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Monthly Archive for: ‘February, 2012’

Today is the day!

We would like to take this opportunity to congratulate the Fraser Valley Real Estate Board for promoting and organizing such a well-run event.  It was our first appearance and we had a blast.  It was great meeting you all and, in many cases, putting faces to names.  We intend to return next year.

We would also like to thank all of you who took the time to drop by our booth for a chat and to enter our draw.

So, without further adieu, the winner of the Magellan Law Group wine basket is ………. Drum roll please ………………

Michele Cummins of Royal LePage Wolstencroft Realty.

Congratulations Michele!!!

Please contact us at your convenience so that we can arrange delivery or pick up of your basket.

As an aside, for those of you who didn’t have a chance to pick up our handouts on Completing a Home Purchase from both the Buyer’s and Seller’s perspective, those articles have been posted on our “Articles” page together with two new articles on the implications of a collapsing real estate deal (again, from both the Buyer’s and Seller’s perspectives).

So you’ve entered into a Contract of Purchase and Sale to sell your property and now the purchaser doesn’t want to complete the transaction. What will you do? Your strategy may depend on the answer to a number of questions, including:

  1. Do you want to complete the transaction?
  2. Will you suffer losses as a result of not completing the sale?
  3. Why is the buyer resisting completion, i.e., is the buyer unable to obtain financing after all; is the purchase price above market value (as the result of a falling market); or has the Buyer learned something about the property that caused him to change his mind.

I. Saving the Deal

If you, or your solicitor, suspect that the deal is collapsing because of challenges the buyer is facing in completing the transaction, you should review with your solicitor, and perhaps your realtor, whether or not there is a course of action that could facilitate completion of the transaction. i.e., should you grant an extension to complete, should you consider closing the sale in escrow, or do you have information that may assist the other party in completing the transaction.

1.            Extension

When an extension of the complete date is agreed to, care should be taken to maintain time as being of the essence.  If time is not made of the essence again, the situation may arise that the “new” completion date is not enforceable and either party may set the completion date as long as reasonable notice is given.  In other words, if time is not made of the essence by the addendum granting the extension, then it isn’t and neither party can sue to enforce the new date.

As consideration for granting the extension, it is not unreasonable to ask for compensation from the buyer for actual costs incurred by you as a result of agreeing to the extension; additional mortgage loan interest is an obvious example.  You should not use the extension as an opportunity to “increase” the purchase price as this attitude may lead to further problems with the buyer.

2.            Escrow

Essentially, “closing in escrow” is a phrase that has come in to common usage to describe the situation where, because of one reason or another, the transaction cannot be completed on the completion date but the seller is willing to give up possession of the property to the buyer if certain safeguards are put in place to ensure that the transaction is completed once the particular “obstacle” is removed.  While closing a transaction in escrow may be more common in other jurisdictions it is not as common in British Columbia and is fraught with risk. Before agreeing to complete a transaction in escrow, the risks should be carefully considered with your solicitor.  As a seller the risks much higher than those faced by the buyer but, particular attention should be paid to ensure that the buyer cannot back out of the transaction after possession has been given to the purchaser, proper insurance coverage is in place during the escrow period and caution should be exercised in allowing the buyer to do any additions or renovations prior to completion as any consequential damages will be the seller’s responsibility, since risk does not pass to the buyer until title passes.

3.            Preserving your contractual rights

When faced with the prospect of a collapsing deal, the contract must be reviewed carefully to ensure that you maintain strict compliance with its terms during the period leading up to the completion date, if you wish to maintain your right to enforce the terms of the contract. Most standard form real estate contracts stipulate that time is of the essence. It is important to ensure that time lines are monitored and closely adhered to.  Further, unless the seller expressly repudiates the contract prior to the completion date, thereby making it clear that they are not going to complete the contract, you should take the necessary steps to complete the transaction, including demonstrating that you are ready, willing and able to complete.  Your solicitor will most likely send a “ready, willing and able letter” to the buyer’s lawyer.

II.  Walking Away from the Deal  

1.            Change in Sellers Circumstances

Alternatively, perhaps your situation has changed drastically since making the offer or since the last subject clause, or condition precedent was removed and you want to find a way out.  If you find yourself in this position and you want to avoid completing the transaction, you should review the contract to determine whether or not there are any problems or weaknesses in the contract that you can exploit in order to collapse the deal. The majority of the terms in most standard form real estate contracts are time-tested “boiler plate” clauses that have been revised over the years often as a response to litigation.  However, where there is an opportunity to add custom terms to the body of a contract or the Addendum, this is often where problems do arise. These terms should be carefully reviewed to determine if there are any weaknesses.

III. The Transaction Did Not Complete, Now What?

Essentially, there are two options available to the non-defaulting seller:

  1. Allow the contract to collapse and, thereafter, elect to take the deposit; or
  2. Accept the repudiation/breach of the contract and sue for damages.

Options 1 and 2 are not necessarily exclusive.

1.            When is a Deposit a Deposit?

Traditionally, earnest money paid prior to the completion of the contract (customarily 10 % of the contract price) has usually been considered to be a “true deposit” which, according to the usual Real Estate Board standard form of Contract of Purchase and Sale, should be automatically forfeited to the seller after the buyer’s breach of the contract, without the seller having to prove actual damages.

However, not all money paid prior to completion is considered a deposit, for example a recent BC Court of Appeal case has thrown a wrench into the usual understanding of the traditional rules regarding damages by considering the deposit language in the standard form Contract of Purchase and Sale and deciding that the deposit is not automatically paid to the seller.  Rather, the seller is entitled to claim the money paid as a deposit on account of its damages which he would have to prove.  This decision serves as a reminder that parties interpreting Contracts of Purchase and Sale must review the wording of the relevant terms very carefully and with the assistance of their lawyer. 

Depending on the wording of the contract a party may be able the claim the deposit and claim damages that exceed the deposit. However, where the wording of the contract provides that the deposit is liquidated damages, a seller will be prohibited from seeking additional damages. As a result, it is common for contracts to provide that the deposit will be absolutely forfeited to the seller and the seller may claim any additional damages.

Such a careful review is especially important if the wording of the deposit clause is not standard form.  In such a case the Court could characterize the deposit clause as a: true deposit clause; which is enforceable; a penalty clause, which is not valid; a clause describing an excess deposit, which may not survive the Court’s review; or anything in between.  In other words, just because it is called a “deposit” in the Contract that does not mean that it is a “true deposit” which can be automatically claimed by the seller if the buyer defaults.  You will need legal advice from a lawyer experienced in collapsing real estate transactions to help you determine if it is a “true deposit”.

2.            Sue for Damages

When calculating damages, the Court will try to put the party in the position it would have been had the breach not occurred. Often the main component of the damages will be the difference in the value of the property from the contract price. In calculating the loss, the normal date for assessing the value of the property is the date when the breach of contract occurred. Notwithstanding the foregoing, where the date of the breach would be unjust, the courts have applied different dates to assess the loss of property value. (In one circumstance the court declared that three months after breach of contract was reasonable as that was a reasonable period of time to resell the property. Other components that may be included by the Court when calculating damages will be the other losses and expenses that the plaintiff has suffered and may include: closing costs incurred for the collapsed transaction, moving and storage costs, additional property or rental costs, interest and professional fees due or lost as a result of the breach. i.e., a realtor’s commission may be due and payable, despite failure to complete the transaction, and in such a case it can be included in damages.

 No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting seller cannot rest on his right to sue in the hope of eventually making himself whole – he has a duty to mitigate or minimize his losses and may need to aggressively sell the property. If the Court finds that the plaintiff hasn’t properly mitigated its losses, the plaintiff may not be awarded full indemnification.

IV. Obtain Proper Legal Advice

Notwithstanding the various remedies available to the non-defaulting party to a transaction that does not complete, uncertainty about what to do as a result of the collapsing transaction and navigating the Court process is a stressful and wearing ordeal. After all, a man’s home is his castle and uncertainty about one’s home is extremely stressful.  In our view, the best way to ensure that the stress and frustration is minimized is to engage a lawyer, at an early stage, who has experience dealing with collapsing real estate transactions in order to ensure that the process is handled in as efficient and strategic a manner as possible.

So you’ve entered into a Contract of Purchase and Sale to buy your dream home and now the seller doesn’t want to complete the transaction. What will you do? Your strategy may depend on the answers to a number of questions, including:

    1. How badly do you want the property?
    2. Will you suffer losses as a result of not completing the purchase?
    3. Is the property special or unique to you?
    4. Why is the seller resisting completion, i.e. is the sale price below market value (either as a result of the Seller’s under-valuation or a rising market); will the seller be unable to clear title; or is the seller unable to find a replacement house to buy?

I. Saving the Deal

If you, or your solicitor, suspect that the deal is collapsing because of challenges the seller is facing in completing the transaction, you should review with your solicitor, and perhaps your realtor, whether or not there is a course of action that could facilitate completion of the transaction. i.e., should you grant an extension to complete, should you consider closing the sale in escrow, or should a holdback or reduction in price be considered.

1.            Extension

When an extension of the complete date is agreed to, care should be taken to maintain time as being of the essence.  If time is not made of the essence again, the situation may arise that you may not be able to stand firmly on your rights as to the timing of the contract and either party may set the completion date as long as reasonable notice is given. In other words, you may lose control over when the transaction may complete.  Depending on how much of an extension is being sought it may be worth considering a reduction in the sales price.

2.            Escrow

Essentially, “closing in escrow” is a phrase that has come in to common usage to describe the situation where, because of one reason or another, the seller is not able to complete on the completion date but is willing to give up possession of the property to the buyer if certain safeguards are put in place to ensure that the transaction is completed once the particular “obstacle” is removed.  While closing a transaction in escrow may be more common in other jurisdictions it is not as common in British Columbia and is fraught with risk. Before agreeing to complete a transaction in escrow, the risks should be carefully considered with your solicitor.  As a buyer, the risks are less than those faced by the seller but particular attention should be paid to ensure that proper insurance coverage is in place during the escrow period and caution should be exercised in doing any additions or renovations prior to completion and, therefore, the transfer of title to you.

3.            Price Change or Holdback

Another consideration is whether or not a holdback or a change in price will facilitate completion of the deal. That is, if the seller has failed, or is unable, to do something required under the contract, prior to the completion of the transaction you may wish to either negotiate a holdback, to ensure that they will fulfill their obligations, or negotiate a reduction of the price to compensate for the seller’s inability or unwillingness to fulfill his obligation under the contract. In our view, all things being equal, it is generally preferable to negotiate a change in price instead of negotiating a holdback because the former will avoid the inevitable debate concerning the terms of the release of the holdback.

4.            Preserving your contractual rights

When faced with the prospect of a collapsing deal, the contract must be reviewed carefully to ensure that you maintain strict compliance with its terms during the period leading up to the completion date, if you wish to maintain your right to enforce the terms of the contract. Most standard form real estate contracts stipulate that time is of the essence. It is important to ensure that time lines are monitored and closely adhered to.  Further, unless the seller expressly repudiates the contract prior to the completion date, thereby making it clear that they are not going to complete the contract, you should take the necessary steps to complete the transaction, right up to and including the tendering of funds, to show that you are ready, willing and able to complete.  Your solicitor will most likely send a “ready, willing and able letter” to the seller’s lawyer.

 II. Walking Away from the Deal – Initiating the Collapse

1.            Change in Buyer’s Circumstances

Alternatively, perhaps your situation has changed drastically since making the offer or removing the last subject clause, or condition precedent and you want to find a way out.  If you find yourself in this position and you want to avoid completing the transaction, you should review the contract to determine whether or not there are any problems or weaknesses in the contract that you can exploit in order to collapse the deal. The majority of the terms in most standard form real estate contracts are time-tested “boiler plate” clauses that have been revised over the years often as a response to litigation.  However, where there is an opportunity to add custom terms to the body of a contract or the Addendum, this is often where problems do arise. These terms should be carefully reviewed to determine if there are any weaknesses.

Problems that most often arise in contracts can arise because of uncertainty relating to a fundamental term of the contract – a term that goes to the root or heart of a contract (i.e. who are the parties to the contract, what is the price, the property or timing of the contract). Are all these terms in your contract “certain”?

Simply ignoring or refusing to waive conditions precedent or subject clauses may not help you out of the contract.  There is case law that imposes upon the buyer a positive obligation to take reasonable steps to fulfill conditions precedent. Therefore, careful consideration should be given as to what steps need to be taken before deciding not to waive a condition precedent.

2.            Pre-Sale Contracts

The Real Estate Development Marketing Act, S.B.C. 2004, c.41 provides significant consumer protection for buyers of presale properties. Given the protection provided under the Act, special attention should be paid, and research should be conducted, to determine whether or not there have been breaches of Real Estate Development Marketing Act by the developer.  Such breaches may include: any misrepresentations made by the developer; the developer failing to provide to the buyer a disclosure statement that accords with the Act; and the developer failing to provide to the buyer every amendment to the disclosure statement as required by the Act. Generally, a breach of the Act will result in the buyer being entitled to rescind or revoke the contract.

III. The Transaction Did Not Complete, Now What?

Essentially, there are three options available to the non-defaulting buyer:

    1. Allow the contract to collapse and, thereafter, demand the return of the deposit;
    2. Sue for specific performance of the contract; or
    3. Accept the repudiation/breach of the contract and sue for damages.

Options 1 and 2 are not necessarily exclusive.

1.            Accept the Collapse

If you choose Option 1 then you will want the deposit returned as soon as possible because you may need the funds to use as a deposit on a new property. If the seller has indicated a clear intention that he will not complete the sale of the property and you have decided that you do not wish to sue for specific performance, your solicitor should ensure that the deposit is released to you promptly without conditions.  This should be straight forward and almost automatic but, on occasion, an aggressive seller may request that the buyer sign a release of claims before the seller will agree to release the deposit. You should carefully consider with your counsel whether or not this request is appropriate as it will prevent you from suing for the damages you may suffer.

2.            Sue for Specific Performance

When setting the remedy for a breach of contract, the Court tries to put the innocent party in the same position it would have been had the breach of contract not occurred. Specific performance is based on the concept that in some circumstances, damages will not be an adequate remedy for the particular breach of contract. In the context of a real estate transaction where the property is unique, it affords a party the opportunity to stand on its rights under the contract and to force a completion of the transaction.  For a period of time, it was presumed that specific performance was a given with real estate. However, given the increasing propensity for housing to be standardized and “cookie cutter”, obtaining an order for specific performance has become rare. In order to get specific performance, the plaintiff must prove that the property in question had unique characteristics that are not readily replaced; clearly a significant hurdle for parties wishing to enforce a contract of purchase and sale for an apartment, condominium or town home. Damages may still be available even where the claim for specific performance fails; although it should be noted that where there isn’t a reasonable basis to claim for specific performance a plaintiff is required to mediate or minimize its damages.

3.            Sue for Damages

When calculating damages, the Court will try to put the party in the position it would have been had the breach not occurred. Often the main component of the damages will be the difference in the value of the property from the contract price. In calculating the loss, the normal date for assessing the value of the property is the date when the breach of contract occurred. Notwithstanding the foregoing, where the aforementioned date would be unjust, the courts have applied different dates to assess the loss of property value. Other components that may be included by the Court when calculating damages will be the other losses and expenses that the plaintiff has suffered and may include: closing costs incurred for the collapsed transaction, moving and storage costs, additional property or rental costs, interest and professional fees due or lost as a result of the breach.

No matter how the damages are calculated, when contemplating litigation, it must be remembered that a non-defaulting buyer cannot rest on his right to sue in the hope of eventually making himself whole – he has a duty to mitigate or minimize his losses. If the Court finds that the plaintiff hasn’t properly mitigated its losses, the plaintiff may not be awarded full indemnification.

IV. Obtain Proper Legal Advice

Notwithstanding the various remedies available to the non-defaulting party to a transaction that does not complete, uncertainty about what to do as a result of the collapsing transaction and navigating the Court process is a stressful and wearing ordeal. After all, a man’s home is his castle and uncertainty about one’s home is extremely stressful.  In our view, the best way to ensure that the stress and frustration is minimized is to engage a lawyer, at an early stage, who has experience dealing with collapsing real estate transactions in order to ensure that the process is handled in as efficient and strategic a manner as possible.

An Ounce of Prevention is worth a Pound of Cure

Forming a business is a lot like getting married.  At the beginning of the relationship, partners are focused on how bright their future will be and not on what may happen if they hit a bump in the road.  But just like a marriage, businesses and their partners, or “shareholders”, will encounter rocky times.  The most successful businesses are those that are able to navigate the bumps in the road by agreeing, in advance, upon various mechanisms for addressing various contentious issues that often result in a breakdown in the relationship and the premature end to the business venture.

A shareholders’ agreement is a contract among the shareholders of a company that sets out the mechanisms for addressing the potential problem areas before they become actual problems.  In my view, a shareholders’ agreement is essential for all businesses other than those that are wholly owned by one person.

Given how important it is for shareholders to have a shareholders’ agreement, it is only a surprisingly few number of businesses that actually have one.  While there are many reasons why this may be the case, I have found that cost is often the determinative factor.  While companies must carefully watch their expenditures during their start-up phase, I believe it is more important to spend your money wisely and to carefully consider the big picture.

The legal fees associated with the preparation of the shareholders’ agreement vary in direct proportion with the complexity and comprehensiveness of the agreement.  Very basic agreements can cost as little as $2,000 and more comprehensive shareholders’ agreements can cost $10,000 and upwards.  But even in the case of an expensive agreement, the costs of preparing the shareholders’ agreement pale in comparison to the costs of litigating a shareholders’ dispute or the breakup of the business.

Surprisingly, even once you get past the cost issue, parties are still often reluctant to enter into a shareholders’ agreement.  While there are many explanations for this phenomenon, I feel the marriage analogy probably explains it best.  Just as couples who are about to get married are often reluctant to consider entering into a prenuptial agreement; entrepreneurs starting a business are also reluctant to enter into a shareholders’ agreement.  As a business lawyer, I’ve heard all the rationalisations for not entering into a shareholders’ agreement – “we’ve been best friends for years, I trust him implicitly”; “she’s my sister, if I can’t trust her, who can I trust?”; “this business is going to be so successful, there’ll be no reason for us to fight”; you get the picture.  Moreover, if the partners have already worked together for some time, they may feel that a verbal agreement will suffice and that negotiating a shareholders’ agreement is a sign of a lack of trust by one shareholder towards the others.

But just like a couple about to get married, the best time to form a consensus is right before the formation of the partnership, when everyone is amicable and amenable.  By the time there’s something worth fighting about, consensus will be far more difficult (and expensive) to obtain.  If there is no shareholders’ agreement in place and problems arise, instead of paying me to prepare a shareholders’ agreement earlier on, they will have to go through the much more costly process (both from a monetary and emotional perspective) of shareholder dispute resolution with our litigation team, or face the premature demise of the business and their relationship.

The legal fees associated with the preparation of a shareholders’ agreement can be mitigated quite effectively by consultation with various other professionals such as accountants and insurance brokers and, of course, by careful planning.  To begin with, thought must be given to the share structure of the company.  Consideration must also be given to the purchase price of the shares and how they will be paid for.  Often shares are acquired for a nominal price with cash being injected by way of a shareholder’s loan.  Additionally, shareholders may wish to consider owning their shares through different vehicles such as a holding company or a family trust or even having their shares issued to a spouse or their children.  At this point of the planning process, I strongly urge my clients to consult with their accountants to work through the tax planning issues.  Too many entrepreneurs ignore this important first step only to find that they have a major tax problem when they are exiting the business.  Even the most skilled lawyer or accountant cannot necessarily fix a problem “after the fact”.  For instance, if your shareholdings are not structured properly for the two years preceding your exit, the $750,000 lifetime capital gains exemption may not be available to you.

During the planning and consultation process, partners can flush out the major considerations for inclusion in their shareholders’ agreement and I can then begin drafting.  The important thing to keep in mind is that a shareholders’ agreement, much like a will, is not intended to be a static document.  It is, in fact, a living document that should be revisited and revised as the business evolves and grows.  Keeping this fact in mind can ease some of the anxiety associated with the need to “get it right” from the get-go.

While shareholders’ agreements vary wildly in terms of their complexity and comprehensiveness, there are a few basic considerations that most shareholders’ agreements contain.  A shareholders’ agreement will often outline the various rights and obligations available to the shareholders; address the problems that arise when a shareholder dies or is unable to work; prescribe mechanisms to deal with the situation where one shareholder wishes to exit the business, while the other shareholders do not (often referred to as the “buy-sell provisions”); and helps address the process to be followed when the partnership breaks up.

In addition to the considerations set out above, a shareholders’ agreement will often include mechanisms that help shareholders address the following important issues:

  • the constitution of the board of directors;
  • the sale, transfer or mortgaging of the business;
  • changes in the authorised share structure of the company and the dilution of ownership interests;
  • the amalgamation of the company with another business;
  • borrowing by the company in excess of a certain amount;
  • the disposition of major assets or lines of business;
  • the requirement to obtain life insurance;
  • valuation of the company;
  • contracts between the company and any of its shareholders;
  • the declaration of dividends;
  • remuneration of shareholders and the setting of work expectations;
  • rules for resolving deadlocks and settling disputes; and
  • entering into transactions outside of the ordinary course of business

It goes without saying that while not every company will need to consider all of these issues, this list is by no means exhaustive and the parties should consult legal and other professionals before entering into a shareholders’ agreement.

Despite the importance of having a lawyer draft a shareholders’ agreement, people will still try to cut as many corners as possible and draft the agreement themselves.  While there are many “precedents” available online, if the parties don’t fully understand their specific needs and the implications of the provisions contained in the chosen precedent, they may end up doing more harm than good.

Some of the pitfalls that do-it-yourselfers often encounter arise as a result of the following issues: confusion between shareholder and management issues; lack of appreciation regarding the different roles of the shareholders, directors and officers; and their confusion between a return on capital with a return on labour.  I have also often encountered parties who believe they require a form of buy-sell provision referred to as a shot-gun clause, but they fail to consider whether they would be able to afford to buy out their partners.  For this reason, I think it is important to consult insurance brokers in the planning phase.

If you do it yourself, you may end up getting what you pay for.

One final consideration is the flexibility that a shareholders’ agreement can provide to the parties.  While many of the mechanisms that are dealt with in a traditional shareholders’ agreement can be addressed in the company’s Articles of Incorporation, those Articles are public documents that are filed with the Registrar of Companies.  A shareholders agreement is confidential and its contents need not be filed or made public.  In addition, as mentioned above, shareholders’ agreements can be amended and terminated with ease.  It is far more difficult to make fundamental changes to a company’s Articles.

The moral of the story here is that regardless of whether you start a new business with other people or buy into an existing business, a shareholders’ agreement is an essential document that can help you and your partners navigate the rocky times and ensure that you can focus on the more important tasks of running your business and growing it into a success.

Bike Trek for Life and Breath

Team Magellan

2011 marked my fifth consecutive year participating in the BC Lung Association Bicycle Trek for Life and Breath, a 200 km cycling adventure that supports research and cures for lung diseases. The Trek is the culmination of many months of fundraising and training (well – some people train, others just tough it out) that, year after year, continue to be an important way that I and the others at Magellan Law contribute to the betterment of our community. It’s definitely the highlight of the many community and non-profit initiatives that we like to support, and a cycling trip in the second weekend of every September is a great way to kick off the fall.

The milestone anniversaries were, however, overshadowed by the fact that we had launched our new firm just one month prior to the Trek. We are especially proud of our efforts this year, as the Magellan Team came second in overall team fundraising despite the fact that we had less than a month to put the team together (and to train). Not only did we do well on the fundraising side, but our team came together so nicely that we were awarded the Team Spirit Award.

We would like to thank our clients, friends, contacts, family and colleagues who generously showed their support of this great cause and helped us raise over $10,000 in 2011. Including 2011, I have now helped raise over $50,000 for the BC Lung Association!

In contrast to 2010, which featured a dreary, cold and wet second day of trekking, this year’s event took place over two, 30-plus degree sunny days. The start and finish lines are always the same, beginning at Hazelmere Campground in Surrey and ending the first day at Stillwood Campground in Cultus Lake where we are treated to an unlimited amount of delicious food and some lighthearted evening entertainment. It’s a nice treat after the last few kilometres of the first day, which are infamous because of the long and incredibly steep hill that climbs its way up to the campground, as well as an annual reminder of the difficult battle that people fighting lung disease must face.

The Trek is one way that we like to set an example for businesses in the Langley community and in the Lower Mainland. We believe strongly that organizations like ours have a duty to give back to the cities and neighbourhoods that support us and enable us to grow. In addition to the Trek, Magellan Law also supports The Centre for Child Development, the BC Epilepsy Society, Big Brothers Big Sisters of Langley and the Langley Child Development Centre.

On day two, our sore backsides are a small blemish on an otherwise perfect weekend. Instead of complaining we need only remember that we do this to help people who are, by necessity, much tougher than us.

Can’t wait until next September.

You have decided to sell your home.  You listed your property with a Realtor; there have been “open houses”, numerous people touring your home during evenings and weekends; and a few offers that went nowhere.  Finally, your Realtor brought you an offer from an interested buyer and a Contract of Purchase and Sale (the “Contract”) was negotiated.  After all subject condition clauses have been removed or waived and a deposit has been paid by the buyer, the Contract is firm and binding on both parties.  The question posed by most sellers at this point is: “what is left for me to do to ensure that the sale of my house completes smoothly, that I receive the sale proceeds that I expect and that my mortgage is either paid out or “moved” to my new house?”

This Guide has been prepared to explain the “conveyance” process from the seller’s perspective and to highlight the steps that are taken by your lawyer between your signing of the Contract and your receipt of the net sale proceeds.

I.          THE CONTRACT

If questions of a legal nature arise during the negotiation process, it is recommended that you consult a lawyer specializing in real estate law.

Once the Contract has become firm and binding, your Realtor will notify your lawyer of your impending sale.  Your Realtor’s office will send a Transaction Record Sheet, commonly referred to as a “Deal Sheet”, to your lawyer’s office.  It is at this point that your lawyer’s office will contact you to confirm the Realtor’s instructions and to gather some preliminary information from you.  This preliminary information will include details with respect to any mortgage(s) or other financial encumbrances, that are registered against your title to the property.

The standard form printed Contract used by Realtors for residential transactions in British Columbia stipulates that it is the buyer’s responsibility to prepare most of the documentation necessary to complete the transaction.  This means that the buyer’s lawyer will prepare the necessary documents and forward them to your lawyer’s office for your signature.

II.        THE DOCUMENTS

Typically, the documents that you will be asked to sign will include: a Seller’s Statement of Adjustments; a Form A Transfer (the “Transfer”); documents concerning the applicability of GST/HST to the particular sale and documents concerning your residency.  On occasion, if you have agreed to supply an existing site survey to save the buyer the added expense, you will be asked to attest to the accuracy of that survey by making a Statutory Declaration.

The Transfer is the document which, when properly executed and registered in the Land Title Office, effects the transfer of legal ownership of the property from the seller to the buyer.

The Seller’s Statement of Adjustments sets out the exact amount of money that your lawyer will receive from the buyer’s lawyer as net sale proceeds.  Items adjusted on the Statement of Adjustments include: the real estate commission that you will pay; municipal property taxes; utility levies; and strata fees, if applicable.

Generally speaking, the sale of “used residential housing” is not subject to GST/HST.  However, there are certain circumstances where the sale of used residential housing will attract GST/HST.  Although GST/HST is payable by the buyer, and collected by the seller, it is the seller’s use of the property that determines whether or not the sale is exempt from GST/HST.  Therefore, the buyer buying a used home may require a certificate confirming that the sale is not subject to GST/HST because the home is used residential property that has not been substantially renovated.  A buyer will also wish to confirm that the seller did not claim input tax credits on the purchase or capital improvements made to the used home.  It is essential that a seller determine, prior to agreeing to sell the property, whether or not the sale will attract GST/HST liability

To ensure that non-resident sellers pay Canadian tax owing on the gain resulting from the disposition of Canadian property, the Income Tax Act requires a non-resident seller to report the sale to the Canada Customs and Revenue Agency (“CCRA”) and to obtain a clearance certificate for the taxes potentially owing as a result of the transaction.  If a non-resident seller fails to comply with the procedures established by the CCRA, the buyer may become liable to pay the tax on behalf of that non-resident seller.  To avoid this potential liability, the buyer is required to make a reasonable inquiry (which will usually include requesting a statutory declaration from the seller) to determine whether or not the seller is a “non-resident” of Canada.  Consequently, the buyer will usually require you to make a statutory declaration stating that you are not a “non-resident” of Canada, within the meaning of the Income Tax Act.  If you are, or may be a non-resident of Canada, you should take steps to obtain a clearance certificate from CCRA well in advance of the date that the sale is to complete.  Failure to obtain a clearance certificate prior to completion will result in the buyer lawfully withholding 1/3 (in most cases) of the gross sale price and holding it in trust until 30 days after the month of closing at which point in time it must be remitted to CCRA if the seller has not yet provided the clearance certificate.  This withholding may leave insufficient funds to pay the outstanding balance owing on your mortgage.  As a result, you will not be in a position to provide clear title to the buyer, you will not be able to complete your sale and you will be in breach of contract.

A site survey may be required by the buyer’s lender, before it will advance funds under a mortgage.  A site survey shows the location of the dwelling in relation to the boundary lines of the property and will ensure that the dwelling is situated on the lot and is not encroaching on neighbouring properties or within municipal by-law set-back requirements.

If you have agreed to supply the buyer with a site survey, you will be asked to make a statutory declaration as to the continued accuracy of the site survey.  The Statutory Declaration is merely a declaration from you that, to the best of your knowledge, the foundation or boundaries of the dwelling have not been altered since the site survey was completed.  If no site survey is available or if additions have been made to improvements on the property, the buyer will have to obtain a new site survey, or arrange for title insurance, at their expense.  Generally, a seller is under no obligation to provide a site survey, however, if the seller is in possession of an up to date survey, it can save the buyer the expense of either obtaining a new one or arranging for title insurance instead of the survey.

While the buyer’s lawyer is busy preparing the documentation described above, your lawyer will have contacted the lender that holds your mortgage in order to request a payout statement indicating the monies that will be owing to the lender on the completion date as specified in the Contract.

Once your lawyer has received the above documentation from the buyer’s lawyer, it will be reviewed to ensure that it is accurate and that it correctly reflects the terms of the Contract.  Based upon the seller’s statement of adjustments as prepared by the buyer’s lawyer, your lawyer will prepare an Authority to Pay for your signature.  By signing this document, you authorize your lawyer to make certain disbursements on your behalf from the sale proceeds that will be received from the buyer’s lawyer.  The most common disbursements that will be found on the Authority to Pay are the amount required to pay out the mortgage on your property and the legal fees, disbursements and taxes incurred by your lawyer in acting for you in the sale transaction.  The balance of funds remaining after payment of your mortgage, legal fees and any other disbursements, are the “net sale proceeds” that will be paid to you.

After your lawyer has reviewed the seller’s documents and prepared the Authority to Pay, your lawyer’s office will contact you to arrange a meeting so that you and your lawyer can review and sign the necessary seller’s documents.

III.       CLOSING PROCEDURES

Once you have signed the seller’s documents, your lawyer will return them to the buyer’s lawyer who will attend to registering the Transfer in the Land Title Office on the completion date.  It is at this time that undertakings (i.e., promises or guarantees) are arranged between your lawyer and the buyer’s lawyer.

Undertakings are relied upon by real estate lawyers to establish the conditions upon which the closing documents are released to the buyer’s lawyer and to establish the conditions upon which the sale proceeds will be paid to the seller’s lawyer.  The buyer’s lawyer will undertake not to register the Transfer until the buyer has deposited into his lawyer’s trust account enough money to complete the purchase.  Your lawyer will undertake that, after having received the net sale proceeds from the buyer’s lawyer, all financial charges currently registered against the property will be discharged.

On the completion date as specified in the Contract, the buyer’s lawyer will attend to the registration of the Transfer and, if necessary, the buyer’s mortgage.  After registration is complete and the buyer’s lawyer has all the funds necessary to complete the transaction, the buyer’s lawyer will contact your lawyer’s office to advise that the net sale proceeds due to you are available for pick up.  Pursuant to the Contract, the buyer’s lawyer must ensure that the funds are available for pick up on the completion date as specified in the Contract. It then becomes your lawyer’s responsibility to arrange for the pick-up of the funds and their deposit into your lawyer’s trust account. However, the call to your lawyer’s office may not come until late that afternoon, often after the banks have closed.  Consequently, it may not be until the next weekday that your lawyer will be able to pay your mortgage lender the amount required to pay out the mortgage as well as make the net sale proceeds available to you.  Your lawyer will also advise the Realtors involved that the sale has completed and that the deposit monies can either be released to you or applied toward the real estate commission now owing, whichever is the case.

It is important to realize that it is difficult, and on occasion impossible, to have the seller’s mortgage lender paid out on the day of completion or to have the net sale proceeds available to the seller on the day of completion.  Therefore, if you require the net sale proceeds on a specific day (e.g., to complete the purchase of your next home), the Contract should establish the “completion date” as at least one day before the date that you will require the funds from your sale.  This will usually ensure that you receive the funds from the sale of your house in a timely fashion.

IV.       Possession

Finally, possession of the property is granted to the buyer upon the possession date as specified in the Contract.  It is at this point that the sale of your home is complete.

So you have decided to buy a new home.  The question is, what happens after you sign the Contract?  If you don’t know the answer to that question, don’t worry, you’re not alone.  Most new buyers are not aware of the extent of the work actually done by their lawyer to ensure that they obtain title to their new home on the terms that they had agreed to in the Contract.

This Guide has been prepared for you as the buyer and will attempt to simplify the “conveyance” process and take the mystery out of all those documents that your lawyer will present to you for your signature.

I. GATHERING INFORMATION

After receiving instructions from your Realtor, the first step taken by your lawyer will be to gather information concerning the property that you are about to purchase.

First, a title search of the property, as well as the relevant sub-division plan, is ordered from the Land Title Office (the “LTO”).  A review of the search will indicate who legally owns the property now and what charges are currently registered against it.  The charges may be financial, (e.g., a mortgage to be removed by the seller) or they may be non-financial (e.g., an easement or right of way) in which case the charge must be reviewed with you to ensure that it will not interfere with your intended use of the property.

The sub-division plan, which shows the location of the property relative to adjacent properties, will be reviewed with you to ensure that the property that you have agreed to buy is actually the same property that you intended to buy.

Second, your lawyer will request tax information from the particular municipal authority.  This search will reveal the amount of the annual property taxes and whether or not those taxes are up to date or are in arrears.  This specific information is necessary so that an adjustment can be made between the seller and you to ensure that each party pays its fair share of the current year’s taxes.

Third, if you are going to rely on mortgage funding to complete your purchase then you should request your mortgage lender to instruct your lawyer to prepare and register the mortgage.  Thereafter, the mortgage lender will forward the mortgage instructions to your lawyer for preparation and registration.

Fourth, assuming that you are relying on a mortgage loan to complete your purchase, the mortgage lender will require your lawyer to ensure that fire insurance coverage on the home has been arranged before it will release the mortgage funds.

Finally, it may be necessary to order a site survey as prepared by a licensed surveyor.  Essentially, a site survey is a line drawing that outlines the boundaries of the property and the house as it is situated within those property boundaries.  A site survey is only necessary if it is requested by the mortgage lender to confirm that the buildings on the property meet Municipal set-back requirements and to ensure that the buildings do not encroach on neighbouring properties.  Of course, you may have your own reasons to confirm this information and can request that a site survey be prepared.  If you prefer not to purchase a site survey, most mortgage lenders will accept a title insurance policy instead of a site survey.

It should be noted that if you are buying a strata lot (i.e., a townhouse or a condominium) the LTO will require that your lawyer obtain and file certain additional documents.  The intent of this additional requirement is to protect you, the buyer.

 II.     PREPARATION OF THE DOCUMENTS

After your lawyer has gathered all the necessary information, the next step is to prepare the documentation required to complete the conveyance of the property and the registration of the mortgage.  In British Columbia, the standard form Contract of Purchase and Sale stipulates that it is the buyer’s responsibility to prepare all the documentation necessary to complete the transaction.  This means that your lawyer will prepare all the documentation required, at your expense.

For the seller’s signature your lawyer will prepare a Form A Transfer (the “Transfer”), a Seller’s Statement of Adjustments and documents concerning the applicability of GST/HST to the particular sale and a statutory declaration concerning the seller’s residency (altogether, the “seller’s documents”).  The Transfer, when signed and registered in the LTO, is the document that will actually transfer title in the property from the seller’s name to your name.  The Seller’s Statement of Adjustments is a formal statement that will set out all of the financial adjustments to the sale price to be made between you and the seller and will also serve to “calculate” the exact amount the seller will be entitled to receive from you as net sales proceeds.

Next, your lawyer will prepare the Buyer’s Statement of Adjustments, a Property Transfer Tax Return and a Form B Mortgage (the “Mortgage”) for your signature.  Similar to the Seller’s

Statement of Adjustments, the Buyer’s Statement of Adjustments will adjust the purchase price and it will also calculate the amount of money required from you to complete the purchase.

Preparing the Mortgage, on behalf of the lender, and advising you on its content and consequences will place your lawyer in a conflict of interest.  This arrangement is the normal situation for a standard conveyance and mortgage transaction.  However, this conflict situation is allowable only if you have been made aware of the existence of the conflict faced by your lawyer and you have consented to it in writing.  The alternative to consenting to this arrangement is for you to pay for a second lawyer to act for the mortgage lender alone.

III.      SIGNING THE DOCUMENTS

After completion of the documentation, the seller’s documents are sent to the seller’s lawyer for signature by the seller.  It is at this time that undertakings (i.e., promises or guarantees) are arranged between your lawyer and the seller’s lawyer.  These undertakings are relied upon by real estate lawyers to close the transaction and to ensure that upon the seller’s lawyer receiving the net sale proceeds from your lawyer, the seller’s lawyer undertakes (or promises) to pay out immediately any financial charges that were registered against the property.  Without the reliance on undertakings, the closing process would be very complicated and cumbersome.

Finally, your lawyer’s office will contact you to arrange a meeting so that you and your lawyer can review the documents that you will have to sign: the Buyer’s Statement of Adjustments; the Mortgage; the Property Transfer Tax Return; and any other necessary documentation.  After signing the documents, but before the date for completion of the purchase, you will be asked by your lawyer to bring in any funds required to add to the mortgage proceeds in order to complete the transaction.  These funds must be in the form of a certified cheque or a bank draft made payable to your lawyer – in trust.

IV.     REGISTRATION AND COMPLETION

On the completion date, as set out in the Contract of Purchase and Sale, your lawyer will register the Transfer, the Mortgage, the Property Transfer Tax Return, as well as all other necessary documents, in the LTO.  The strict registration procedures followed by your lawyer on that day are designed to ensure that, at the end of the day, you will be the registered owner of the property, subject only to your lender’s mortgage and the seller’s financial charges which will be cleared from title by the seller’s lawyer, pursuant to the undertaking mentioned above.

After receiving confirmation from the LTO that the Transfer and Mortgage have been successfully registered, your lawyer will advise the mortgage lender that it has a valid first charge on the property and, at that time, the lender will advance the mortgage funds to your lawyer.  Upon receipt of the mortgage proceeds, your lawyer will combine those funds with the amount brought in by you and send the total amount, less any monies payable to realtors or other designated parties, to the seller’s lawyer on their undertaking to clear the existing financial charges.

The actual closing or completion of the transaction is complete when you take possession of the property.  Possession of the property will be granted to you on the possession date, as specified in the Contract of Purchase and Sale, or after the seller’s lawyer has received the net sale proceeds, whichever is later.  The keys for your new property will usually come to you via your Realtor once the seller’s lawyer has received the net sale proceeds.

 V. FINAL REPORTING

Aside from reporting to you in writing immediately after the completion date, the only task remaining for your lawyer is to obtain the State of Title Certificate, or “STC”, for the property.  The STC will be available approximately three to six weeks after the completion date.  The STC is issued by the LTO and it will show you as the registered owner of the property, subject to your mortgage registered as a first charge on title.  Ordinarily, the seller’s mortgage will no longer appear on title.

Upon receipt of the STC your lawyer will forward a copy to the mortgage lender and a copy to you, thereby confirming to each party that the transaction has been successfully completed and that your file will be closed.

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