Real Estate: Risks and tips

 

The Collapsing Deal
Holds on trust cheques, certified cheques and bank drafts
Assignments of contracts (flips)

Mortgages – Two year limitation to enforce runs from date of default
Mortgages – Standard practices for real estate conveyancing challenged (Lin)
Mortgages – Managing mortgage instructions

Strata - New strata assignment requirements effective January 1, 2019
Strata – Parking stalls and storage lockers in strata developments
Strata – Risks for property developers (Ulansky; Chameleon)
Strata – Special resolution required before litigating

Tax – Additional property transfer tax for foreign nationals, foreign entities and taxable trustees
Tax – New property transfer tax return requirements in effect September 17, 2018
Tax – Protect your purchaser client and yourself (Mao)
Tax – Additional property transfer tax on foreign parties
Tax – Property transfer tax misunderstandings

Value and identity fraud – Don't get caught
Value and identity fraud – Picture ID – keep copies

Undue influence
Witnessing signatures
Phony DocuSign scam

Lawyers who act in real estate transactions should be alert to the most common causes of reports of claims and potential claims in conveyancing practice. Read more about the common causes and the steps you can take to avoid getting caught.

 

The Collapsing Deal

Deals collapse for a variety of reasons. Your job is to preserve the right of the purchaser to claim for specific performance and the fullest amount of damages, or the right of the vendor to claim the deposit and further damages.

Find more information here: The Collapsing Deal | Law Society Online Learning Center (learnlsbc.ca)

Holds on trust cheques, certified cheques and bank drafts

Financial institutions can and have placed holds on trust cheques, certified cheques and banks drafts. A hold on these financial instruments can cause issues with lawyers' undertakings and closings. Read this resource with five risk management tips to reduce the risk of a hold.

Originally appeared in E-Brief, September 2018.

Real estate transactions involving assignments of contracts (flips)

Lawyers who prepare transfer documents and Property Transfer Tax forms in situations where there has been an assignment(s) of the purchase contract resulting in a final increased purchase price should consider carefully the appropriate amount to use in the Item 2b Market Value paragraph of the Form A Transfer and in the Item E portion of the Property Transfer Tax form. Most often, the total consideration paid by the Transferee is the amount that should be used.

Originally appeared in E-Brief, April 2016.
 

Mortgages

Protect your lender client and yourself

In Leatherman v. 0969708 B.C. Ltd., the BC Court of Appeal found that the new Limitation Act’s two-year limitation period to enforce mortgage security ran from the first date of default and not, contrary to the lender’s understanding, from the first date of demand. Read the case to properly advise lender clients about the two year limitation and when it starts to run.

Originally appeared in E-Brief, May 2018.

The law of property in BC might not give your clients the result they expect

The decision of Lin v. CIBC Mortgages Inc., 2015 BCCA 518, challenges standard practices for real estate conveyancing in British Columbia. Although it remains to be seen how the decision will be applied or interpreted, lawyers are encouraged to read the case and the Law Society’s suggestions on how to protect their lender clients and themselves.

Managing mortgage instructions

As lenders continue to revise the detailed mortgage instructions given to lawyers, you should consider any new provisions very carefully before accepting them. Pay particular attention to instructions that:

These steps may range from the primarily procedural, such as obtaining a certified copy of the insurance policy, to the more substantive, such as requiring higher liability coverage on the property than is usual, or asking you to conduct execution searches of guarantors or obtain waivers of equitable liens from the vendor in certain circumstances.

For instance, a lender that asks you to obtain “appropriate” or “adequate” property insurance is asking you to provide a service that falls to the expertise of an insurance broker, not a lawyer. As such, you risk giving the wrong advice in circumstances in which your professional liability indemnification policy will not cover you.

­You may, for instance, be asked to notify the lender of any significant escalation in the value of the property over a short period of time. You want to clarify that the intent of these instructions is to advise the lender only if you have the information in your possession that allows you to give the advice.
 

For example, lawyers for mortgagors are still being asked to go beyond the officer certifications contained in ss. 41 to 48 of the Land Title Act. Under those provisions, lawyers are not required to confirm that a person is who they say they are. In addition, the instructions may ask you to ensure that any identification offered is “valid.” Clarify that any assurance you give assumes that the identification reviewed is authentic.

You may find yourself facing a contractual claim for compensation by the lender for the actions of some third party, for example, in circumstances where your professional liability indemnification policy will not cover you.

As undertakings are intended to deal with issues between lawyers, not between lawyers and clients, it is not appropriate to accept such an undertaking. In addition, the undertaking may impose terms with which you are unable or unwilling to comply. If you are asked to accept such an undertaking, please contact the Law Society’s Practice Advisors for advice.

Whether you are asked to accept instructions, or have in fact already accepted instructions, deal proactively with these risks by taking the following steps:

  • Read each and every provision of the mortgage instructions carefully and thoroughly.
  • Identify any instructions that you are unable or unwilling to comply with, as well as any ambiguities.
  • Raise these issues with the lender, explaining your position that the particular service cannot be provided by a lawyer (or anyone), or address the cost of so doing and who will bear it.
  • Confirm the revised instructions in writing.

If you are asked to sign your acceptance of general mortgage instructions that will govern all future transactions, your systems should ensure compliance in the absence of separate instructions for each transaction.

This material is based on Curbing risk in real estate practice, Insurance Issues: Risk Management, March-April 2006.
 

Strata

New strata assignment requirements effective January 1, 2019

Lawyers acting for developers should become familiar with new disclosure, reporting and document retention requirements for assignments of new and pre-existing strata purchase agreements. Developers who do not comply may face marketing restrictions and significant fines or penalties (first offence up to $1.25 million, subsequent offences up to $2.5 million, and significant administrative penalties). See Policy Statement 16, Information Bulletin and creation of a Condo and Strata Assignment Integrity Register for more information.

Originally appeared in E-Brief, December 2018.

Parking stalls and storage lockers in strata developments

Purchasers of strata units expect to secure one or more parking stalls and storage lockers when buying a unit. If you act on a strata lot conveyance, your client will want to know that each parking stall and locker forming part of the deal is properly capable of transfer or assignment. Either investigate the issue yourself, or make it clear that it is the client’s responsibility to do so. If you act for a developer client wishing to designate parking stalls and storage lockers for various units, review the proposed structure to ensure that each stall and locker can effectively be transferred or conveyed.

Originally published as Parking stalls and storage lockers in strata developments (p. 8), Practice Watch, Benchers' Bulletin, Fall 2012.

Risks for property developers

New requirements for filing amended disclosure statements were set out in 2009 by the Court of Appeal in Chameleon Talent Inc. v. Sandcastle Holdings Ltd. In 2011, the BC Supreme Court found additional disclosure obligations for developers in Ulansky et al v. Waterscape Homes Limited Partnership et al. Help your developer clients protect themselves from buyers attempting to avoid completing future contracts by alerting them to their obligations arising from both decisions.

 Adapted from notices that appeared in E-Briefs, July 2010 and February 2011.

Special resolution required before litigating

A special resolution authorizing legal action by a strata corporation is now required before an action is commenced.

A decision of Cohen J. of the Supreme Court of British Columbia holds that the right of a strata corporation to commence a representative action does not exist outside of ss. 171 and 172 of the Strata Property Act, SBC 1998, c. 43: The Owners, Strata Plan LMS 888 v. The City of Coquitlam et al, 2003 BCSC 1131.

The case holds that non-compliance with ss. 171 and 172 must result in an action being declared a nullity. The court postponed granting an order to strike the plaintiff's action pending receipt of further submissions on an application to substitute an owner (or owners) as a plaintiff in the action.

Section 171 provides that, before a strata corporation sues as a representative of all owners about any matter affecting the strata corporation, the suit must be authorized by a resolution passed by a three-quarters majority vote ("a special resolution") at an annual or special general meeting. Section 172 provides that, before a strata corporation sues on behalf of one or more owners about matters affecting only their strata lots, the strata corporation must obtain the written consent of the applicable owners, and the suit must be authorized by a special resolution.

Cases under the predecessor provisions in sections 15(1) and 15(7) of the Condominium Act, RSBC 1996, c. 64 held that the need for the applicable special resolutions was a condition precedent to bringing an action. However these conditions precedent were interpreted as procedural in nature and any failure to obtain the approval of the owners prior to commencing an action was a mere irregularity that could be rectified. Cohen J. decided that the result of new wording in the Strata Property Act is that the case law under the Condominium Act does not apply to actions commenced on or after July 1, 2000.

In The Owners, Strata Plan LMS 888 v. The City of Coquitlam, 2003 BCSC 1131 the action was commenced after the Strata Property Act came into force. Special resolutions authorizing the action by the strata corporation were passed after the action had been commenced. Some defendants applied to strike the action on the basis that the plaintiff did not have the right, power or entitlement to bring the action. In making its ruling in favour of the defendants, the court held that requirements on a strata corporation for authorization to bring a representative action have changed substantially under the Strata Property Act. The mandatory provisions in ss. 171 and 172 are clear on their face and are substantive, rather than purely procedural.

Originally published as Leaky condo alert: The Owners, Strata Plan LMS 888 v. The City of Coquitlam, reported through Alert!, June 2003.
 

Tax

Additional property transfer tax for foreign nationals, foreign entities and taxable trustees

A foreign national, foreign corporation or taxable trustee will be required to pay additional property transfer tax on certain real estate transactions. This additional tax applies to the residential portion of a property that BC Assessment has classified as residential (class 1), farm land (that includes a residential improvement) or commercial (that includes a residential improvement). Familiarize yourself with the features of the tax by reading the Ministry of Finance’s webpage.

Originally appeared in E-Brief, December 2019

New property transfer tax return requirements in effect September 17, 2018

The BC Ministry of Finance has authorised a new version of the property transfer tax return (version 31) effective September 17, 2018. As of that date, the new PTT return will require  information on all beneficiaries of certain trusts and corporate interest holders, including their name, contact information, tax identifiers (SIN, ITN, BN) and citizenship. You will need to plan for time to obtain this information before your transactions close to avoid potential issues on closing.

The new PTT return is available for download on the Land Title and Survey Authority of British Columbia (LTSA) website. For more information on the regulation, including exclusions, read the Information Collection Regulation.

Originally appeared in Notice to the Profession, August 24, 2018 and Notice to the Profession, September 7, 2018.

Protect your purchaser client and yourself

In Mao v. Lui, 2017 BCSC 226, a notary, acting for a purchaser, was found liable for failing to make reasonable inquiries regarding an owner’s residency status.  In the decision, the Court held that withholding the non-resident income tax from the purchase price does not place a purchaser in breach of the contract of purchase and sale, where the registered owner may be a non-resident.  Real estate practitioners should consider advising their purchaser clients to withhold non-resident income tax in appropriate circumstances.

Originally appeared in E-Brief, March 2017.

Ministry of Finance announces additional property transfer tax effective August 2, 2016

The BC government has announced an additional property transfer tax on residential property transfers to foreign entities in the Greater Vancouver Regional District. The additional tax applies on all applicable transfers registered with the Land Title Office on or after August 2, 2016, regardless of when the contract of purchase and sale was entered into. For transactions involving Canadian citizens and permanent residents, their social insurance number must be collected and their identity verified against official government issued identification. The additional tax also has some unique features. For instance, it applies to transfers to a surviving joint tenant and various other transfers that may normally be exempt from property transfer tax. Lawyers will want to familiarize themselves with these and other features of the new tax, including issues relating to tax liability and anti-avoidance provisions, in order to properly advise clients. For details, read the Ministry of Finance’s tax information sheet and the legislation. Note that as changes may be made to the tax information sheet, you will want to subscribe to the government’s What's New page to receive email updates. 

The updated Property Transfer Tax form (version 27) is available for download through the Land Title and Survey Authority’s website.

For further information, see the following contact information:

Property transfer tax misunderstandings

The Lawyers Indemnity Fund has encountered several scenarios in which lawyers have misunderstood the operation of the property transfer tax regime.  Read more.

 

Value and identity fraud

Don’t get caught

If you act on any real estate transactions, you must learn about these and other fraud risks.  Protect your client – and yourself. 

Picture ID - keep copies

Obtaining picture identification is a critical step in preventing both value and identity frauds. Even if a fraud occurs, you want to know that you discharged your obligations to the lender. Remember, however, that you want proof that the identification was reviewed. In this respect, legible copies of the identification is the best evidence. Simply recording the driver’s licence number is probably not sufficient, although you may still need to write down the number if it is not ­legible on the copy. We've received reports involving lawyers who quite properly insisted on picture identification from the purchaser/borrowers. Unfortunately, the lawyers did not keep copies, creating evidentiary problems for their defence. And remember, if you're dealing with more than one client, insist that each produce separate photo ID.

In addition to keeping copies of identification, you also want to note any specific steps the lender asks you to take in trying to ascertain identity. These instructions may include taking identification from a list acceptable to the lender and completing a form regarding identification.

This material is based on Curbing risk in real estate practice, Insurance Issues: Risk Management, March-April 2006.
 

Undue influence

Are you concerned that your client may be vulnerable to undue influence by a relative, friend, caregiver, acquaintance, clergy member, accountant or other person? The BC Law Institute's guide can help.
 

Witnessing signatures

If you are about to witness a signature on a real property transfer form, mortgage or discharge or any other document with legal consequences, keep safe.
 

Phony DocuSign scam

Two BC lawyers have reported receiving phony DocuSign requests to access real estate documents by clicking on a link. The purpose of the scam is to enable a scammer to access confidential information (including bank accounts, passwords, etc.) or install malware. Even if the sender appears to be a client or another lawyer, consider the possibility that a fraudster is at work. Similar scams have been reported by lawyers in Alberta; see the Alberta Fraud Alert for more information. Read more about other scam attempts against lawyers and steps that you can take to protect yourself. If you are considering using a third-party storage provider, review your obligations in Law Society Rule 10-4. If you receive suspicious emails, please forward them to bbuchanan@lsbc.org.

Originally appeared in E-Brief, September 2018.
 

Common causes of reports in real estate practice

Lawyers who act in real estate transactions should be alert to the most common causes of reports of claims and potential claims in conveyancing practice:

The failure of lawyers to properly manage issues arising from title searches is the single greatest cause of real estate claims in BC. On these matters, a title search is done, but the lawyer:

  • assumes, without reading the search, that it doesn't raise any issues for the client (therefore missing, for example, a judgment registered on title or a bylaw contravention notice);
  • fails to read the search carefully or thoroughly (therefore missing, for example, a "flag" such as a notation of "miscellaneous notes" that indicates further searching is required);
  • reads the search but doesn't report the results to the client, assuming that whatever is noted on title will not be an issue for the client; or
  • waits until the last minute to read the search and report to the client, leaving the client with insufficient time to deal with any issues that might arise.

If a problem arises after the contract of purchase and sale is entered into but before the completion date, the lawyer sometimes fails to advise the client about the problem and seek instructions. For example: A purchaser discovers a driveway is partially located on municipal property, and the purchaser's lawyer advises the vendor's lawyer that the purchaser won't complete unless the price is reduced. The vendor's lawyer, rather than advising the vendor of the options (e.g. reduce price, insist on specific performance on the basis that the purchaser is bound by the contract of purchase and sale) and seeking instructions on those options, assumes that the vendor will want to reduce the price. The lawyer either recommends this option (without giving alternatives) or fails to seek any instructions. The vendor, unhappy with the results, makes a claim.

Some lawyers rely too heavily, or even completely, on their paralegals or conveyancers to read and appreciate the consequences of all documents and to manage those consequences appropriately. The lawyer is ultimately responsible for ensuring the conveyance is properly managed, and even highly experienced staff cannot be relied on or expected to bring a lawyer's expertise to every issue. At an absolute minimum, the lawyer should review the contract of purchase and sale, correspondence, title search and statement of adjustments to ensure that all is in order.

Staff should also be trained to "red flag" issues for the lawyer, rather than simply dealing with the issues themselves. For example, a purchaser's conveyancer may notice tax arrears and believe that he's dealt with them satisfactorily, but in fact he has not. If this issue is not flagged for the lawyer, and the lawyer does not fully review the file, the purchaser may end up with property on which back taxes are still outstanding and any opportunity to hold back funds is gone.

Lawyers may find themselves caught in a conflict involving members of the same family or lenders and borrowers, and facing potential claims as a result. The Code of Professional Conduct for British Columbia provides that in a real property transaction, a lawyer may act for more than one party with different interests only in the circumstances permitted by Appendix C: see section 3.4 and Appendix C of the Code.

Lawyers may find that they have acted in a situation in contravention of the Code requirements, either from the outset or as the matter has developed. The liability exposure arises from the fact that a lawyer cannot serve two masters. For example, information received from one client might prejudice another, but neither client's interests can be preferred over the other's.

In a family situation (such as when a lawyer acts for both parties on the transfer of property from an elderly person to a young relative) conflicts can give rise to claims that the lawyer ought to have recognized undue influence by one party. Further, for a lawyer to advise a client in these circumstances that, "I'm required to tell you to get independent legal advice but, if you do not want to, I'll still witness your signature," may not be sufficient if there are other red flags to suggest that something inappropriate is going on.

Separate from any liability exposure arising from acting in a conflict, a lawyer's breach of the Code may result in the Law Society taking disciplinary action.

Even when a lawyer reviews the file documents, errors can arise if that review is not done thoroughly or carefully. As a result, the lawyer does not consider or investigate issues. The importance of doing so would have been apparent if the lawyer had thoroughly read the documents in the file. For example, a lender may end up with insufficient security if, after giving mortgage instructions to a lawyer to take security on five lots, the lawyer takes security on only two because he or she did not read - or read carefully - the mortgage instructions.

Other mistakes that occur as a result of an inadequate document review include failing to deal with issues arising from section 116 of the Income Tax Act or outstanding municipal taxes, forgetting to hold back funds and failing to determine the correct amount of the mortgage payout or ensure that the payout statement relates to the subject property.

On each conveyance file you open, remember to review the specific terms of the contract of purchase and sale to ensure compliance and avoid a collapsed deal (particularly troublesome in an active real estate market). Even if the contract is in the standard form approved for use by the BCREA and CBA, be sure to review the terms, especially as this contract is revised from time to time.

If you are involved in solicitor property sales - acting for buyers or sellers in the purchase or sale of property or goods - remember that the highest risk you likely face is exposure to a claim for negligent misrepresentation, so exercise caution with respect to all representations concerning a property.

This material is based on Risk Management in real estate conveyancing practice, Alert!, March 2004.

 

Last updated: January 2019