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Further to our COVID-19 – Office Plans communication, at Magellan Law, we take the health and safety of our clients and team very seriously.  In response to the COVID-19 outbreak, we have decided to temporarily close our physical office to minimize potential impact to our clients and team.  Our office closure will be effective immediately and will continue until further notice.

Thankfully, we are capable of transitioning our practice to a virtual office.  The use of document management, client management and practice management software assists us in having file information readily available while our team members are working remotely.

Below we have set out what you can expect as we temporarily transition to a virtual office:

  • Our team members will continue to work on your file remotely. It is expected that this transition will be seamless for you as Magellan Law already maintains its active files electronically.
  • All of our team members’ emails will be monitored. We will continue to be accessible to you by email for inquiries, requests and other correspondence.  While we have arranged for mail forwarding, we encourage you to use email for transmission of documents.  If you have security concerns over email, we can arrange to use e-Courier, a secure email and file sharing tool, to ensure seamless service on your file.
  • Annual reports and other filings will continue to be processed. Our office will complete all filings in the usual course to the extent that the BC Registry and/or other filing agencies remain open.
  • All appointments will be by telephone or video call. While we value and enjoy the opportunity to meet with you in-person, we will make virtual arrangements for all meetings to minimize any potential exposure.  Our voicemail system will be regularly monitored and our team members will be available by IP phones and/or cell phones.  In the event that you had an in-person meeting scheduled with our office in the near future, we will contact you to make the revised arrangements.

As we navigate the potential challenges ahead, we will endeavor to keep you updated as quickly as possible.  We value your continued trust and partnership with Magellan Law.  Please feel free to reach out to us if you have any additional questions.

At Magellan Law, we take the health and safety of our clients and team very seriously.  We also prioritize clear and transparent lines of communication.  Accordingly, we wish to share some of the steps we are taking to respond to the COVID-19 outbreak.

As the impact of COVID-19 continues to evolve and new information becomes available daily, our goal at Magellan Law is to remain calm but ensure that we have a contingency plan in place to minimize potential impact to our clients and team.

Our team members have been instructed to sanitize their offices and workstations every night.  We are taking steps above and beyond our usual strict cleaning regimens for our common areas, including reception and boardrooms (which are always sanitized after each meeting and at the end of the day), to help reduce the spread of germs.  We have also posted hygiene reminders throughout the office and hand sanitizer has been made readily available.

We are monitoring the health of all team members and encouraging anyone who feels sick to stay at home.  We have also temporarily ceased our group team meetings and, to the extent possible, are managing internal workflow electronically.

Further, our team members have been encouraged to avoid any physical contact (including handshakes) with clients and colleagues.

Thankfully, we are capable of transitioning our practice to a virtual office in the event that it becomes prudent or necessary to temporarily close our physical location.  The use of document management, client management and practice management software assists us in having file information readily available in the event that our team members are working remotely.

We continue to monitor the local situation and are prepared for the possibility that our office may be faced with an exposure to the virus.  Below we have set out what you can expect if we temporarily close our physical office:

  • Our team members will continue to work on your file remotely. It is expected that the transition to a virtual office (if necessary) will be seamless for you as Magellan Law already maintains its active files electronically.
  • All of our team members’ emails will be monitored. We will continue to be accessible to you by email for inquiries, requests and other correspondence.  While we will arrange for mail forwarding, we encourage you to use email for transmission of documents in the event that our physical office is closed.  If you have security concerns over email, we can arrange to use e-Courier, a secure email and file sharing tool, to ensure seamless service on your file.
  • Annual reports and other filings will continue to be processed. Our office will complete all filings in the usual course to the extent that the BC Registry and/or other filing agencies remain open.
  • All appointments will be by telephone or video call. While we value and enjoy the opportunity to meet with you in-person, we will make virtual arrangements for all meetings to minimize any potential exposure.  Our voicemail system will be regularly monitored and our team members will be available by IP phones and/or cell phones.

As we navigate the potential challenges ahead, we will endeavor to keep you updated as quickly as possible.  We value your continued trust and partnership with Magellan Law.  Please feel free to reach out to us if you have any additional questions.

We are all Canadian. Today we took the opportunity to come together as a firm and show our support for the Humboldt Broncos. We ask that you hug somebody you love today, because tomorrow is not a guarantee.   We may not know any of the young men or women who were involved in this terrible accident, but we share in the overwhelming sense of grief and love because,  we are all Canadian.

 

On July 18, 2017, the Department of Finance Canada released draft amendments to the Income Tax Act (Canada) and a discussion paper proposing significant changes to the taxation of private corporations in Canada (collectively, the “July Proposals“). The July Proposals seek to increase the tax paid by private corporations on investment income and also eliminate common tax planning arrangements for corporate shareholders. As summarized in our article of September 20, 2017, three of the most disconcerting points of the July Proposals were: (1) restrictions on the ability to income split among family members; (2) higher tax on passive investment income earned within a corporation; and (3) restrictions on the conversion of income into capital gains.

During the consultation period, we understand that the Government received over 21,000 submissions in response to the July Proposals. After the consultation period formally ended on October 2, 2017, the Government announced certain amendments to the July Proposals during the week of October 16, 20171 (the “October Announcements” and, together with the July Proposals, the “Proposals“). It is clear that our voices are making a difference and we applaud those of you who shared your story and set out your concerns to your Member of Parliament and The Department of Finance Canada during the consultation period.

As a brief summary, the October Announcements set out the Government’s intention to:

  • Lower the federal small business tax rate to 10% effective January 1, 2018, and to 9% effective January 1, 2019;
  • Simplify the proposed changes to income splitting;
  • Not move forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption;
  • In relation to the proposed measures concerning the way passive investment income is taxed within a private corporation:
  • Ensure that all past investments and the income earned from those investments is protected; and
  • Protect up to $50,000 per year of passive income in a private corporation; and
  • Not move forward with the proposed measures relating to the conversion of income to capital gains.

Although the Government has abandoned or retrenched some of the July Proposals, the proposed changes that are moving forward remain problematic and will negatively impact the way private corporations and their shareholders are taxed in Canada. It is particularly concerning that the Government is pressing forward with the proposed changes relating to income splitting (despite the intention to simplify these proposals) as such changes will likely have the largest impact on family businesses.

We continue to be of the opinion that not only will the Proposals have a significant adverse impact on the Canadian economy, but will also be a pressing issue leading up to the next federal election.

Although the formal consultation period has come to a close, we encourage you to continue to reach out to your Member of Parliament to share your views and concerns regarding the Proposals. As mentioned above, it is clear that our voices are making a difference and we feel it is important to keep the conversation open.

The information provided above is of a general nature and has been provided as a courtesy to our corporate clients. This email has been sent to our contact on file so please feel free to share the information contained herein as you feel may be appropriate. While we have strived to ensure the information contained herein is accurate and has been obtained from reliable sources, the content of this email should not be acted upon without prior consultation with your professional advisors.

If you would like to further discuss the Proposals, please contact your tax advisor or one of our corporate lawyers.

On July 18, 2017, the Department of Finance Canada released draft amendments to the Income Tax Act (Canada) and a discussion paper proposing significant changes to the taxation of private corporations in Canada (collectively, the “Proposed Tax Changes“). The Proposed Tax Changes seek to increase the tax paid by private corporations on investment income and also eliminate common tax planning arrangements for corporate shareholders. If implemented, the Proposed Tax Changes will negatively impact the way private corporations and their shareholders are taxed in Canada. We strongly recommend that you get familiar with the Proposed Tax Changes and how they may negatively affect your business and your family.

In summary, the three main focusses of the Proposed Tax Changes are as follows:

    • Income Splitting – The Proposed Tax Changes will result in restrictions on income sprinkling to family members using a private corporation. Specifically, this change targets private corporations using different share classes or a family trust to split income among family members. A reasonability test will be implemented which will take into consideration the family member’s involvement in the business (labour contributions, assumed risk, etc.) when certain income is distributed to that family member (i.e. dividends).
    • Higher Tax on Passive Investment Income – The Proposed Tax Changes will change the way passive investment income is taxed within a private corporation. These changes are intended to limit the benefits and neutralize the financial advantages of investments held within a private corporation.
    • Restrictions on Capital Gains – In certain circumstances, corporate surplus can be converted into capital gains (lower-tax bracket) rather than being treated as a dividend (higher-tax bracket). The Proposed Tax Changes will prevent such conversion to capital gains and instead provide that such income be treated and taxed as a dividend.

It is likely that many of the foregoing terms sound familiar. Countless business owners have spent their time and money, together with their legal and accounting teams, planning and implementing a structure for their business to take advantage of the above benefits and rates currently available to private corporations. The Proposed Tax Changes have the ability to render the structures that have been so carefully implemented, and that have been proven successful for years, ineffective.

The Minister of Finance, Bill Morneau, has indicated that the Proposed Tax Changes are about fairness and that business owners should be treated (and, accordingly, taxed) just like salaried employees. However, there are significant differences between business owners and employees. Full-time salaried employees get sick days, employment insurance benefits if they lose their job, vacations, and other benefits such as pension plans and health insurance, with these benefits at least partly paid by the small businesses for which they work.  If they lose their jobs and believe they weren’t provided with adequate notice, they can sue their former employers, a right which essentially provides employees with enhanced employment insurance coverage.  Business owners and professionals, in contrast, have to provide for their own benefits and pensions, do not get sick or vacations days, and are not able to benefit from the employment insurance system if they lose their business.  In addition, they bear the expense and pressures of running their businesses and the risk of losing their investment, which is why they have historically received a lower tax rate and other benefits.

Should you wish to read more about the Proposed Tax Changes, the following link will bring you to the Government of Canada’s website and provides links to each an overview, the consultation document and the draft legislation: http://www.fin.gc.ca/n17/17-066-eng.asp.

Please note that the consultation period for the Proposed Tax Changes closes on October 2, 2017. Accordingly, we encourage you to contact your Member of Parliament to share your views on the Proposed Tax Changes as soon as possible. The Department of Finance Canada is also inviting written comments on the Proposed Tax Changes until October 2, 2017 at the following electronic address: fin.consultation.fin@canada.ca.

For your ease in responding to these extensive and severe proposals, attached please find a template letter in Word format. Please feel free to use the attached template as a base for your written submission by affixing your letterhead and outlining your comments and concerns thereon.

While we have maintained a fairly neutral and professional approach in our template letter, we encourage you to passionately voice your concerns. You have the opportunity to ensure your story is represented and that the sacrifices you and your family have made continue to be recognized. It is with such passion that traction is made and that our voices, as business owners, are heard. You may even wish to indicate your intent to vote (or not vote) a certain way if the Proposed Tax Changes proceed.

We strongly believe that our country will suffer irreparable harm if the Proposed Tax Changes are implemented. Again, we ask that you please join the discussion by providing a written submission to the Government using one of the methods above. We truly hope that an abundance of negative and warranted response will persuade the Government to repeal the Proposed Tax Changes in their entirety.

Please note that the importance of sharing your voice on this issue is even more pressing given that the British Columbia Provincial Government just raised the corporate tax rate and rate for the top personal tax bracket.

The information provided above is of a general nature and has been provided as a courtesy. While we have strived to ensure the information contained herein is accurate and has been obtained from reliable sources, the content of this Article should not be acted upon without prior consultation with your professional advisors.

If you would like to further discuss the Proposed Tax Changes, please contact your tax advisor or one of our corporate lawyers.

DOWNLOAD LETTER TEMPLATE

We act for a number of professionals, including lawyers, realtors, doctors, dentists and physiotherapists, all of which are subject to various rules and regulations of their respective governing body. One of the matters that is regulated by these governing bodies is the ability of a professional to practice through a professional corporation and how the professional corporation can be structured. A professional corporation is a type of corporation whose business is limited to providing professional services. The decision by a professional to conduct their business or practice via a professional corporation is usually tax driven. Prior to incorporating a professional corporation it is necessary to review the applicable rules and regulations of the particular governing body in order to ensure that the structure of the professional corporation is in compliance with all such rules and regulations.

Recently, we were asked to incorporate a professional corporation for a physiotherapist in which the voting shares of the professional corporation were to be held by a holding company controlled by the physiotherapist. Physiotherapists are subject to the rules and regulations of both the College of Physiotherapists of British Columbia (the “College“) and the Health Professions Act (British Columbia) (the “Act“). Consequently, our client could not incorporate a professional corporation without first obtaining a permit from the College to do so.

During the incorporation process we were advised by the College that our proposed corporate structure for our client’s professional corporation would not be permitted by the College as the College did not allow a holding company controlled by a physiotherapist to hold the voting shares of a professional corporation. This policy was at odds with our review of the provisions of both the Act and the College’s bylaws (the “Bylaws“). In reviewing the Act and the Bylaws, we determined that there is nothing in either the Act or the Bylaws that prohibits a holding company controlled by a physiotherapist to own the voting shares of a professional corporation. In fact, Part 4 of the Act specifically allows for a holding company controlled by a registrant to own the voting shares of a professional corporation.

We also determined that pursuant to provisions in both the Act and the Bylaws, the College does not have the discretion to withhold a permit for a professional corporation if the applicant is in compliance with the Act and the Bylaws. We brought our position to the College and received confirmation from the College that they agree with our analysis and will be changing their policy going forward. This policy change will enable physiotherapists who wish to utilise such a corporate structure to do so in the future; and allow physiotherapist who were denied such a corporate structure in the past to change their corporate structure going forward.

If you would like further information about professional incorporations please contact Steven Fruitman at steve@magellanlaw.ca or (778) 726-0175.

Steven Fruitman, a Langley lawyer, joined more than 200 cycling enthusiasts and event volunteers from across British Columbia for the BCLung Association’s 28th Bicycle Trek for Life and Breath (Trek).

This was Fruitman’s [sixth] time participating in the popular two-day, 200-kilometre ride from White Rock to Cultus Lake and back to raise funds in support of vital lung health research, programs and clean air initiatives.

The ride took place on Sept. 8 and 9.

[F]ruitman is a member of Trek team Magellan, a team named after the Langley-based law firm he helped found. Team Magellan is one of the event’s top two fundraising teams and raised more than $13,000 this year alone. So far the 2012 event has raised more than $200,000, contributing to the $5.5 million raised during the event’s 28-year lifespan.

A quiet phenomenon which began more than two decades ago, the grassroots event has built up over time and serves as a reunion for many “trekkers” who return on average 10 times.

“Many people do the event year after year,” said BC Lung Association event organizer Kate Jarvis. “The event has a real family feel with less fanfare than other, bigger commercial fundraisers but with a lot of heart and soul. There is a true sense of community amongst participants, many of whom meethere once a year and share in the spirit of giving back.”

To participate, cyclists raised a minimum donation of $475 and in return, travelled a fully supported bike route from start to finish, with reststops, food to fuel the journey, fabulous scenery and a slew of fundraisingincentive prizes, including the chance to win a trip for two to Paris.

For more information or to make a donation in support of the BC Lung Association call 604-731-5864 or toll free at 1-800-665-5864 (outside Greater Vancouver), email info@bc.lung.ca or visit www.bc.lung.ca.

Read more: http://www.langleyadvance.com/Lung+health/7259927/story.html#ixzz27FBJWCMA

Written and published in the Langley Advance on September 18/2012

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.

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