages if the vendor’s lawyer fails to fulfil that undertaking. If a charge is to be discharged or modified, the charge holder must be contacted for information such as the payout balance and any other requirements to obtain a discharge. Regardless of who obtains this information, it must be current, in written form and addressed to the party who intends to rely on it.

2. Charges to be Discharged Before Closing [5.14]

a. General [5.15]

The lawyer is responsible for reviewing title and ensuring that all charges not excepted in the purchase contract are removed. Financial charges by large institutional lenders commonly are paid out and discharged after transfer of the property, with the purchaser’s agreement. However, discharges from individuals or small institutional lenders should be obtained before closing and re required to be obtained when the CBA standard undertakings are used. Similarly, charges under the Land Tax Deferment Act may be paid out and discharged using the sale proceeds. However, the lawyer clearing title must provide the land title office with a copy of the letter confirming payment of the tax by the lawyer to the Minister of Finance, which is to be submitted concurrently with the transfer. In addition, the following charges must be removed before completion subject to the terms of the individual contract: 1) certificate of pending litigation, 2) caveats, 3) entries under the Land (Spouse Protection) Act, 4) tax sale notices, 5) unpaid maintenance fees under the Strata Property Act, 6) rights of first refusal, 7) fixtures notices registered against title or on behalf of a secured party who holds a security interest over the fixtures. Because these charges must normally be removed before completion, the vendor may not be able to use the purchase funds for payout. The vendor should be advised of his or

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her obligations well in advance of the completion date so that satisfactory undertakings can be settled or bridge financing arranged if necessary.

b. Certificate of Pending Litigation [5.16]

At common law, filing a certificate of pending litigation is merely notice to the world and a notice given after the transaction of purchase has been completed cannot affect the title of an honest purchaser. However, under the Torrens system of land registration, the certificate of pending litigation effectively closed the register to further entries. The Land Title Act codifies the common law doctrine of certificate pending litigation with the addition of ss. 216 and 217. The effect of the amendments is to “freeze” the register if a certificate of pending litigation has been registered, except in certain circumstances such as: 1) when an instrument expressly conveys subject to the certificate of pending litigation; 2) when the applicant elects to proceed subject to the certificate of pending litigation and authorizes the registrar to proceed. The second alternative is safer, as it avoids any question about the extent or sufficiency of the transfer and generates a title free of any reference to the litigation after the litigation has been resolved. With respect to prior applicants, the amendments provide that: 1) subject to (3), a prior applicant registers free of the certificate of pending litigation unless named as a defendant; thus the registrar must complete the registration of a transfer or charge claimed by a prior applicant and then cancel the registration of the certificate of pending litigation, 2) if named as a defendant, a prior applicant registers subject to the certificate of pending litigation, but 3) in matters of foreclosure, family relations and wills variations, a prior applicant registers subject to the certificate of pending litigation whether or not he or she is named defendant.

c. Release of Certificate of Pending Litigation [5.17]

Section 252 of the Land Title Act permits a broad class of persons to apply for an order cancelling a certificate of pending litigation if no step has been taken for one year in the proceeding in which the certificate of pending litigation was registered. Unless the proceeding dealt with in the certificate of pending litigation relates to: 1) a charge or 2) an action under the Wills Variation Act, the prior applicant is provided with a summary procedure for a court application to cancel the certificate. If the court is satisfied that there is no allegation that the owner or charge holder is not a bona fide purchaser for valuable consideration, it may make an order declaring that the applicant’s title or charge is not affected by the certificate of pending litigation.

d. Tax Sales Notices [5.18]

A municipal taxing authority may file a tax sale notice against title to land under s.272 of the Land Title Act as a result of an actual sale to a third party, subject to a right of redemption or simple to commence the formal tax sale process. The Land Title Act contemplates only two methods of removing a tax sale notice: 1) by filing notice of redemption under s. 273 if the land has been redeemed or 2) by filing a certificate of non-redemption to register a third-party purchaser as the owner under s. 276. The legislation enabling tax sales seems abundantly clear in preserving the taxing authorities’ lien for unpaid taxes in any event until the taxes are actually paid.

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e. Government Second Mortgages [5.19]

If a government second mortgage is to be discharged, write immediately to the Ministry of Finance and Corporate Relations for a payout statement. A copy of the letter paying out the mortgage must be submitted to the land title office concurrently with the transfer.

f. Judgements and Builders’ Liens [5.20]

If a judgement or builders’ lien is to be discharged, the lawyer acting for the judgement creditor or lien claimant must be contacted to obtain the payout balances and to arrange for the exchange of discharges and undertakings between counsel.

j. Conditional Sales Contracts [5.21]

Under the former Sale of Goods on Condition Act, it was possible for a conditional vendor to protect a security interest in a fixture by registering a notice in the land title office. The Personal Property Security Act repealed the previous Act but deems the existing notice to be filed under the Personal Property Security Act for the unexpired portion of the filing. A security interest in a fixture may be registered under the Personal Property Security Act both at the Personal Property Registry and at the land title office. If the purchaser is to obtain title to the fixture free of the security interest, appropriate arrangements must be made with the holder of the security interest.

3. Charges to be Assumed [5.24]

a. Non-financial Charges [5.25]

The purchase contract may provide that certain charges, such as easements, rights of way, restrictive covenants and building schemes will remain as charges against the title to the property. The Contract of Purchase and Sale lists as permitted encumbrances “registered or pending restrictive covenants and rights-of-way in favour of utilities and public authorities”. It does not permit similar charges in favour of parties other than utilities or public authorities. The purchaser’s counsel should obtain copies of these documents, including plans showing rights of way and easements. If the owner of the property has ongoing maintenance obligations to third parties under these charges, confirmation of compliance should be sought from these third parties. Information may be obtained from the municipal authorities about land use contracts, development permits, building permits, occupancy permits and encroachment agreements. The purchaser must be advised of the nature and extent of all charged being assumed, keeping in mind that some non-financial charges may be modified or cancelled. The purchase should be advised about: 1) the obligations imposed on the purchaser by the non-financial charge, 2) the likelihood of enforcement of those obligations, 3) the anticipated cost of effecting cancellation or modification, and 4) the risk of alerting an otherwise dormant chargeholder. The purchaser’s instructions must be obtained with respect to further action to be undertaken on his or her behalf.

b. Financial Charges [5.26]

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The purchaser’s lawyer must obtain as much information as possible on the financial encumbrances being assumed. The vendor or the title search can confirm where this information may be obtained. The information must be current, written and addressed to the purchaser’s lawyer to entitle the purchaser’s lawyer to rely on it. If a mortgage is being assumed, the confirmation letter should state the current balance, the amount of monthly payments, the due date, the balance in any property tax account and the current interest rate. Arrangements must be made to ensure that the last payment has cleared. If the mortgage is assumable only with the lender’s consent ensure that consent has been obtained. If a vendor’s mortgage is being assumed, the vendor’s lawyer should advise the vendor of his or her ongoing obligation to the lender and the potential right to end that obligation under the Property Law Act.

4. Special Notations on Title [5.27]

Title to the property may be subject to other notations; some may affect the use of the property and some may involve financial obligations. Some common non-financial encumbrances are: 1) heritage destinations, 2) agricultural land reserve, 3) filings under the Aeronautics Act. It is not mandatory for notices to be registered on title for these statues to apply, therefore the appropriate inquiries should be made if there is any doubt as to their existence.

C. Duplicate Titles [5.28]

If the duplicate title is not in the land title office, its location should be determined immediately because an application for a replacement duplicate certificate of title can be time-consuming.

III. Matters that May Affect Use of the Property [5.29]

A. Property Taxes and Utility Accounts [5.30]

The state of account with local authorities and utility companies must be investigated to ensure that the proper financial adjustments are made between the vendor and purchaser and that the property continues to be serviced by these utilities. Inquiries should be made of the local municipality or city hall with respect to water, sanitary services and garbage collection.

B. Bylaw Compliance [5.31]

In a residential conveyance, the purchaser’s counsel does not normally perform searches with respect to bylaw compliance, although counsel for the purchaser’s mortgage company may carry out these investigations. However, such searches should be conducted if commercial property is being conveyed. In either case, the client should be informed if such searches are not going to be conducted.

C. Encroachments [5.32]

In most cases, encroachments will become evident if a lender requires a survey certificate. However, in vendor-financed or assumed-mortgage transactions, such a certificate may not be required and it may be impossible for the purchaser’s lawyer to determine physically if there are encroachments. The purchaser should be advised of the consequences of not having a survey done and that a survey

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certificate should be obtained if there is any doubt. A letter of comfort from the municipality indicating that no action is contemplated is usually sufficient to satisfy the lender’s requirements. A survey previously made by the vendor may be acceptable to the lender if accompanied by the vendor’s statutory declaration that no alterations have been made since the date of the survey.

D. Heritage Designations [5.33]

The possibility of an unregistered heritage designation exists only in rare cases involving residential property. If the age or other special features of a building raise any suspicions or concerns about heritage status, an inquiry should be made at the appropriate municipal office.

E. Environmental Searches [5.34]

In recent years the risk of environmental liability for real property has increased significantly. The presence of contamination may severely affect the value of the property. It is unusual for environmental searches to be carried out in the purchase of residential properties. However if anything indicates possible contamination or any environmental hazard, the purchaser’s lawyer should raise the possibility of environmental liability and seek instructions from the purchaser with respect to conducting an environmental investigation.

1. BC Ministry of Environment [5.35]

This search is performed by making an information request to the regional office of the Ministry responsible for the site. The Site Registry also contains information about contaminated sites. It is maintained by a registrar and contains information on site profiles, preliminary or detailed site investigations, orders, approval, remediation agreements and other records concerning contamination.

2. Municipalities [5.38]

For certain types of environmental concerns, municipalities may have work orders under local bylaws or provincial laws. There may or may not be obtained as part of routine due diligence.

3. Metro Vancouver [5.39]

For properties located within the Grater Vancouver Regional District, questions about air emissions should be directed to Metro Vancouver.

4. Environment Canada [5.40]

Information requests about federal lands and federal matters may be made to the local office of Environment Canada.

5. Fisheries and Oceans Canada [5.41]

Information requests can be directed to the Vancouver office of the Habitat Management Unit of Fisheries and Oceans Canada. They will advise if there are any habitat remediation orders with regard to the property.

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F. Archaeological/Heritage Sites [5.41A]

The Heritage Conservation Act provides the framework under which archaeological and heritage sites are registered and regulated. If a property is determined to be a heritage site, certain consequences flow from this – development of the property may be limited and the owner may be required to seek a permit from government for making any changes. The owner may also be required to pay for certain archaeological or heritage studies in conjunction with obtaining a permit. The heritage designation of a property should appear as a legal notation on title to the extent that the heritage designation is derived from a municipal bylaw, however there is recourse to the assurance fund if such a notation is absent or contains an error.

IV. Other Matters [5.42]

A. Deposits and Real Estate Commissions [5.43]

The purchaser’s lawyer should confirm the deposit and the party to whom it has been paid. Counsel also should determine whether the deposit bears interest, to whose credit interest is applied, the amount of real estate commission and applicable GST/HST payable and the additional monies required to pay the commission. Normally, a sales record sheet containing this information will be provided to the purchaser’s counsel by the vendor’s licensee. The vendor’s lawyer should have the vendor confirm the amount of commission because “deals” are sometimes made. If further sums are required to pay the commission, the vendor’s authority is needed. This authority is usually set out in the vendor’s statement of adjustments. In the event of a dispute, it is the vendor’s obligation to pay the commission and the purchaser’s lawyer should advise the vendor’s lawyer and the licensee that he or she will not be involved in that dispute.

B. Status of the Vendor [5.44]

A number of matters may require investigation depending on the circumstances

1. Capacity of Parties [5.45]

The purchase contract may have been signed by someone other than the registered owner under a power of attorney, as an agent, or as an executor, administrator, committee or receiver. Because this may cause problems on the closing date, the registrability and power of the parties must be examined closely. Copies of the empowering documents must be obtained to ascertain whether they authorize the acts of the signatories, whether they are in registrable form and whether title must be transmitted before transfer. Consider whether a Bankruptcy and Insolvency Act search is appropriate, as it is the trustee in bankruptcy who will be empowered to execute documents if the owner is involved in bankruptcy. It is prudent practice to determine whether the corporate purchaser or vendor has been incorporated prior to execution of the purchase contract and if not, to ensure that it is.

2. Residency [5.46]

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The purchase contract usually contains a declaration that the vendor is a resident of Canada. If this is completed in the negative, if the vendor’s address on title or on any purchase contract is an address outside of Canada or if the agreement is signed by a third party on behalf of the registered owner, further investigations should be made by the purchaser’s counsel to avoid the ramifications of s. 116 of the Income Tax Act. These investigations should be directed to the real estate licensee or the vendor’s counsel and unless a satisfactory clearance certificate is obtained by the CRA, the purchaser should hold back the required percentage of the purchase price to avoid liability.

3. Vendor’s Marital Status [5.47]

Section 56 of the Family Relations Act provides that on the happening of certain events, each spouse was entitled to a one-half interest in each “family asset”. S.81 of the Family Law Act provides generally for equal entitlement of both spouses to “family property” and equal responsibility for “family debt”. If the title search indicates that title is in the name of one part and the purchaser knows that the vendor is married, the purchaser should be asked whether he or she knows anything of the status of the vendor’s marriage. In some situations, it may be appropriate to consider seeking the purchaser’s instructions to approach the vendor’s spouse for written consent to the sale. If title is held by both spouses but the contract of purchase and sale has been signed by only one spouse, it is unlikely that a valid contract exits unless the contracting spouse has some authorizing power.

4. The Vendor as “Developer” [5.48]

If the property has been developed recently, the purchaser’s lawyer should determine whether a disclosure statement as required under s.3 of the Real Estate Development Marketing Act has been delivered to the purchaser. If none has been delivered, the purchaser’s counsel should demand a copy and review it with the client.

5. Corporate Vendors [5.49]

A corporate vendor need not supply a purchaser with a directors’ resolution confirming approval of the sale except in uncommon circumstances in which a company’s articles preclude the sale of land without a resolution. A purchaser is entitled to rely on the binding effect of the original agreement and on the proof of execution appended to the transfer. Some inquiry should be made however as to whether the sale constitutes a sale of substantially all of the assets of the company, which requires a special resolution of members. The vendor’s lawyer should satisfy the purchaser’s lawyer of this by opinion or by providing a certified copy of the members’ resolution. If there is uncertainty as to the signing officers and their authority, a company search may provide more information or a statutory declaration could be obtained from one of the officers and their authority, a company search may provide more information or a statutory declaration could be obtained.

C. Insurance [5.50]

The purchaser should be advised to arrange for insurance coverage and to determine the lender’s requirements. The lender’s insurance requirements are usually well documented. In most cases, it is

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sufficient to obtain a binder or cover note confirming that insurance has been placed and specifying the insured, the property coverage, the insurer and the loss payee. A “standard mortgage” clause is usually required by the lender to ensure that any mishap caused by the owner’s negligence is insured. Mortgage lenders usually require that insurance coverage be effective on the completion date. Accordingly, the purchaser should be advised to arrange for insurance from and including, the completion date.

D. Status of the Purchaser [5.51]

Advise the purchaser about the possible methods of ownership – personal versus corporate, tenants in common versus joint tenancy.

E. Physical Inspection [5.52]

If the purchase contract permits inspection, the purchaser should be advised to visit the property close to the possession date to ensure that no improper removals or alternations have been made by the vendor. It is doubtful, however, that the discovery of a missing stove on closing day will be sufficient grounds for refusal to complete. It may be necessary to proceed to court for a remedy.

F. New Financing: Common Requirements of Lenders [5.53]

1. General [5.54]

The lawyer should obtain and review the lender’s commitment letter as soon as possible (preferably before acceptance by the purchaser) to make certain that the terms reflect the purchaser’s understanding of the agreement and that arrangements for satisfying all conditions as being made. If the commitment letter does not reflect the agreement or is unclear on any issues, the lender must be notified of the discrepancy at the first opportunity and an appropriate amendment executed and delivered. The legal and related loan documentation must be completed, approved and executed. The purchaser’s lawyer should review all security documentation to make sure that it is consistent with the agreement as set forth in the commitment letter. The lender must be made aware of the deadlines that must be next. If it becomes necessary to extend closing, the purchaser’s lawyer must ensure that the extension does not exceed the commitment expiry date. The parties must agree on who is responsible for satisfying various conditions.

2. Removal of Financing Subject Clauses from Purchase Contract [5.55]

If a purchaser’s obligation to complete is made subject to the purchaser obtaining financing and the purchaser should be satisfied that all the lender’s conditions have been satisfied that all the lender’s conditions have been satisfied and approvals obtained before giving notice of satisfaction or waiver of that condition. At the very least, the purchaser should be satisfied that the lender’s conditions can be satisfied and approvals can be obtained. The purchaser’s lawyer is concerned not so much with the number of conditions imposed by the lender but with the expression of those conditions in a way that the purchaser can satisfy. For example, lenders have been known to request “insurance satisfactory to lender” in their commitment letters. This causes difficulty because it makes it difficult for the purchaser

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to know in advance whether they can satisfy such a condition. The purchaser’s lawyer should require the lender to sign off or formally approve or withdraw conditions that are unreasonable or uncertain.

3. Lender’s Commitment to Fund [5.56]

Either by amendment or by “side” letter, the lender should commit to fund or to deliver net proceeds to the lender’s lawyer for release upon the satisfaction of lending conditions. In the latter case, the purchaser’s lawyer should obtain the undertaking of the lender’s lawyer for release upon the satisfaction of lending conditions. In the latter case, the purchaser’s lawyer should obtain the undertaking of the lender’s lawyer to release those funds concurrently with the other elements of the completion such as upon receipt of a satisfactory post-filing search. Regardless of how the lender’s commitment is structured, the purchaser’s lawyer should attempt to obtain the lender’s unequivocal confirmation of the satisfaction of lending conditions in order to rely on the availability of borrowed funds at closing. In every case, the lawyer must advise the client of the possibility that the lender may refuse to advance funds.

4. Form of Mortgage Documentation [5.57]

The form of mortgage documentation is often non-negotiable with an institutional lender. However, the borrower’s lawyer must be satisfied that the documentation conforms with the business terms already agreed on and that any unusual provisions such as more frequent payment terms, prepayment privileges or penalties are reviewed with the borrower. The lender’s lawyer will want to inspect copies of the transfer documents and other applications which will precede the mortgage security in order to be satisfied as to their accuracy and consistence with lending documentation, their registrability and their possible effect on the security. If secondary financing is involved, this should be disclosed to the lender’s lawyer at the outset, as a last minute disclosure of this fact could delay funding or constitute breach.

5. Fees and Other Financing Costs [5.58]

The lender’s lawyer should identify all costs associated with the loan for loan approvals, inspections, surveys, appraisals, interest adjustment, legal fees and disbursements and holdbacks, if any, and specify the net loan proceeds available at closing. The purchaser’s lawyer should be able to comment on the reasonableness of the lender’s lawyer’s fees and to negotiate the fee, if necessary. The borrower should be encouraged to review the matter with the lender if the fees are unreasonable. In larger transactions, it is becoming more common for the borrower to request that the lender obtain two or more quotations for legal fees.

6. Builders’ Lien Holdbacks [5.59]

If the lender requires a builders’ lien holdback, the amount must be determined and satisfactory arrangements must be made with the vendor’s lawyer about the acceptability of the amount and the conditions of the release of the funds. For new construction, lenders typically insist on withholding an amount and often base the holdback on the loan amount. AS there is no absolute right on the part of

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the purchaser to retain a holdback in the absence of an agreement, the lender’s holdback requirement may leave the purchaser with insufficient funds to complete the purchase. This can be avoided by negotiating a holdback from the vendor in the original purchase contract. If the purchase contract has already been executed, the purchaser’s lawyer should identify this issue as a possible impediment to completion and attempt to negotiate an amendment to the contract.

7. “Opinions” or Proofs of Authority [5.60]

“Opinions” as to the authority to act of a corporate borrower, guarantor, partnership, trustee or other non-person are often requested by lenders. The form and content of opinions vary widely and are often a source of difficulty and delay as well as potentially increased costs. Consensus is developing however that such opinions or requirements should be confined to proof of incorporation, good standing and to due authorization, execution and delivery of the documents required.

IV. Money Laundering Reporting Requirement [6.18A]

This legislation imposes requirements on real estate developers to report where there are reasonable grounds to suspect that a transaction or an attempted transaction is related to the commission or attempted commission of a money laundering offence or a terrorist activity financing offence. Real estate developers must report if they come to know or believe that any property in their possession is owned or controlled by or on behalf of a terrorist or a terrorist group. Large cash transactions involving amounts of $10,000 or more must be reported. Real estate developers are also required to implement a compliance program in order to manage the reporting and record-keeping requirements.

The provisions of this legislation should be considered carefully by purchasers of applicable properties to ensure compliance. Non-compliance may result in criminal penalties including fines of up to $2,000,000 and up to five years’ imprisonment or administrative penalties including fines of up to $500,000 for entities and up to $100,000 for individuals.

V. Environmental Matters [6.19]

Environmental considerations, while important in residential transactions, are not usually as prominent or complex as they can become in commercial transactions. Liability and recovery of costs for remediation obligations, and liability for damage from the discharge of contaminants, is often the focus of very detailed due diligence and negotiation in larger commercial transactions. In many cases, independent consultants are retained to determine the appropriate scope of environmental investigation, and specialized counsel may be involved to deal specifically with the legal aspects of environmental matters

A. Representations and Warranties [6.20]

The vendor and purchaser have competing interests in negotiating environmental clauses. The vendor’s ideal is to sell the property for the highest possible price without any continuing liability. In contrast, the purchaser wishes to pay fair market value for a property that is free of contaminants and other environmental problems. The purchaser will want the vendor to warrant to that effect and to remain

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responsible after closing should a problem arise. The environmental clauses eventually settled are typically a synthesis of those competing positions.

1. As Is – Where Is [6.21]

This type of transaction contemplates no disclosure by the vendor of his or her information about the environmental state of the property. In this type of transaction, the purchaser acquires the property based on independent investigations only. There are no other representations or warranties. The purchaser may also release (and sometimes indemnify) the vendor for any environmental liability that may accrue to the vendor after the closing date. “As is-where is” transactions generally provide for no disclosure by the vendor to the purchaser and a period of time for the purchaser to determine that it is satisfied with the information and/or the state of the property. The purchaser may be entitled to perform its own investigations. If so, then the vendor should consider requiring the purchaser to provide a copy of any information it obtains through those investigations and to keep the results confidential if the purchaser elects not to proceed. The purchaser should be responsible (through insurance and otherwise) for any damage or claims arising from the purchaser’s testing. It is common for a vendor to require a purchaser to use reasonable efforts not to unduly interfere with the vendor’s operations at the property in carrying out its investigations and to indemnify the vendor from any liability (including builders’ liens) arising from the purchaser’s entry. The agreement should include acknowledgments that: 1) the property is being sold in an “as is-where is condition”, 2) no representations or warranties are made about the condition or suitability of the property, 3) the purchaser is relying on its own investigations and not on the vendor, and 4) if the purchaser elects to proceed with the transaction, then the purchaser is responsible for all environmental matters or claims that may arise. The purchaser may release and possibly indemnify the vendor from claims for environmental liability. This is important from the vendor’s perspective, especially in light of the provisions relating to liability for former owners. Otherwise the purchaser will potentially have a statutory right to make a cost recovery claim against the vendor, even in the absence of a contractual right.

2. Purchaser’s Warranties [6.22]

The purchaser will want to obtain representations and warranties. Consider the following: 1) the property complies with all environmental laws, 2) there are no pending or existing orders or other requirements made by government agencies, 3) the property and, to the best of the vendor’s knowledge, any other adjoining properties, are free of contaminants, hazardous materials or other environmental concerns, 4) all licenses and permits are in force and are current, 5) there have been no spills, discharges or releases of regulated substances on the property, 6) there are no waste disposal sites on the property, 7) there are no environmental restrictions on land or its use affecting the property, and 8) there have been no environmental investigations, charges or prosecutions affecting the property. It is very unlikely that a vendor would agree to continue to be responsible for disclosed or undisclosed contaminants or environmental concerns forever. Therefore, if the vendor is to remain responsible, typically it would be for an agreed number of years and/or up to a maximum level. To eliminate nuisance claims there also may be a minimum claim set, in aggregate or annually.

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B. Indemnities [6.23]

If a purchaser is to rely on a vendor’s representations and warranties over a number of years, an indemnity may be negotiated for government agency and/or third party claims. Such indemnities may contain minimum and/or maximum values for claims, how claims are to be made, what constitutes a claim, and time limits for making claims. In some cases the purchaser seeks to have the indemnity secured, perhaps by means of a holdback, letter of credit, performance bond, and so on. Vendors resist suggestions for security for obvious reasons.

C. Environmental Disclosure [6.24]

Vendors sometimes tend to resist advice to fully disclose environmental concerns to purchasers. Under the doctrine of caveat emptor, it may seem that there is no legal requirement for the vendor to provide any information. However, there is case law that creates exceptions to caveat emptor when hazardous contamination is present in the land and, based on this case law, it may be prudent to advise vendors to disclose fully problems known to them so as not to run afoul of the common law liabilities. In general, the rule of caveat emptor still applies. However, the concept has been eroded by the courts in cases in which the vendor is aware of substantial defects (including environmental problems) but remains silent. Since the 1950s, case law has developed in which claims have been successfully made against vendors by purchasers where the vendor has knowledge of a latent defect (or has recklessly disregarded the problem) and the defect renders the property unfit for habitation or dangerous in and of itself. After completion, the purchaser discovers the problem and that the vendor has knowledge of the problem. The purchaser then claims that the vendor’s failure to disclose the defect amounts to fraud or an error in substantialibus (two exceptions to the rule of caveat emptor). If the vendor makes representations or actively conceals a problem, then it may lead to liability based on fraud or deceit. In some cases, the failure to disclose major defects has led to rescission. However, the case law also provides that if the purchaser relied on his or her own investigations (as opposed to relying on the vendor’s misrepresentations or silence) then there may be no liability if there was no actual reliance on the representation. The case law deals with concerns ranging from cockroach infestation to radioactive waste on a property that was represented as making excellent fill. The vendor is liable for only what it may know. However, the problem is difficult for corporate vendors since operational personnel may be aware of problems that have not been disclosed to senior management. Also, vendors have been held responsible for failing to disclose problems in their general neighborhood, of which they were aware, even though they did not know at that time that the problem affected their property. The extent to which a vendor will have to establish that it provided relevant information will depend on the danger of the problem.

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Undertakings*See PLTC page 95

I. Introduction [9.1]

Chapter 9 addresses the standard practice in British Columbia conveyancing for transactions to close on the basis of an exchange of lawyers’ undertakings. The chapter defines undertakings, discusses the client’s authority, provides guidelines for their use, and discusses specific problems that may arise in a conveyance. In the course of reviewing the contract for the first time, the lawyer should pay particular attention to any agreement the clients may have made about undertakings. If the lawyer cannot give or accept the undertakings contemplated by the contract, this must be discussed with the client immediately to allow time for an amendment, or change of lawyer, if necessary. Undertakings that, in their basic form, are “common” or “usual” are important because they provide certainty and predictability and are the standard mechanisms used to close real estate transactions. For this reason, the profession continues to search for some level of agreement on the appropriate undertakings for the most common transactions. It is professionally irresponsible (and may be a breach of contract) to reduce or simplify the difficulty or complexity of the lawyer’s function at the expense of the client’s best interests. Therefore, it is the responsibility of every lawyer, whether giving or accepting an undertaking, to be satisfied that the proposed undertaking addresses the client’s risk, and addresses the terms imposed by the contract, in sufficient scope and detail, regardless of whether the undertaking conforms with the CBA standard undertakings or some other common or usual model. The lawyer is not the insurer of the transaction; the lawyer’s role is to manage and to reduce the client’s legal risks. Accordingly, any compromise on the form of an agreed-upon undertaking must fall clearly within the client’s agreement to assume a given level of risk. The lawyer’s duty to the client takes priority over the convenience of a generally accepted undertaking, and this principle must guide every lawyer in giving or accepting an undertaking. The sanctity of undertakings is the cornerstone of the legal profession. When used properly, they can expedite and simplify otherwise cumbersome transactions. When used improperly or carelessly, however, they can lead quickly to the discredit of the lawyer personally, and of the profession generally.

II. Undertakings Defined [9.2]

Undertakings serve two basic purposes in real estate transactions: 1) to settle the immediate matters of the delivery or exchange of documents, the registration of documents, and the payment of money necessary to complete the transaction; and 2) to return the parties to their original position or otherwise deal with contingencies if the transaction is not satisfactorily completed. The word “undertaking” does not need to be used expressly in correspondence or discussions for there to be an undertaking that binds the lawyer.

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Strata Lots*See PLTC page 5 for Strata Property Act and page 161 for strata mortgages

A. New Condominium Developments and Conversions [3.60]

A developer is permitted to market strata lots proposed to be constructed or converted from an existing building if the appropriate authority has approved the development or conversion and the developer prepares and files a disclosure statement with the Superintendent of Real Estate. Each prospective purchaser or lessee must receive a copy of the disclosure statement and be afforded an opportunity to review it before entering into the purchase contract (REDMA, s. 15). After signing the purchase contract, the purchaser is entitled to rescind the contract during the ensuing seven-day statutory rescission period (REDMA, s. 21(2)). If no disclosure statement is provided to a purchaser, the purchase contract is not enforceable (REDMA, ss. 15 and 23). If the developer has its construction financing and building permit in place, the developer may offer proposed strata lots for sale under the disclosure statement. If either construction financing or a building permit is not in place, a developer may only offer proposed strata lots for sale under the disclosure statement for nine months. By this time it is required to have obtained its final building permit (Policy Statement 5) and a construction financing commitment (Policy Statement 6) and to have filed an amendment to the disclosure statement with the office of the Superintendent of Real Estate, setting out details of the permit and the commitment. The owner developer is also required to “immediately” file an amendment to the disclosure statement and to provide a copy to each purchaser or prospective purchaser “within a reasonable time” if the owner developer becomes aware that the disclosure statement does not comply with REDMA or the regulations, or if the disclosure statement contains a misrepresentation of a “material fact” (REDMA, s. 16). Such an amendment must “clearly” identify and correct the misrepresentation or non-compliance (REDMA, s. 16(3)). Material fact” includes: (1) a fact, or a proposal to do something that affects, or could reasonably be expected to affect, the value, price, or use of the development unit or development property; and (2) the identity of the developer (REDMA, s. 1).

B. Property [3.61]

1. General [3.62]

A purchaser of a strata lot acquires the interior of the particular unit, an undivided interest in the common property, and the right to use an limited common property allocated to the strata lot. In some cases, the conveyance will also involve other rights, such as a lease of license giving the purchaser the right to use a particular parking stall or storage locker. Therefore, it is necessary to identify the proportionate share of the common property, the limited common property and the nature of any other rights being acquired. The following documents should be obtained and reviewed at the time of reviewing the purchase contract: 1) disclosure statement, including all amendments, 2) bylaws of the strata corporation, 3) sales promotion material and 4) the strata plan if available, including all sheets depicting the applicable strata lot, the parking facilities and bylaw amendments.

3. Parking and Storage [3.64]

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Purchase contracts often indicate that on the completion date the vendor will provide the purchaser with one or more parking stalls. Developers use a variety of mechanisms to allocate parking stalls to purchasers, including: 1) by designating them as limited common property on the strata plan, 2) by causing the strata corporation to pass a special resolution designating them as limited common property and filing that resolution with the LTO, 3) by granting a long-term lease of the stalls in favour of a related entity and then having that entity assign the lease to purchasers, 4) by causing the strata corporation to grant a long-term lease in the same manner or 5) by causing the strata corporation to grant a parking stall license or exclusive-use agreement to each purchaser.

4. Form of Purchase Agreement [3.65]

Generally, the form of purchase contract for a condominium is dictated by the vendor. The contract is often embodied in the pre-printed form, leaving only the business terms, such as price, deposit and conditions precedent to be negotiated by the parties. The form of purchase agreement to be used must be attached to the disclosure statement if the owner developer wants to market the units before the developer has obtained its building permit or financing commitment. The objectives of the purchase contract, from the vendor’s perspective, other than simply to establish the bare obligation of the purchaser to purchase the strata lot are: 1) to ensure that the purchaser remains obliged to complete the purchase even though the development or the strata lot itself, as constructed, varies somewhat from what was described in the original disclosure statement and 2) to retain control of the closing date and the closing procedure. Therefore, the purchase contract will generally contain language that permits the area of the strata lot and certain design features to change or permit the owner developer to substitute materials as long as they are of an equal or better quality. The closing date will usually be determined with reference to the date on which the strata lot can be occupied and title has been raised.

1. Strata Property Act Matters [5.64]

a. Schedules [5.65]

The strata plan and schedules may be obtained from the land title office. These documents will disclosure the following information: 1) site plans showing the location of, or buildings containing strata lots, common property and their dimensions, 2) the common property that has been designated as limited common property for the exclusive use of a strata lot owner, 3) charges on the common property. 4) bylaws, including restrictions on the use of the strata lot, 5) unit entitlement, interest on destruction, 6) whether it is a phased development.

b. Strata Property Act – Form B (Information Certificate) [5.66]

The purchaser’s lawyer should request a Form B (Information Certificate) under s. 59 of the Strata Property Act from the strata corporation. This section provides that a strata corporation must disclose certain details about the corporation’s expenses, bylaws, contingency reserve fund, and payment of monies by an individual unit owner. Information that should be requested includes: 1) whether all monthly assessments are paid up-to-date, and, if not, whether the vendor’s counsel should be put on notice to pay them, 2) whether any special assessments are unpaid or imminent, 3) the amount in the

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contingency reserve fund, and 4) whether there are any amendments to the bylaws as they appear in the strata plan and schedule.

c. Form F (Certificate of Payment) [5.67]

The purchaser’s lawyer must obtain a Form F (Certificate of Payment) from the strata corporation confirming that all strata corporation assessments are fully paid.

d. Insurance [5.68]

Strata lots are insured in the name of the strata corporation. Evidence of insurance is usually in the form of a rider to the master policy showing the owner and the lender as loss payee for the specified strata lot. The owner of the strata lot is not named as an insured but as the person entitled to share in proceeds of the insurance in proportion to his or her interest upon destruction. In many cases the strata corporation should be contacted to obtain the “cover note” or rider. The purchaser should, however, be advised to obtain separate insurance for the contents of the strata lot and for any additional improvements to the unit. Many condominium projects in British Columbia consist of bare land strata lots created by filing a strata plan which delineates only the lot lines and not buildings or other structures. In these cases the residential premises are built simply as an improvement and the strata corporation is not obligated to obtain and maintain insurance on these buildings. Accordingly, the client should be alerted to the need for full property (fire) insurance identical to single family residential coverage. In many cases the strata corporation does, in fact, obtain and maintain insurance as agent of the individual owners. If so, there should be evidence of the strata corporation’s authority to do so in the bylaws, and the strata corporation should provide a true copy of the policy to the purchaser.

h. Strata Lots to be Leased by the Purchaser [5.72]

An owner who leases his or her strata lot for more than one month must give the strata corporation the undertaking in Form K (Notice of Tenant’s Responsibilities) of the Strata Property Act, s. 146. This undertaking, to be signed by the tenant and the landlord, deals with compliance by the tenant and all other occupants with the Strata Property Act and the strata corporation’s bylaws, rules, and regulations.

i. Restrictions on Leasing [5.73]

Since its adoption, the Strata Property Act has permitted residential strata corporations to adopt rental restriction bylaws. Developers of residential strata lots have long been required by s. 139 of the Strata Property Act to file a rental disclosure statement with the Superintendent of Real Estate, in which they disclose if they intend to rent any of the residential strata lots they are developing. Typically, when completing the rental disclosure statement, developers would reserve the right to rent out any or all of the strata lots for an indefinite period or for a stated period of years. This was done for two reasons: 1) to appeal to the concerns of investor buyers who wanted to rent out the strata lot and avoid rental restrictions subsequently adopted by the strata corporation; and 2) to address the concerns of the developer’s lenders who wanted to ensure that if the project encountered problems, and the lender either took title to the strata lots or sold them through the foreclosure process, the strata lots could be

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rented out. Under the Strata Property Act prior to the amendment, if a strata lot owner purchased the strata lot directly from the developer and a valid rental disclosure statement was filed with the Superintendent, that filing preserved the first buyer’s right to rent the unit until the expiry of the rental period specified in the rental disclosure statement, notwithstanding the adoption of rental restrictions by the strata corporation following the initial purchase. With the adoption of the SPAA, new rules apply to residential strata developments where the rental disclosure statement is filed with the Superintendent on or after January 1, 2010. If a strata corporation adopts a rental restriction bylaw, the bylaw will not apply to any strata lot where the developer filed a rental disclosure statement until the rental period specified in the rental disclosure statement expires. The number of subsequent owners of the strata lot is irrelevant, with all subsequent owners being able to rent out their strata lots until the rental period expires. In other words: 1) for residential strata lots where the rental disclosure statement was filed before January 1, 2010, any rental restrictions adopted by the strata corporation will apply to a strata lot on the earlier of: i) the date the strata lot is conveyed by the first buyer to a new owner, an ii) the date the rental period set out in the rental disclosure statement expires; and 2)for residential strata lots where the rental disclosure statement was filed after December 31, 2009, the number of owners subsequent to the first buyer is irrelevant and the ability of all subsequent owners to rent continues until the date the rental period set out in the statement expires. When buying from a developer, buyers and their real estate agents should always review the disclosure statement filed under the Real Estate Development Marketing Act, S.B.C. 2004, c. 41 and review its provisions relating to rental restrictions, the bylaws, and the rental disclosure statement. Now, they should also focus on the date on which the rental disclosure statement was filed with the Superintendent of Real Estate. If the rental disclosure statement was filed with the Superintendent of Real Estate before January 1, 2010, the old rules apply. If it was filed after January 1, 2010, the new rules apply. When purchasing in the resale market, buyers and their real estate agent should always review any rental restriction contained in the bylaws, as well as the rental disclosure statement. If not available from the seller, a copy of the rental disclosure statement can be obtained from the Superintendent of Real Estate, upon payment of a $38 fee, or the strata management company.

A. Strata Title Issues [7.62]

1. Unit Entitlement [7.63]

Under s. 246 of the Strata Property Act, upon the filing of a strata plan, a Form V (Schedule of Unit Entitlement) must be filed in the general index of the strata corporation which shows the unit entitlement of each strata lot. The unit entitlement of a strata lot represents its share of the assets and liabilities of the strata corporation. In a residential strata lot that is a portion of a building, the unit entitlement is usually based on habitable area. The unit entitlement of each strata lot is used to determine the undivided share of each owner in the common property and common assets and the proportion payable by each owner of contributions levied under s. 92 of the Act. The legal description of a strata lot includes a reference to the strata lot’s interest in the common property.

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Closing ProceduresI. Introduction [11.1]

This chapter outlines the steps taken by lawyers and their assistants to complete or “close” a transaction. The chapter is written from the point of view of a purchaser’s lawyer who is involved in a typical residential conveyance. it is assumed that the purchase contract has been settled and any ambiguities resolved, that the appropriate documents and undertakings have been exchanged, that the sequence of closing events has been settled, and that both parties wish to complete.

II. The Terms “Closing” and “Completion” [11.2]

The phrase “closing” is a term of convenience that is used to describe the several distinct registration procedures that must be completed in order to “consummate” the purchase and sale under the purchase contract. A closing may span more than one day and may involve obligations beyond the typical search, application for registration, post-filing search, payment, and reporting features that characterize a typical residential conveyance. For example, the discharge of a financial encumbrance may not occur for several days or weeks following the submission of the principal documents for registration, although it is arguable that a discharge is included in a “closed” transaction. For this reason, the phrase “closing” (or similar references such as “completion”) should be avoided if it is intended to describe a more specific event (for example, satisfactory results of a post-filing search).

III. Using Title Search or Registry Agents [11.3]

Many, if not most, B.C. lawyers engage the services of professional “title search” or “registry” agents to assist in the aspects of a transaction that involve searches or registrations in a land title office. These agents usually maintain permanent offices in or near the three existing land title offices and are familiar with land title practice in British Columbia. Many registry agents will perform EFS and conduct a pre-inspection of electronic documents. Now that EFS filing is required for effectively all transactions in the land title office, and it is possible in most cases for documents to be filed from a lawyer’s office directly, the use of agents is an option but not a necessity. Registry agents are often helpful and reliable when dealing with general matters involving the land title office and in correcting errors in filed documents, as they often have technical knowledge and a relationship with land title office staff. Furthermore, most registry agents carry errors and omissions insurance for the benefit of their principals. Before engaging the services of an agent, it is wise to investigate the reliability of the agent and the limits and terms of the agent’s insurance. Although many lawyers rely on the assistance of registry agents in completing real estate transactions, registry agents are not lawyers and it must be remembered that the lawyer is ultimately responsible for determining such matters as the extent of title searches and for reviewing the title and related documents.

IV. Pending and Final Registration [11.4]

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Registration is completed (i.e, becomes “final” instead of “pending”) when the particulars of the estate or interest have been entered on the title, other than as a pending application. Note that EFS filings result in delivery of a notice of registration to the submitter’s BC OnLine mailbox or email, depending on personal preference. Effectively, all title registrations are now computerized and all pending applications can be determined by referring to the title itself. The difference between a pending and a final registration is significant in that pending registrations may be defected or even in theory completely rejected (although compete rejection is very rare). The distinction should not be overlooked in the completion of a transaction. Undertakings exchanged in connection with a closing often require payment of the purchase price upon the purchaser’s lawyer receiving only pending registration and not final registration, and in most cases final registration follows in due course upon pending registration. However, if there is any uncertainty that final registration will be forthcoming, because of the technical nature of the filing (for example, the registration is conditional upon a complex subdivision), or for other reasons, this distinction should be considered with care. In the case of transfer of an estate in fee simple, the common description of the moment that payment will be made is “upon the purchaser’s lawyer’s receipt of a post-filing search that indicates that upon registration of pending applications in the normal course the purchaser will be the registered owner of the property free and clear of all registered encumbrances except …”. The use of the word “satisfactory” in describing the search is unacceptable to many lawyers because of the discretion implied by the word “satisfactory”. Pending applications revealed by post-filing searches are relied on in almost every residential conveyance in British Columbia. The result is that the purchaser pays the purchase price without having received final registered title to the property. The purchaser has only the opinion of the purchaser’s lawyer to support the release of funds. Arguably, this practice has developed to facilitate payment of purchase proceeds without having to wait for the uncertain time delay which would arise from paying only on final registration, although the risk borne by the purchaser and the purchaser’s lawyer is increased as a result. Note that in some jurisdictions, the practice is to pay out only upon final registration, but in British Columbia the standard practice is to pay out on pending registration.

V. Searches and Registration [11.5]

A. Pre-Filing Search [11.6]

Immediately before documents are tendered for registration, a title search should be conducted to identify whether any non-permitted registrations are on title that are not anticipated in the purchase contract. Although the results of this title search usually do not reveal any such additional registrations, it is possible that a third party may have applied to encumber the property without the consent or knowledge of either the vendor or the purchaser. The most common of these third-party registrations are probably claims of builders’ lien, caveats, and certificates of pending litigation. If unanticipated registrations are revealed by the pre-filing search, application for registration of any transfer and related documents should not proceed until the registrations are discharged or until appropriate arrangements are made between the respective lawyers to deal with such registrations. As the purchase contract invariably provides for a transfer free of these intervening registrations, it is incumbent upon the vendor and the vendor’s lawyer to deal with the intervening registrations to the satisfaction of the purchaser before application for registration is made. The usual practice is to bring the intervening registrations to

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the attention of the vendor’s lawyer and to delay closing until the charges are dealt with. While the existence of registrations not contemplated by the contract may be a breach on the part of the vendor, the purchaser should be cautious to avoid default by refusing to close if such registrations can be justified by the vendor under the terms of the contract. For example, if the contract permits “rights of ways in favour of public utilities”, a new right of way in favour of an electricity provider may not offend. Under the EFS, it is common for practitioners to perform the pre-filing title search from their offices before filing the documents electronically; it is far less common to involve land title agents. In any situation in which unspecified intervening registrations appear, instructions should be obtained from the client before any arrangements are made by the participating lawyers.

B. Strata Lots [11.7]

A pre-filing search of a strata lot should include the title to the common property of the strata corporation in addition to the title to the strata lot itself. Although intervening applications or encumbrances registered or pending against common property may not have the same direct significance to a strata lot purchaser as they would to a purchaser of unstratified property, the purchaser’s lawyer should review the new charge and, if appropriate, discuss the new charge with the purchaser before the application for registration proceeds.

C. Submitting Documents for Registration [11.8]

Assuming that the results of the pre-filing search are consistent with the purchase contract and the original title search, the transfer and related documents may be submitted electronically for registration under the EFS or, far less commonly, tendered for registration in the land title office if an exemption to electronic filing applies. A typical conveyance requires registration of the following documents: 1) a Freehold Transfer, Form A, 2) a Property Tax Return, 3) a Certificate of Payment, Form F of the Strata Property Regulation. Each EFS application is reviewed after submission by an to determine if it complies with LTSA requirements, and if found defective, the examiner issues a notice declining to register. The applicant has several options as to timing the filing of a submission. EFS permits an option of “Submit Immediately”, which will, as the heading suggests, cause the submission to be made immediately. Alternatively, an option of “Defer” allows the applicant to specify a future date for submission, which can be useful when the applicant wishes to set up the submission well in advance of the closing date. If a submission is deferred, the submission will be processed at 6:10 a.m. on the specified date.

Submissions may be made as a package to ensure that a filing made up of numerous documents (for example, a subdivision, additional charges and transfer) proceeds as a complete filing so that if any component of the filing is defected the entire package is not registered. Such a package is accepted for preliminary inspection by the Land Title Office with a package status of “Queued for Review” and receives an information message describing the review process. Note that it is important to ensure that the documents are indeed inserted into the package and therefore filed in the correct order. A “package” is effectively a set of forms submitted at the same time through the Submit Document Package screen on EFS. Upon submission, each document is endorsed with a serial number that will be recorded on the title as a pending application. EFS submissions are noted on title immediately following

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submission. Fees for each application must be debited automatically from the applicant’s BC OnLine account, along with property transfer tax upon EFS filing. Note that the authorized property transfer tax is generally debited from the requisite account in about two working days.

1. The Electronic Filing System Procedure [11.9]

Section 5(1) of the Property Law Act, R.S.B.C. 1996, c. 377, states, “A person transferring land in fee simple must deliver to the transferee a transfer registrable under the Land Title Act”. This means that the vendor must deliver to the purchaser a registrable Land Title Act Form A Transfer. In practice, the purchaser’s lawyer or notary usually prepares the Form A Transfer for execution by the vendor. The usual first step in any real estate transaction is for the purchaser’s lawyer or notary to conduct a search of the vendor’s title. The next step is to obtain a Form A—Transfer and Property Transfer Tax Return through BC OnLine and complete each form. Once completed, the forms can be locked. The forms are then assigned a version control number. The purchaser’s lawyer or notary transmits the electronic Form A—Transfer to the vendor’s lawyer or notary. The document can be viewed and if changes are necessary, the document can be unlocked and amended. However, a new version control number would be assigned, making the changes apparent to the purchaser’s lawyer or notary. The vendor’s lawyer or notary prints a copy of the Form A—Transfer and attends to execution by the vendor in the usual manner; that is, a paper copy is signed before an officer. The vendor’s lawyer or notary incorporates his or her electronic signature (which is based on a digital signing certificate obtained from the Law Society of British Columbia) into the EFS Form A. This incorporation is a certification by the lawyer or notary: that a true copy of the EFS instrument has been executed and witnessed in accordance with Part 5 of the Land Title Act, and that the true copy or copy of the true copy is in the possession of the person who incorporated his or her electronic signature. The vendor’s lawyer or notary can then electronically forward the Form A—Transfer to the purchaser’s lawyer or notary. EFS software ensures that any alteration or change of an electronic instrument after it is digitally signed will operate to invalidate the electronic signature. Once an electronic signature is incorporated into the Form A—Transfer and Property Transfer Tax Return, the documents can be submitted by any party who has access to BC OnLine. It may be that the Form A—Transfer, Property Transfer Tax Return, and a mortgage may be submitted by the purchaser’s lawyer or notary, the lawyer or notary for the mortgagee, or the agent of either, or the two lawyers or their agents can join in an electronic meet. The forms may be uploaded but not submitted on a date prior to the closing date as described above. The Form A—Transfer can be uploaded and validated but is only formally submitted for registration and received by the land title office once formally submitted under the EFS procedures described above. When the Form A Transfer is received by the land title office, the electronic signature is verified, the submitter’s BC OnLine account is debited for registration fees, and property transfer tax is paid by an electronic funds transfer from the submitter’s designated account. The application is then electronically marked up. After the application is are noted on title as pending, a notice of receipt is automatically sent to the submitter providing the pending number, date, time, and fees debited from the BC OnLine account. The amount of the property transfer tax, if any, will be debited from the account authorized in the PTT form, and advice of same will be included in the notice of receipt. A notice of registration is delivered to the submitter’s BC OnLine mailbox or e-mail depending on the submitter’s preference when the land title examiner has completed

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examination and registration. Where the application is defected, the defect notice is delivered to the submitter’s BC OnLine mailbox or e-mail. Anyone seeking a copy of a filed EFS document will receive an image that is an exact copy of the EFS form immediately following submission. It is possible to submit documents any time the BC OnLine system is available, which is currently from 6:00 a.m. to 10:50 p.m., Monday through Saturday, and from 1:00 p.m. to 10:50 p.m., Sunday.

2. Electronic Signatures [11.10]

When an electronic form is submitted to the land title office with an electronic signature, the system automatically ensures that the electronic signature matches the copy of the certificate on file with the Law Society of British Columbia. As long as the certificate has not been revoked, this authenticates the electronic signature of the lawyer and verifies that he or she is a member in good standing with the Law Society.

D. Concurrent Applications [11.12]

Documents for the same transaction are often submitted on behalf of two or more parties. This is typical in the case of a new first mortgage granted by the purchaser to facilitate the purchase of the property. In this case the purchaser’s lawyer will submit transfer documents and the lender’s lawyer then will submit mortgage documents for ultimate registration without any intervening charges appearing. It is common in residential transactions for the same lawyer to represent both the purchaser and the lender, this is often referred to as a “concurrent” registration. The mortgage is not registrable against the interest of a purchaser who has not yet been registered as the owner of the property or who has not submitted a transfer to become the registered owner. Concurrent applications for registration are employed to provide the lender with assurance that, upon final registration, the mortgage will appear immediately after the transfer as a charge on the title. Concurrent applications will show the same time of application and differentiate the applications by sequential serial numbers.

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Mortgages*See PLTC page 146

There are two characteristics of a mortgage – 1) has an element of personal covenant to repay a loan (contractual part) and 2) it is a conveyance of land for security for that loan. Historically mortgages were transfers of the land to the lender and the lender owned the land until he was repaid. Equity stepped in and provided that 1) even if the borrower had transferred the land to the lender, the borrower gets to stay in possession, and 2) imposed the right of redemption, meaning that even if the borrower loses his contractual right to get the land back, equity will still give you a right to redeem. This concept of equity of redemption has become an interest in the land itself. It means that the borrower owns this right and can sell, transfer or further mortgage it. The interest is less than a fee simple but it is nonetheless an interest in land and in cannot be contracted out of. This interest can only be extinguished by: 1) lapse of time, 2) foreclosure or 3) sale of land to a third party. “Power of sale” is the concept that if the borrower defaults, the lender can sell the land in order to realize on its loan. The power of sale exists in all mortgages in Canada. In BC, this power of sale right does not override equity of redemption. Rather, to exercise your power of sale, you have to go to the courts and the judge will determine how long the redemption is and when the lender can actually exercise the power of sale. The standard redemption period is six months from the date that you appear in court (not from the default). In BC mortgage is reflected as a charge on title and not as it historically was as a transfer of land. Land Tile Act s. 231 says that a mortgage is a charge and less than a fee simple ownership in land. While technically nothing precludes a mortgage from containing words which purport to transfer the land, regardless of the words in the mortgage, BC courts have continued to treat a mortgage as a charge.

A mortgage consists of two parts (LTA s. 255) – 1) Form B (two page form with essential elements: lender, borrower, principal amount, interest rate, due dates) and 2) Contract for the terms of the mortgage: three types of terms: i) prescribed terms and ii) standard terms – most banks, financial institutions, law firms have drafted standard terms. You can file standard terms with the LTO and can refer to them by serial number. If you want to use your standard terms you must provide a copy to the borrower, otherwise the prescribed terms will govern. 3) Express terms – terms that are unique or specific to the transaction. In these cases you attach terms (as Part 2) to Form B (as Part 1) and file them together.

The right to redemption is a right possessed by the mortgagor upon payment of the mortgage to retain legal title to the property. It is fundamental to the idea of a mortgage, can’t have a mortgage without the ability of the borrower to redeem. It arises on entering into a mortgage but can’t be enforced until contractual rights have expired. It cannot be contracted out of and has to be free of conditions, with the only exception being that you pay the money you owe on the mortgage.

Mortgages have been around so long that they have been given special rules of interpretation and enforcement, some of which are codified in statue. Where a mortgage is made pursuant to the Land Transfer Form Act, it allows for use of standardized short form which represents much more detailed terms. For example, it means that there are implied covenants, warranties etc that are brought into the mortgage by virtue of the use of the Land Transfer Form Act.

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There are several statutory provisions that apply to the issuance of mortgages. Provincial statues are not directly applicable to banks because they are federally incorporated but they will nonetheless attempt to abide under them. The Mortgage Brokers Act specifies that all fees and charges have to be disclosed to the borrower by the lender. This includes interest, professional fees, appraisal fees and any other fees and charges. It also requires mortgage brokers to disclose all costs of the loan including any fee the lender may be paying to the mortgage broker. S.16(3) also gives the borrower a 48 hour “cooling off period” after receiving disclosure from the lender, during which he can rescind the mortgage. Lenders need ot be careful of this when they give money to the borrower, because if they rescind within 48 hours and lender has no security in the land to claim against. The SCC also has power under s.17 to review non-compliance with the terms set out in the Act. The Business Practices and Consumer Protection Act also applies to situations where credit is advanced, including mortgages. The BPCPA protects consumers from unconscionable practices and in the context of mortgages, is mostly concerned with the non-disclosure of costs or hidden fees. BCPCA ss. 66(3), 67: On granting credit agreement the creditor must provide borrower with a disclosures statement in writing, that contains the information required by statute and prominently displays that information in a clear and comprehensible manner that the borrower can understand. BCPCA s. 8(3) contains examples of what is considered unconscionable, which is defined broadly in order to protect consumers. The burden of proof is also on the creditor to show that the act wasn’t unconscionable (s.10). Remedies are set out in s.10 and include: revisit the transaction, require an accounting, order full repayment or set the entire transaction aside. Federally, mortgages are dealt with in the Interest Act s.10 which states that if the term of the mortgage is 5 years or more, the borrower gets the opportunity to repay with the only penalty being provided that the pay three months interest. S.6 of the Interest act applies to mortgages on real property that are payable by one of three methods: 1) sinking fund plan: every time you make a payment the fund goes down, 2) blended interest and principal – part of payment goes to interest first, then rest to principal, 3) stipulated repayments – schedule of interest that applies to specific payments. These methods of calculating are deceptive and therefor they are required to provide a statement of what the true interest rate would be if calculated yearly or half yearly. If the lender doesn’t comply with this section, they may get no interest at all. S. 8 of the Interest Act provides that any provision in a mortgage that has the effect of raising the interest rate on money in arrears after maturity date is prohibited. In arrears means when interest rate is triggered due to one of the following: 1) money is not repaid on maturity date, after that date the money is in arrears, 2) if you breach and the bank demands repayment then the principal is in arrears, 3) if you breach and the bank doesn’t demand repayment then only the monthly amount is owed in arrears. You also cannot be forced to pay a penalty because that has the effect of increasing the interest rate. There is also such a thing as a criminal interest rate under CC ss. 347, 347.1 which make it an offence to enter into an agreement for criminal interest or to receive criminal interest. A criminal rate is anything that exceeds 60% per annum and includes anything you are required to pay to get the loan including charges, expenses, fees and fines.

Like any other property interest you can do things with a mortgage. The lender can give away its ownership of the mortgage to anyone with no limitation. Priority agreements reflect the priority of claims based on date/time of registration unless the parties express a contrary intention to this (if owners have an agreement to change priority). The Property Law Act also contains a number of

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provisions that deal with the transfer of a mortgage. S. 21 – in an instrument transferring land subject to a mortgage there is an implied covenant that transferee will make payments under the mortgage and will indemnify transferor for any liability under mortgage. S. 22 – lender has right to take action against the current owner of the fee simple subject to mortgage. S. 23 – where land transferred subject to mortgage, transferor stops being liable under the mortgage unless the lender gives them within 3 months of the expiry of the mortgage. S. 24 - for residential land transferred subject to mortgage – if lender approves the transferee then transferor is free from the personal covenants in the mortgage. S. 31 - consolidation of mortgages; where lender grants multiple mortgages on different properties if one loan goes bad they can enforce them all.

In a default situation the lender has two options: 1) sue for repayment on personal covenant – by statement of claim, or 2) foreclose on the security – by petition. If the borrower has granted a mortgage the only right they still have is the right of redemption, foreclosure is an equitable action that ends the borrower’s right to redeem the property. In BC, you must start a foreclosure by petition. In court, the lender will ask for an order nisi, in this order they want: 1) declaration that the mortgage is in breach, 2) declaration that money is owed (and amount owed), 3( declaration of court as to length of redemption period – length of time they have to wait to sell (presumption is 6 months although court has discretion). At the end of the redemption period, the lender can ask for: 1) order absolute: transfers title of the land to the lender and if granted extinguishes the personal covenant of the borrower or 2) order for sale (more common) – lender gets the right and ability to list for sale, accepts offers and brings offers to court to close (court supervises). Personal covenant still exists here – if sale doesn’t meet the loan value you can go after the borrower. For both orders, the court will make a vesting order which is a final order than changed title. The first mortgagee gets paid out and the remaining money flows down to the lower charges.

Case Law

Royal Bank v Mesa Estates

Words of charge must be used in the agreement if it is the intention of the parties to create a mortgage.

In BC, when an owner deposits a duplicate indefeasible title with a bank, the deposit is generally for one of three purposes: for safekeeping, as security for an undertaking not to sell or mortgage the land until the discharge or release of an obligation to the bank, or to charge the land in favour of the bank, by way of equitable mortgage, as security for the performance of an obligation to the bank. In the case of the second or third purpose, ss. 187, 189 and 195 of the Land Title Act assist the bank in protecting its security. There is, however, no presumption under the Act that the deposit of title deeds with a financial institution creates an equitable mortgage.

Kreglinger v New Patagonia Meat and Cold Storage Co Ltd

A stipulation in a mortgage for a collateral advantage is not invalid provided it imposes a purely personal obligation

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A firm of woolbrokers made a loan to a company carrying on business as meat preservers upon the security of a floating charge upon the undertaking of the company. The agreement provided that for five years from the date thereof the company should sell its sheepskins only to the lenders and should pay them a commission upon sales to others. It was held that the stipulation was a collateral bargain and a condition of the loan and was not invalid as a clog on the equity of redemption.

Prudential Insurance Co of America v Cedar Hills Properties

Action for monies allegedly due under a loan agreement. The plaintiff agreed to lend 6.4 million to the defendants. By the terms of the loan, the defendants were to pay a $8,000 application fee, bear all the legal costs and pay an Interest Rate Standby Fee of $100,000. The standby fee was said to represent consideration for the plaintiff’s reservation of funds and for fixing the mortgage loan interest rate at the time of the receipt of the defendants’ application.

On receipt of the application, the plaintiff’s solicitors advanced the loan monies. None of the funds were ever advanced further to the defendants. Subsequently, the defendants’ were unable to clear title and therefore unable to close.

The loan monies were returned to the plaintiff’s solicitors with interest. The plaintiff sought to recover its legal fees and standby fees. The court held that there was no evidence that the plaintiff could have suffered or did suffer loss

either as a result of the fixing of the mortgage interest rate or the reservation of the funds. Court held that the real purpose of the standby fee is to bind the defendants to the loan

agreement by creating a penalty for breach of the conditions for making the loan. The amount stipulated was extravagant and unconscionable and well outside what could be lost by the plaintiff as a result of the breach.

Canadian Mortgage v Cameron

Section 6 of the Interest Act provides that whenever any principal money or interest secured by mortgage on real estate is, by the same made on the sinking fund plan or any plan under which the payments of principal money and interest are blended, no interest whatever shall be recoverable unless the mortgage contains a statement showing the amount of such principal money and the rate of interest chargeable thereon calculated yearly or half-yearly not in advance.

Held that the provisions of this section are complied with if the facts stated in the mortgage show the amount of the principal and the rate of interest calculated as requires and that a special statement, complete in itself, of such amount and rate is not essential.

Therefore, where the mortgagor covenants to pay the principal and interest in ten half-yearly payments, and to pay interest on the principal, or so much thereof remains due, at the rate of ten per cent per annum and the same rate in arrear, the mortgagee is entitled to the interest.

Raintree Financial Ltd v Bell

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Lenders have attempted to avoid this prohibition by providing for one interest rate to a certain date, usually shortly before maturity, and a higher rate thereafter. The purpose of this increase may be to encourage prompt payment on maturity, to persuade the borrower to arrange for renewal at maturity, to compensate lenders for the cost of foreclosure. The court has not been consistent in its decisions in this area. In Raintree, the mortgage provided that interest was payable at a higher rate starting one week before the maturity date and the court held that this did not offend s. 8 of the Interest Act because the increase in the interest rate was not triggered by a default or arrears.

TD Trust v Guinness

Application for an order nisi of foreclosure. Mortgage had a one-year term which mature. The interest rate was stipulated to be 16.5 per

cent until a point and then 24 per cent thereafter. The only issue for determination was whether that interest provision offended section 8 of the Interest Act or constituted a penalty against which a court of equity would grant relief.

In considering Section 8, a court should not restrict itself to the form of the interest provision in the mortgage but should look to its substance. In this case, the substance of the provision was clearly to extract a higher rate of interest if the mortgage was not repaid by its maturity date. It was apparent on its fact that the wording of the provision was an attempt to avoid section 8. The substance of the interest provision in this case violated section 8 and there was unenforceable.

Nelson v C.T.C. Mortgage Corp.

The principle excluding voluntary payments from the application of the criminal interest rate provisions of the Criminal Code was established by the BC court of appeal in this case.

The borrower had exercised a prepayment option and the amounts payable upon the exercise of that prepayment option resulted in an interest rate of more than 60 per cent over the term of the loan. The decision to prepay was not a foregone conclusion and was a voluntary decision by the debtor.

Spectacular Bid Resources v Aaron

Argument that the plaintiff failed to furnish disclosure statements or to recognize the defendants’ right of rescission as provided for in ss. 17 to 20 of the Act. The net effect of the sections is to grant an escape provision for borrowers so that within forty-eight hours of signing a mortgage or receiving a disclosure statement, the borrower may rescind the transaction (s.17), or if he is not furnished with a disclosure statement the borrower may within one month seek to redeem the mortgaged land on repayment of only the actual amount advanced.

The plaintiff or its lenders failed to furnish the defendants with disclosure statements. While the furnishing of a disclosure statement to a borrower is a mandatory provision, in this

case it is not a condition precedent to a valid and enforceable mortgage contract. That being the case, I cannot conceive of any benefits or rights accruing to the defendants under the Act arising

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from their preceding contractual arraignments with the plaintiff especially since the defendants refused to grant the mortgage and accept the committed mortgage funds.

Manulife Bank of Canada v Conlin

Section 15 providesthat the covenants and agreements survive any dealing between the borrower and the lender. The intended result is that the lender may release part of the mortgaged land, disregard or waive a mortgage default, give extra time to cure a default or breach, and have other dealings with the borrower respecting the mortgage without impairing or releasing the covenant of the covenanter.

When a lender seeks to rely on section 15 after terms of the mortgage have been altered, be aware that the courts have interpreted similar clauses very strictly in determining the liability of the covenantor after such modification

Exculpatory clauses will generally be construed strictly against the lender, especially in the case of co-called “accommodation” guarantors as opposed to “compensated” guarantors. Accommodation guarantors are those who enter into a guarantee in the expectation of little or no remuneration and for the purpose of accommodating others. Compensated guarantors are those whose business consists of guaranteeing performance and payment in return for a premium.

La Salle Recreations Ltd v Canadian Camdex Investments

Foreclosure proceedings – issue whether carpeting is a fixture Settled law on fixtures: 1) articles not otherwise attached to the land than by their own weight

are not to be considered as part of the land, unless the circumstances show that they were intended to be, 2) articles affixed to the land even slightly are to be considered part of the land unless the circumstances show otherwise, 3) the circumstances necessary to alter the prima facie character are circumstances which show the degree of annexation and object of such annexation which are patent to all to see, 4) the intention of the person affixing the article to the soil is material only so far as it can be presumed from the degree and object of the annexation.

Bank of Nova Scotia v Nargang

A second mortgagee can purchase the property and still retain the covenant and need not account for a profit on resale.

Application by a second mortgagee to approve the sale himself of a residential property subject to an order nisi of foreclosure. At the time the order nisi was granted to the petitioner first mortgagee, the applicant applied for and received an order for sale, under his conduct.

Issues included whether the applicant was precluded from purchasing to the order for sale and whether the offer was reasonable

Court approved the sale – there was evidence that the mortgagor himself had attempted to sell the house and received no offers. . Extending the redemption period in order to allow him to sell

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the land at a higher price was unrealistic. The applicant was not precluded from purchasing pursuant to the order for sale.

Where a prior mortgagee exercised a power of sale and a subsequent mortgagee became the purchaser, such subsequent mortgagee, in the absence of anything to impeach the bona fides of the transaction, acquired the same irredeemable title as if he were a stranger

British Pacific Trust Co v Baillie

The assignee of an agreement for sale, even in the event of the payments under the agreement not having matured at the time of the assignment, is only entitled to recover the moneys due and enforce the agreement subject to any equities existing between the purchaser and vendor.

Where an assignee of an agreement for sale has an acknowledgment of the debt under such agreement and comes to trial with full knowledge of the fact that the purchaser intends to set up by way of equitable defense a claim against the assignee for defective construction of a building on the land comprised in the agreement, but fails to specifically plead estoppel, the purchaser is entitled to set up a claim in connection with the construction of the building as against the assignee, in the same manner, as she could against the original vendor if he were taking proceedings under the agreement.

Canada Permanent Trust v Neumann

Stands for the proposition that it is legally repugnant to have two different mortgage debts The Neumanns joined together with another couple and granted a mortgage to Canada

Permanent. Later wishing to absolve themselves of this liability, the Neumanns conveyed all their interest and title to the other couple in return for their promise to assume liability for the mortgage debt. Canada Permanent was not a party to this transfer and did not release the Neumanns from their debt. The other couple modified the agreement and eventually defaulted. Canada Permanent brought suit against the Neumanns.

The court held that there had been a novation because of the modification agreement and that there cannot be two contracts of mortgage and two methods of calculating the debt in respect to the same mortgage at the same time.

Canada Trust Co v Wenngatz

This was an application for an order requiring the mashalling of security. Trust co was the first mortgagee on six properties owned by Wenngatz. The applicant bank was a secong mortgagee on only one property. When Wenngatz commenced bankruptcy, Trust Co commenced foreclosure proceedings. The bank was owed much more than Trust Co and was unsecured – doctrine of marshalling would allow it to collect on one of the properties.

Application was allowed. There was no reason why the principle of marshalling did not operate as between two encumbrances regardless of the extrinsic rights of one of them to other recourse against the debtor so long as other limitations of the principle were met.

Nor did bankruptcy preclude the right to insist on marshalling

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Third parties who may not be prejudiced by marshalling did not include the unsecured creditors of the debtor. The bank was therefore entitled to succeed so long as the rights of the guarantor were not prejudiced.

Principle of Marshalling – the doctrine of marshalling rests upon the principle that a creditor who has the means of satisfying his debt out of several funds shall not, by the exercise of his right, prejudice another creditor whose security comprises only one of the funds

Canadian Commercial Bank v Island Realty

The fact that a discharge of a prior mortgage has been forged does not affect the priority of a subsequent mortgagee who accepts title as a bona fide mortgagee

The registration of a forged discharge of a second mortgage was effective in discharging the mortgage. A subsequent mortgage acquired its interest in the land bona fide and for value because it did not take interest from or through the second mortgage, and because it did not take under a void instrument. Once the second mortgage was discharged it could “no long affect the land in respect of which it was registered” within the meaning of s.248 of the LTA. The subsequent mortgagee’s mortgage then became the new second mortgage, not because it tool any interest from the original second mortgagee or any greater interest from the mortgagor, but because the registration of the original second mortgage had been fraudulently cancelled.

Cobra Industries v Millie’s Holdings

The court set out the following principles with respect to equitable set-off: 1) The party relying on a set-off must show some equitable ground for being protected against

his adversary’s demands 2) The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be

allowed 3) A cross-claim must be so clearly connected with the demand of the plaintiff that it would be

manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim

4) The plaintiff’s claim and the cross-claim need not arise out of the same contract 5) Unliquidated claims are on the same footing as liquidated claims Have to show that the cross-claim flows out of and is inseparably connected with the dealings

and transactions that give rise to a claim or goes to the very root of the claim in such a way that it would be manifestly unjust to allow the plaintiff to enforce his claim without taking into account the cross-claim

Darby House Mortgage Corp v Atherton Realty Company Ltd

The appellant was the assignee of the mortgage over and of rents of a property. However, it ranked subsequent to the respondent both as to the mortgage and the assignment of rents.

Atherton paid unpaid taxes on the property to avoid it being forfeited to the Crown. Court sale was insufficient to satisfy even the first respondent

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Appellant applied for a declaration that it held a charge in the amount of the taxes paid in priority to the other charges

The court held that the taxes were paid by appellant to preserve the property for the good of all persons interested in the property – the salvage principle applies where an advance is made by means of which the encumbered property is saved from loss or destruction is a limited exception to the general rule that encumbrances rank in order of time. Such an advance has priority over all other charges. It is not an essential prerequisite to the application of the principle, that all prior charge holders have been notified before the payment was made.

Here there was no choice open to the charge holders but to acquiesce in the payment or to make the payment themselves.

Jager v Li’s Investments

The developer’s lawyer should be aware and advise the developer that, despite the provisions of s.23 or s.29(2) of the Land Title Act, it has been successfully argued in a number of cases that the title of a transferee of an interest in real property may in some circumstances be subject to an unregistered interest in that real property that does not fall within s.23 or the exceptions to s.29 of the LTA if the transferee had actual notice of the unregistered interest before the transferee registered his or her own interest. However see Jager the Cleaner in which the opposite conclusion was reached. The success of these arguments has been based on the conclusion by the courts that a transferee with actual notice of an unregistered interest in real property in completing his or her own transaction for that real property had become a party to the transferor’s fraud, or in the alternative, was no longer bona fide.

Mere notice of the unregistered interest before taking a subsequently registered interest may not be enough to constitute fraud. In a number of cases dealing with this issue, there is more than mere notice – notice coupled with some conduct such as accepting rent or evidence of communication with the holder of the unregistered interest.

Court stated that fraud is never light to be inferred, but rather must be established by the particular facts of the case. According to Jager, the question in very case must be whether a fraud would be committed if the purchaser were to claim the protection of the Act.

Mikulic v Calvillo

A mortgagor who is in default of his or her obligation to pay the principal balance on the due date stipulated in the mortgage and from whom a mortgagee has not demanded payment, must give the mortgagee six months’ notice of his or her intention to pay the mortgage or, in lieu of such notice, six months’ further interest at the date of payment. Although the general rules exist, the court has a discretion in appropriate circumstances to fix a lesser period of notice (Mikulic).

Ocean Park Securities Ltd v Foulkes

The petitioner vendor took a 12.5% mortgage from the purchaser. Under its mortgage agreement, the vendor was to give priority to a 12% mortgage for $16,500 that the purchaser

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was going to give to the respondent. The mortgage that the purchaser subsequently gave to the respondent was at 18% for $16,500. The vendor’s mortgage was registered before the respondent’s mortgage. If one mortgage is to have priority over another mortgage, justification for priority has to be found in the mortgage granting priority. The respondent’s mortgage did not fit the wording of the clause in the vendor’s mortgage allowing for priority. Therefore, the court refused to alter the priorities as they appeared on title.

McCurdy v Doyle

Contest between plaintiff and claimant over which is entitled to receive money owing by garnishees to the defendant

Claimant asserts that it has become entitled to payment of all the mortgage moneys which were unpaid at the time the transfer of mortgage was registered and that the garnishing order had been rendered wholly ineffective

Here no act of the mortgagors (garnishees) misled the claimant. They did their best to put the claimant on its guard. The garnishees are bound to pay plaintiff the mortgage moneys up to the amount attached by the garnishing order. It is not the law that garnishees must pay twice. It would be an injustice if garnishees, who are bound to pay the plaintiff, also had to pay over again to the claimant which insisted upon proceeding with the purchase of the mortgage after fair warning of the garnishment

In my opinion defendant transferred to claimant, in the words of the transfer of mortgage, such “rights, powers, title and interest” in the mortgage as he had and no more, and claimant took from the defendant only that balance of the debt which he had left to sell after the garnishing order had taken effect.

Richmond Savings Credit Union v Niijer

Richmond Savings considered the degree to which the Form B must be completed to comply with s. 225 of the Land Title Act

The respondent, a second mortgagee, sought out an order in foreclosure proceedings that the petitioner’s first mortgage was invalid and that the respondent’s mortgage was thus entitled to priority

The principal amount of the mortgage was entered as “WBD” which were defined to mean “will be determined by the Lender and the Borrower for each advance at the time of each advance”. Section 225(3)(d) of the Act provides that terms be included in Part 1 of the mortgage, only if those terms are contained in the mortgage.

In this case, it would have been misleading to enter interest figures for advances made under the mortgage at the time of registration because more advances could have been made at a later date at different interest rates. Therefore the use of the letters WBD complied with the regulations. Their use was accurate and did not “obscure the meaning, intent or legal effect of the transfer form”.

The information provided in the petitioner’s mortgage was sufficient notice to a prospective mortgagee to make further inquiries as to the exact amount owing under the mortgage on any

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given date after the initial advance. Accordingly the petitioner’s mortgage was held up as priority.

Wynne v Erickson

The plaintiffs commenced an action against the defendant, the holder of a mortgage on the plaintiffs property and against BMO, holder of three sub-mortgages on the defendant and two judgment holders who held judgments registered against the defendant.

The plaintiffs are asking the court to cancel this mortgage to Erickson on the plaintiff paying into court the full balance payable under the mortgage. Section 187 of the Land Registry Act sets out that no order is to be made for the cancellation of the registration of any mortgage unless the mortgagee or person entitled to the mortgage has sworn an affidavit of the amount due under the mortgage – qualified by “unless under special circumstances to be established to the satisfaction of the judge”.

In view of the fact that Erickson has refused to give the discharge to the plaintiff and in view of the fact that both Counsel have stated to the court, they are unable to contract Erickson at this time, this court would find here that special circumstances do exist that would allow the court to make an order without the affidavit from the mortgagee

Yeulet v Matthews

S. 20 of the LTA provides for a unregistered interest to be enforceable against the person who granted that interest – see Yeulet for discussion on the effect of unregistered interests

A registered owner may create an equitable mortgage by pledging the duplicate title. Notwithstanding that an equitable mortgage of this kind is not registrable and may not be registered. It may have priority over certain charges, such as judgments, which can attach only to the interest beneficially held by the judgment debtor. See ss. 20 and 33 of the LTA and Yeulet as to priorities between as equitable mortgage and a judgment as common law.

Yorkshire Trust Co v Finlayson Arm Tree Farm Ltd

This is a motion to join Haska Management and Contracting as a respondent and for an order that certain caveats and a lis pendens filed by Haska be discharged

Counsel for Haska submits that as the petitioner had notice of the logging contract, the mortgages registered by the petitioner are subject to the logging contract. He contends that section 44 of the Land Registry Act is not effective in respect of interests in land of which the holder of the charge had notice at the time of registration of the charge.

I do not agree. Except in cases of fraud, the holder of a registered charge takes priority over an unregistered charge, save a charge specifically excepted by statue, even if the holder of the registered charge at the time of registration had knowledge of the prior unregistered charge.

Greveling v Greveling

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The fraud referred to in s.25(2) and s. 23 of the LTA is actual, not constructive fraud, as where one buys land with actual or imputed knowledge that the vendor is not the owner.

The plaintiff purchased property and registered it in the name of the defendant, his wife. During the course of a separation, the wife reconveyed the property to the plaintiff, who did not register the conveyance. Shortly thereafter, the wife sold the property to a third party, who learned of the earlier unregistered conveyance two days after an indefeasible title to the property was issued in his name. The wife’s solicitor also acted for the third party, but the solicitor’s knowledge of the unregistered conveyance could not be imputed to the third party in the circumstances. The third party, having neither actual nor imputed knowledge of the unregistered conveyance when he purchased the property, was a bona fide purchaser for value and was not affected by subsequent notice of the instrument

Danica Enterprises Ltd v Curd

Actual notice, and possibly constructive notice, of a prior unregistered instrument can constitute fraud within the meaning of s. 23(2)(i). In this case, the plaintiff corporation purchased property from the vendors following the vendors’ improper termination of a purchase and sale contract with the defendants for the same property and then commenced an action for possession against the defendants. The defendants counterclaimed for registration of title to the property in their names. The beneficial owner of the plaintiff corporation was the vendors’ real estate agent, who had acted to terminate the defendants’ agreement and who knew or should have known that the defendants had an interest in the land which had not been properly terminated. He acted fraudulently by taking advantage of the situation and the plaintiff was thus not a bona fide purchaser for value. Judgment was granted in favour of the defendants

The Collapsing Transaction *See PLTC page 132

The most common breach of the purchaser that gives right to the vendor’s right to terminate the contract is a failure to pay the purchase price. Other obligations of the purchaser are usually not considered as fundamental enough to the right to terminate to arise. Tender is the delivery of all

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documents, money or any items required by the contract, to the other party, in the manner specified in the contract. Tender must be perfect, the purchaser has to tender payment and then the vendor has to tender a registratable transfer. Tender must be given to the parties to the contract personally, can’t just give it to their lawyers if that is not specified in the contract. However, under the standard Purchase and Sale Agreement, lawyers have the authority of undertakings written into the form agreement in order to act for the parties. Tendering has two results: 1) it affirms the contract and 2) it is used as evidence of being “ready, willing and able” to complete the contract. This is important because it is the threshold for claiming specific performance.

Repudiation is the termination of the agreement by the non-breaching party when the other party breaches the contract. There can be two types: 1) express repudiation (ex: I am terminating because you did X) and 2) indirect repudiation – by the action of the party it appears as though they aren’t going to fulfill their covenants. In either case, the other party has to decide: 1) accept repudiation, terminate contract and sue for damages, 2) accept repudiation, terminate contract and seek deposit or 3) reject repudiation, affirm contract and make a claim for specific performance.

Specific performance is an equitable remedy that allows the court to force the parties to comply with the covenants of the contact ( (not just to give damages like in CL). Historically real estate was seen as a unique asset – courts felt that non-breaching party couldn’t simply replace, with money or otherwise, what they had expected to get out of the contract. If you are going to claim specific performance you must: 1. State clearly that you are seeking strict performance by the other party, 2. Ensure that you don’t commit an act that is inconsistent with the contract remaining alive (ex. don’t require forfeiture of the deposit; this would be admission of termination of contract), 3. Must act reasonably quickly (general principle of equity), 4. To get specific performance you must be able to complete your covenants (be ready, willing and able). If you choose to claim specific performance must also decide: 1. If you are going to reset the closing date (can send notice reseting closing date and making time of the essence) - If you do this you have to wait for the new closing date to pass before going to court. If they miss new closing date you can continue your claim in court. 2. If you don’t want to reset closing date – at any time before judgment is rendered you could crystallize the breach and terminate the agreement (then sue for damages) and you are in control as long as you have complied with all your covenants.

A party entitled to specific performance is entitled to elect damages in lieu. With specific performance damages don’t crystallize until there is a pronouncement on the contract (don’t know what damages are until contract is resolved – terminated or enforced). Practically we assess damages at date of trial (in perfect world it should be date of judgment – this is when the contract is resolved). The CL rule was that the general principle for assessment of damages is compensatory. So, the innocent party is to be placed, as much as money can, in the same position as if the contract had been performed. Where contract for sale = usually assess damages as date of breach. However, if this would give injustice – court has power to set another date. Damages awarded must be a true substitute for specific performance – give as nearly as possible what specific performance would have given. There is no basis for deductions that are not related to the value of the property which was the subject of the contract. These deductions would depart from the principle that damages are to be a true equivalent of specific performance.

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The vendor can also look to the forfeiture of the deposit as a remedy if there is forfeiture clause V will be allowed to keep deposit (this clause is in standard contract). Keep in mind if forfeiture of deposit is only remedy or if V could seek damages as well – important where V has suffered damages in excess of the deposit.

A Vendor’s lien can also occur when the purchase goes through, the vendor delivers title but the purchaser hasn’t delivered price. This gives the vendor an equitable lien over the property for the unpaid purchase price. In order to enforce, the vendor will launch a lawsuit for the unpaid purchase price. They will also file this against the title in the LTO as either a 1) caveat – the LTA allows for temporary claim to be registered against tile or 2) file a writ – anything that happens after you file this is subject to the resolution of the claim.

Case Law

Tang v Zhang

In Tang, the court set out the following general principles with regard to deposits: 1) On a general level, the question of whether a deposit or other payment made to a seller in

advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention,

2) Where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law,

3) A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract and is no dependent on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price,

4) The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act,

5) A contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.

Tannery Park Development Corp v Georgilas Investments

It has been held that where a joint obligation to complete a subdivision has not been fulfilled through no fault of the parties, it may be unjust for a vendor to rely upon the “time is of the essence” clause (Salama). However, this has been questioned where nothing done by the

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vendor contributed to the delay and it has been suggested the applicability of Salama is very limited (Tannery Park)

In Tannery Park, the court overturned the decision of the chambers judge to exercise his discretion and not uphold a time of the essence clause.

Tau Holdings v Alderbridge Development Corporation

Some purchase contracts contain terms that must be performed before the completion date. For example, a term may exist that requires the purchaser to increase the amount of the deposit 30 days before the date fixed for completion. If a fundamental term of that nature is breached and the innocent party accepts repudiation and communicates that acceptance before any obligation arises for the innocent party to perform, then the issue of the innocent party’s readiness, willingness and ability to complete is irrelevant.

Serebrennikov v Sawyer’s Landing Investments 1 Ltd

Some decisions have analyzed the appropriateness of specific performance as a remedy by asking three questions – 1) is there evidence the land is especially suitable for the purchaser, 2) is there evidence that a substitute is not readily available, 3) are damages comparatively inadequate to do justice.

Shaw Industries Ltd v Greenland Enterprises

The purchaser’s lawyer may be liable for damages if the vendor’s lawyer fails to fulfill that undertaking.

It the purchase contract requires the purchaser to bear the cost of conveyance and title in the vendor’s name, the purchaser must prepare the transfer document and submit it to the vendor for execution.

If title is in a name of a party other than the vendor, the vendor must prepare the transfer and ensure that it is executed

If the purchase contract does not require the purchaser to pay the cost of the conveyance, the vendor must prepare and execute the transfer document

A party’s failure to plead and prove that he or she was ready, willing, and able to complete may result in a finding that the party was not an “innocent party” but that both parties were in essential default. In that case, the contract still subsists but time is no longer of the essence. Either party can, by giving reasonable notice, designate a completion date and reinstate the requirement that time is of the essence.

Shaw Industries establishes that if neither party is ready, willing and able to complete on the original completion date, the contract continues to subsist but time is no longer of the essence.