Lawson Lundell's Real Estate Law Blog

City of Vancouver Issues Standard Form Letter of Credit Policy

Posted in Development, Lenders, Municipal law
Comment

The City of Vancouver (the “City”) has issued a new corporate policy on Letters of Credit that sets out the requirements that must be met where applicants for City approvals are required to provide security to the City for development or non-development projects.

The policy provides that the City will not accept any form of cheque (whether certified or not) or bank draft as an alternative form of security and that the City will only accept letters of credit from the following financial institutions:

  • Bank of Montreal
  • The Bank of Nova Scotia
  • Canadian Imperial Bank of Commerce
  • Canadian Western Bank
  • National Bank of Canada
  • Royal Bank of Canada
  • The Toronto Dominion Bank
  • HSBC Bank Canada
  • BlueShore Financial Credit Union
  • Coast Capital Savings Credit Union
  • Vancouver City Savings Credit Union

The policy also includes a copy of the only form of letter of credit that will be accepted by the City going forward. A copy of this form of letter of credit can be found at the link here: City of Vancouver – Letter of Credit Template.  The City has advised that the form of letter of credit has been vetted by the major national banks on the above list.  The application of the City’s new policy along with the approved form of letter of credit should streamline the process of settling security with the City when required as part of the City’s approval process.

 

British Columbia Law Institute Publishes Consultation Paper on Complex Stratas

Posted in Condominium (strata) law
Comment

The British Columbia Law Institute published on September 1, 2016 its Consultation Paper on Complex Stratas seeking public comments on proposed reforms to the Strata Property Act and its regulations concerning sections, types, and phases.

The BCLI carries out scholarly research, writing and analysis for law reform, collaborating with government and other entities, and providing materials and support for outreach and public information.

Sections and types allow a strata corporation to manage cost sharing between owners, while phases permit the development of a strata property in segments over tended time. These tools are important in creating and sustaining sophisticated, architecturally varied, or mixed-use stratas. With the publication of the consultation paper, the public has an opportunity to consider and comment on a comprehensive list of needed reforms to sections, types, and phases.

The consultation paper has 68 tentative recommendations for reform, including:

  • 29 tentative recommendations on sections, which propose clarifying the process for creating and cancelling sections, spelling out section powers and duties strengthening section governance, budgets, and finances;
  • 14 tentative recommendations on types, which propose clarifying the process for creating and cancelling types and fine-tuning the operation of types; and
  • 25 tentative recommendations on phases, which propose enhancing the phasing process, simplifying governance in a phased strata corporation and providing additional protections for the financial interests of owners in a phased strata.

Ed Wilson, senior partner of our Real Estate Group is a member of the BCLI’s Strata Property Law Project Committee, which commenced its review of the Strata Property Act in October of 2013 and will continue its review of other important issues into 2017.  Lisa A. Peters, head of Lawson Lundell’s Research and Opinion Group is the incoming Chair of the BCLI.

The full consultation paper, a summary consultation, a response booklet, a background and a link to BCLI’s survey are all available at http://www.bcli.org. The consultation period ends January 15 2017.

 

New Real Estate Tax Leads to Collapsed Deals

Posted in Tax
Comment

The provincial government’s new 15 per cent tax on foreign purchasers of residential property is the talk of the town in Metro Vancouver.  While many local residents have spent the last several days debating about the likely effect of the tax, others are already facing the consequences as buyers respond to the tax by failing to complete on binding agreements of purchase and sale.

To read more, click the original post from our Western Canada Business Litigation Blog here.

Strata Wind Up Amendments Come into Effect

Posted in Condominium (strata) law, Strata wind up
Comment

On July 28, 2016 highly anticipated changes to the British Columbia Strata Property Act came into effect by regulation. The following news release from the government provides more information about these amendments.

Of key importance to strata corporations, developers and owners alike is the reduction in the voting threshold required to terminate a strata corporation. Prior to these amendments, the Strata Property Act required a unanimous vote of all strata lot owners to terminate a strata corporation. With the coming into effect of the regulations, this voting threshold has been lowered to 80% with a court order. For more information regarding this amendment please see our previous blog post that examined a proposed amendment to the Strata Property Act.

Although these amendments to the Strata Property Act make it easier for owners to vote to wind up a strata corporation, a strata wind up is a technical, complicated process. Legal advice should be sought early on in the process to help ensure a successful wind up. Lawson Lundell’s Strata Wind Up Group assists strata corporations, developers, strata management firms, appraisers and real estate agents in all aspects of strata corporation wind ups. We have valuable experience dealing with strata wind ups, including the first court-approved wind up in British Columbia, and can assist strata corporations, developers and real estate agents in navigating this process.

For more information, please contact a member of the Strata Wind Up Group:

Digging Deeper into the New Foreign Entity Tax

Posted in Tax
Comment

In our blog post from July 25, 2016 we highlighted the provincial government’s introduction (effective August 2, 2016) of the new 15% property transfer tax (the “Foreign Entity Tax“) on foreign buyers of residential property in the Greater Vancouver Regional District (“Metro Vancouver“).

The Foreign Entity Tax has been introduced by way of an amendment to the Property Transfer Tax Act (British Columbia) (the “Act“).

Foreign Entity Tax applies in respect of a “taxable transaction“, where such transaction includes “residential property” located either wholly or in part within a “specified area” and where a transferee is a “foreign entity” or a “taxable trustee“, or both.

This article examines each of these key elements to determine those transactions that will trigger the required payment of this Foreign Entity Tax and provides further details of these new rules.

1. What is “Residential Property”?

The Foreign Entity Tax will be triggered by any registered transfer of “residential property” to a foreign entity or taxable trustee.

The Act defines “residential property” to include any of the following:

i) lands or improvements that are described as “Class 1 property” under the Prescribed Classes of Property Regulation (British Columbia). BC Assessment places properties within one or more of 9 classes of property, typically based on the property’s type or use. The class of a particular property is set out on both the BC Assessment Roll Report and Property Tax Certificate. Class 1 property is defined to mean land or improvements, or both, used for residential purposes and includes not only single family residences but also duplexes, multi-family residences, apartments, condominiums, manufactured homes, nursing homes and resthomes. It is important to note that “Class 1 property” also includes bare, undeveloped land that currently has no use and is neither specifically zoned nor held for business, commercial or industrial purposes; and

ii) an area of land, not including improvements, that is not larger than 0.5 hectares in area and which is classified as a farm under the Assessment Act (British Columbia) because the land is used either for: (i) an owner’s dwelling (meaning a dwelling that is occupied as the principal residence of the owner of the property and where the owner is a retired farmer, the spouse of a retired farmer or a person who was the spouse of a retired farmer at the time of the retired farmer’s death and such owner has reached the age of 65 years); or (ii) a farmer’s dwelling (meaning a dwelling located on or adjacent to the farm and is occupied by a person who is actively involved in the day-to-day activities of that farm).

2. What is the “Specified Area”?

The Foreign Entity Tax will apply to registered transactions in respect of residential property located, either in whole or in part, within Metro Vancouver (aka the GVRD), which includes Anmore, Belcarra, Bowen Island, Burnaby, Coquitlam, Delta, Langley City and Township, Lion’s Bay, Maple Ridge, New Westminster, North Vancouver City and District, Pitt Meadows, Port Coquitlam, Port Moody, Richmond, Surrey, Vancouver, West Vancouver, White Rock and Electoral Area A (ie. UBC).

Although Tsawwassen First Nation is included within Metro Vancouver, the new rules explicitly exempt these treaty lands from the “specified area”, and as such the Foreign Entity Tax will not apply to treaty lands of the Tsawwassen First Nation unless such treaty lands are later prescribed as part of the specified area by the Lieutenant Governor through regulation (as set out in more detail below at Item 12).

3. What is a “Taxable Transaction”?

Currently, property transfer tax is only payable with respect to registered transactions. Therefore, only transactions that are taxable within the meaning of the Act, including the transfer of a fee simple interest in land or a registered lease of land with a term longer than 30 years, will attract Foreign Entity Tax, subject to the anti-avoidance rule as described at Item 11 below.

4. What is a “Foreign Entity”?

Under the new rules, a foreign entity includes both a “foreign national” and a “foreign corporation“.

Foreign National

A “foreign national” means a person who is not a Canadian citizen or a permanent resident, and includes a stateless person.

Foreign Corporation

For purposes of determining which corporations are “foreign corporations”, the new rules adopt the “de facto” control test in section 256 of the Income Tax Act (Canada). De facto control occurs where a person or group of persons has a clear right and ability to effect the composition or decision of the board of directors of the company, or can directly influence the shareholders of a company that can elect the board of directors. Many factors are taken into account in determining de facto control, common examples include family relationships, economic influence over the company or its shareholders, degree of involvement in the operation of the company and contractual relationships, and is therefore a fact based test that has a broad scope.

A corporation that is incorporated in Canada but is “controlled” by one or more of the following is considered to be a foreign corporation to which the Foreign Entity Tax applies:

i) a foreign national;

ii) a corporation that is not incorporated in Canada; or

iii) a corporation that is controlled by a foreign national or by a corporation that is not incorporated in Canada.

Corporations whose shares are listed on a Canadian stock exchange are explicitly excluded from the definition of a foreign corporation, and therefore will not attract Foreign Entity Tax even if such corporation is controlled by a foreign entity.

5. What is a “Taxable Trustee”?

Taxable Trusts

A “taxable trustee” will attract Foreign Entity Tax and includes any trustee of a trust that is a foreign national or a foreign corporation, but also includes a trustee of a trust that is not a foreign entity but, immediately after the registration of the taxable transaction, a beneficiary of the trust who is a foreign entity holds a beneficial interest in the residential property to which the taxable transaction relates.

Exempted Trusts

Under the new rules, real estate investment trusts, specified investment flow-through trusts and mutual fund trusts, all as defined in the Income Tax Act (Canada), do not qualify as “trusts” for the purposes of the Act, and therefore are not subject to Foreign Entity Tax.

6. Calculating Foreign Entity Tax

Currently, the amount of the Foreign Entity Tax is 15% of the fair market value (the “FMV“) of the residential property that is the subject of the taxable transaction. The Foreign Entity Tax applies in addition to the general property transfer tax (“PTT“) payable on a taxable transaction under the Act. Therefore, the total amount of property transfer tax payable will range depending on the FMV of the residential property that is the subject of the transaction.

By way of example, if a foreign entity decides to buy a multifamily apartment building in Burnaby for $5,000,000, that entity would be required to pay $878,000 in taxes under the Act at the time the transfer is filed in the land title office ($750,000 for the 15% Foreign Entity Tax and $128,000 for the traditional PTT – being 1% for the first $200,000, 2% for the FMV that exceeds $200,000 but does not exceed $2,000,000, and 3% for the FMV exceeding $2,000,000).

If a property consists of both residential property and also commercial property, only the value of the residential portion of a transfer is used for calculating the Foreign Entity Tax. Also, if a foreign entity or taxable trustee acquires only a portion of the residential property that is the subject of the taxable transaction, that entity will be responsible for its proportionate share of the taxable transaction’s FMV.

7. Implications for Canadian Entities doing Business with Foreign Entities

Each transferee under a taxable transaction is jointly and severally liable to pay the total amount of the Foreign Entity Tax owing. If a Canadian entity goes into business with a foreign entity, for example by way of a joint venture or a partnership, and taxable residential property is purchased collectively by the parties, the foreign entity, but not the Canadian entity, will attract Foreign Entity Tax. However, because the obligation to pay the tax is joint and several, the Canadian company will be liable for the payment of the Foreign Entity Tax if the foreign entity fails to do so.

8. Exemptions under the Act that do not apply to the Foreign Entity Tax

Under the Act, certain transactions are exempt from the payment of PTT. However, the same exemptions do not apply to exempt the payment of the Foreign Entity Tax.

For example, while an amalgamation of two companies under the Business Corporations Act (British Columbia) or the Canada Business Corporations Act is typically exempt from PTT, Foreign Entity Tax will be payable if the amalgamated company is controlled in whole or in part by a foreign national or foreign corporation.

Other transactions that are otherwise exempt from PTT but which attract Foreign Entity Tax include, but are not limited to:

i) a transfer between related individuals;

ii) a transfer to the survivor of a joint tenancy of the land; and

iii) a transfer from a transferor to a transferee, each of whom is registered under the Land Title Act as a trustee of land, if the change in trustee is for reasons that do not relate, directly or indirectly, to a change in beneficiaries or in a class of beneficiaries or to a change in the terms of the trust.

In these circumstances, while PTT would not be payable, the transferee would still be required to pay the Foreign Entity Tax in the amount of 15% of the FMV of such transaction.

9. Revisions to Notice of Assessments

With respect to PTT generally, the government must issue any notice of assessment providing for the corrected determination of the FMV or tax owing within one (1) year after the date the transaction was registered in the land title office. With respect to the Foreign Entity Tax, the government will be able to issue a notice of assessment with respect to Foreign Entity Tax within six (6) years after the date that the transaction was registered in the land title office.

10. Increase in Financial Penalties

The new rules make it an offence for any person to make a false and misleading statement with respect to information required to be provided under the Act.

Additionally, the fines payable under the Act with respect to an offence related to the Foreign Entity Tax is significantly higher than the fines under the Act payable with respect to an offence related to PTT. The following table summarizes these fines:

Fines for an Offence by a Corporation Fines for an Offence by an Individual
Foreign Entity Tax
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $200,000
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $100,000
PTT
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $50,000
  • amount of tax not repaid or remitted, with interest, and
  • an amount not exceeding $25,000

11. New Anti-Avoidance Rule

There is also now a new anti-avoidance rule whereby the government is given the power to determine the tax consequence to a transferee though an assessment under the Act if it determines that a particular transaction, or part of a series of transactions, resulted either directly or indirectly in a reduction, avoidance or deferral of the Foreign Entity Tax. Similar anti-avoidance rules have not existed previously under the Act with respect to the payment of PTT, and still do not apply to PTT under the Act.

As this anti-avoidance rule is only intended to capture avoidance transactions, an exception has been created for transactions that are reasonably considered to have been undertaken or arranged primarily for bona fide purposes other than for the purpose of obtaining a reduction, avoidance or deferral of Foreign Entity Tax.

The government is also granted the power to investigate whether the information required to be provided under the Act is accurate. This expands the government’s current investigative powers under the Act.

12. Legislative Flexibility

Under the new rules, the Lieutenant Governor may, by regulation, amend certain elements of the Foreign Entity Tax, including the following:

i) Prescribing other areas in British Columbia as being located within the “specified area”. In such case the Foreign Entity Tax would apply to these areas even though they are not located within Metro Vancouver.

ii) Prescribing a new tax rate that is not less than 10% and no greater than 20% of the FMV of taxable residential property.

New Property Tax for Foreign Buyers

Posted in Tax
Comment

The provincial government announced earlier today, July 25, 2016, that foreign buyers of residential real estate in the Greater Vancouver Regional District (excluding Tsawwassen First Nation lands) will be subject to an additional property transfer tax (The “Additional PTT”) of 15% of the fair market value of a foreign entity’s proportionate share of property. For a more detailed overview of this new tax, please refer to the Ministry of Finance Tax Information Sheet.

In summary, the Additional PTT:

  1. Is effective on August 2, 2016, regardless of when the applicable contract of purchase and sale was entered into.
  2. Is in addition to the general property transfer tax payable on applicable real estate transfers registered with the Land Title Office.
  3. Applies to “residential property” which includes, but is not limited to, single family residences, duplexes, multifamily residences, apartments, condominiums and nursing homes.
  4. Applies to “foreign entities”, being:
    1. foreign nationals who are not Canadian citizens or permanent residents;
    2. foreign corporations that were either not incorporated in Canada or incorporated in Canada but controlled in whole or in part by a foreign national or other foreign corporation (unless the shares of the corporation are listed on a Canadian stock exchange); and
    3. taxable trusts, being foreign national or foreign corporations or a beneficiary of a trust that is a foreign national or foreign corporation.
  5. Applies to any applicable residential property transfer, even if the transaction would normally be exempt from property transfer tax, for example a transaction between related individuals or a transfer resulting from an amalgamation.
  6. Does not apply to non-residential property.
  7. Requires that foreign entities registering a transfer arrange to have an Additional Property Transfer Tax Return form filed at the time the property transfer is filed with the Land Title Office.

The Additional PTT is being introduced through Bill 28-2016 Miscellaneous Statutes (Housing Priority Initiatives) Amendment Act, 2016, which passed first reading at the provincial legislature today. This legislation is aimed at creating new measures to help make home ownership in the Lower Mainland more affordable. In addition to amendments to the Property Transfer Tax Act, Bill 28-2016 also includes proposed changes to the Real Estate Services Act to end self-regulation of the real estate industry and to the Vancouver Charter to grant the City of Vancouver the power to implement and administer a tax on vacant houses.

The Report of the Independent Advisory Group on the Real Estate Industry in BC

Posted in Uncategorized
Comment

On June 28, 2016, the Independent Advisory Group (“IAG”) issued its Report on the conduct and practices in the Real Estate Industry in BC. The IAG investigated the real estate industry and the existing regulatory regime, in the context of the current extra-ordinary real estate market and reports of inappropriate practices.

The Province announced that it will end the industry self-regulation in the real estate industry and overhaul governance, oversight, transparency and accountability of the sector. The Province accepted the recommendations of the IAG and announced it will:

  • Establish a dedicated superintendent of real estate, who will take over the Real Estate Council’s regulation and rule-making authority to carry out the changes required to restore public confidence.
  • Reconstitute the Real Estate Council with a majority of public-interest, non-industry members.
  • Implement the recommended penalties, as well as increased fines for unlicensed activity and other offences.
  • Allow for commissions from licensees engaging in misconduct to be taken back to the council.
  • Make the managing broker responsible for ensuring the owner of the brokerage does not engage in the business of the brokerage if the owner is not a licensee.
  • No longer permit licensees to offer dual agency representation.

The IAG Report made 28 recommendations with right to regulatory changes, which have been accepted by the Provincial Government.  These 28 recommendations are:

Transparency and Ethics

1. The Real Estate Council create a comprehensive Code of Ethics and Professional Conduct and require licensees to affirm, in writing, their compliance with the Code as part of regular licensing requirements.

2. The Real Estate Council amend its Rules to no longer permit licensees engaged in trading services to offer dual agency.

3. The Real Estate Council require licensees to fully disclose and explain their financial and non-financial incentive structures, prior to and on entering into a client relationship.

4. The Real Estate Council require licensees to provide information to consumers which clearly explains the duties owed to consumers by licensees, and how consumers can protect their own interests, before, during, and after they enter a relationship with a licensee.

5. The Real Estate Council focus more attention on the forms and contracts used by licensees, to ensure they reflect an appropriate emphasis on consumer protection and the public interest.

6. Government implement the changes it made to contracts used by licensees, requiring seller consent to contract assignments by the buyer, to all forms of contract for trades in real estate whether or not the contracts are prepared by licensees.

7. The Real Estate Council require all licensee disclosures of interests in trade be reviewed and approved by a licensee’s managing broker and subsequently filed at regular intervals with the Real Estate Council.

8. The Real Estate Council amend its Rules to prohibit a licensee from acquiring a direct or indirect interest in their own listing.

9. The Real Estate Council require that all offers received by a seller’s agent in relation to a trade in real estate be promptly filed with that agent’s managing broker and be retained at the brokerage for review by the Real Estate Council on demand.

Compliances and Consequences

10. The Real Estate Council apply more stringent suitability assessment criteria to prospective licensees.

11. The Real Estate Council impose an explicit duty on managing brokers to report licensee misconduct to the Council, and explicit duty on licensees to report misconduct to their managing broker when that misconduct places the public at risk.

12. The Real Estate Council implement confidential reporting channels (for example, reporting hotlines or whistle-blower programs) for industry and the public, to facilitate reporting of licensee misconduct.

13. The Real Estate Council use existing regulatory powers to encourage licensee compliance with all rules that govern their conduct, including those of other legal and regulatory regimes.

14. The Real Estate Council increase its proactive detection and deterrence efforts for licensees who engage in, aid, or abet aggressive marketing and sales practices that target vulnerable members of the public.

15. The Real Estate Council increase the focus on licensee conduct examinations in its brokerage auditing program.

16. Government increase maximum disciplinary penalties available to the Real Estate Council to $250,000 for individual licensee misconduct and $500,000 for brokerage misconduct, and increase administrative penalties to a maximum of $50,000.

17. Government amend the Real Estate Services Act to enable the Real Estate Council to disgorge the proceeds of misconduct from licensees and brokerages.

18. The Real Estate Council improve the transparency of its complaints and disciplinary process, and the resulting outcomes.

Governance and Structure

19. Government amend the Real Estate Services Act to require that 50% of Council members be non-industry members.

20. Government amend the Real Estate Services Act to make the regulation of both licensed and unlicensed real estate services the responsibility of a single regulator, the Real Estate Council.

21. Government increase the Superintendent of Real Estate’s oversight of the Real Estate Council including periodic independent assessments of Council’s performance against its mandate.

22. The Real Estate Council strengthen the requirements for managing brokers to have active and direct oversight over licensees.

23. Government implement a “fit and proper” standard for brokerage ownership.

24. The Real Estate Council require record keeping and reporting that would assist it to identify industry practices that may be placing consumers at risk.

Licensee and Public Education

25. The Real Estate Council undertake a comprehensive review of licensing education and testing requirements to raise entry standards.

26. The Real Estate Council implement mandatory continuing education with content and testing that reinforces a licensee’s ethical obligations, conduct requirements, and duties to consumers.

27. The Real Estate Council make its complaints process more publicly accessible and easier to navigate.

28. The Real Estate Council significantly increase and improve its public education and awareness efforts.

New Restrictions on Assignments of Contracts of Purchase and Sale

Posted in Contracts
Comment

The Province has announced new regulations pursuant to the Real Estate Services Act (“RESA”) that impose new duties on licensed B.C. real estate agents effective May 16, 2016, that will restrict the assignment of contracts of purchase and sale of real estate.  The Regulations are intended to cool the overheated real estate market and reduce the number of contracts being assigned or flipped.

The Regulations require that real estate agents include a term in any contract of purchase and sale, unless otherwise instructed by their client, that provides that:

(a) the contract of purchase and sale may not be assigned without the written consent of the vendor; and

(b) that the vendor is entitled to any profit resulting from an assignment of the contract by the purchaser or any subsequent assignee (the “Assignment Restriction”).

If a contract is presented that does not contain the Assignment Restriction, the purchaser’s real estate agent must provide a written notice (the “Notice”) advising the vendor that the contract does not contain the Assignment Restriction.  The form of the Notice must be approved by the Real Estate Council of BC. The Real Estate Council of BC has prepared a form of Notice and it will be providing the Notice to real estate agents over the next few days.

If the vendor is represented by a real estate agent, the Notice is to be provided to the vendor’s real estate agent by the purchaser’s real estate agent. If the vendor is not represented by a real estate agent, the Notice is to be provided directly to the vendor by the purchaser’s agent.

The Regulations do not distinguish as to the type of property impacted or the parties involved, with the exception that the Regulations do not apply to the sale of “development units” as defined in the Real Estate Development Marketing ActAs a result, the Assignment Restrictions do not have to be inserted in a contract for the sale of a new condominium unit nor does the Notice have to be provided to the developer by a purchaser’s agent. This exception is based on the assumption that the developer can look after its own interest and insert a restriction in the developer’s form of contract if the developer wishes.

However, the Regulations will apply to contracts for the purchase and sale of non-residential property. So if the Assignment Restriction is not in a contract for a commercial property, the purchaser’s real estate agent must provide the Notice to the vendor’s agent or to the vendor.

The Assignment Restriction provided for in the Regulations does not:

(a) prevent a purchaser (the “Original Purchaser”) from entering into contract with the owner, transferring title to the Original Purchaser by filing a transfer in the Land Title Office and immediately transferring title to a new purchaser.  In such a case however, property transfer tax will be paid twice, once on the transfer to the Original Purchaser and again with respect to the transfer to the new purchaser;

(b) restrict or prevent a change in control of the  shareholders of a corporate purchaser; or

(c) define what a profit is or how or when that profit is to be paid to the vendor or how the vendor enforces such payment.

The Regulations do not:

(d) prevent the insertion of more detailed or complicated assignment provisions that restricts assignment generally but allows for assignments to affiliated entities or to specified parties. The Assignment Restriction can be amended in any manner the parties agree to, so for example to allow for assignment to a company controlled by an original purchaser;

(e) apply to contracts of purchase and sale made without the involvement of licensed real estate agents; or

(f) apply to contracts of purchase and sale made before the effective date of the Regulations.

The Regulations do apply to contracts of purchase and sale:

(a) used in land assemblies;

(b) used for non-residential properties (commercial, industrial, bare land, multi-family etc.); or

(c) accepted after the effective date of the Regulations.

With the adoption of the Regulations, the BC Real Estate Association/Canadian Bar Association standard form contracts of purchase and sale (for commercial and residential properties) will be amended to include the Assignment Restrictions. The parties to such contracts can choose to keep the new provisions, change them or strike them out completely but certainly a discussion regarding assignment will now likely take place during the negotiation of the contract.

Penalty/Relief – Two Sides of the Same Mortgage Interest Coin When it Comes to Offending S. 8 of the Interest Act?

Posted in Uncategorized
Comment

The Supreme Court of Canada issued its reasons today in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, adding some clarification to a mortgage lender’s right to protect itself from the increased commercial risk associated with a defaulting mortgagor through the use of interest rates, given s. 8 of the Interest Act which reads as follows:

No fine, etc., allowed on payments in arrears

8 (1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

At issue before the Supreme Court of Canada was the various terms of renewal of a mortgage granted in favour of Equitable Trust. The initial interest rate was prime plus 2.875% per annum. The mortgage matured on June 30, 2008, at which time Equitable Trust agreed to extend the mortgage by seven months, with the interest rate increasing to prime plus 3.125% for the first six months and then 25% for the seventh month. When that matured, and the borrower Lougheed was still unable to pay out the mortgage, a second renewal term was granted, this time retroactive to one month prior to expiry of the first renewal agreement, and stipulating interest at 25%. Monthly interest payments were stated to be at the “pay rate” of either 7.5% or at the prime interest rate plus 5.25% (whichever was greater).  Complicating matters, however, was that the difference between the amount payable at the stated interest rate of 25% and the amount payable by Lougheed at the lower “pay rate” would accrue to the loan; and if there was no default by Lougheed, the accrued interest would only then be forgiven.

The majority of the Court found that these terms were contrary to s. 8 of the Interest Act, noting that

…a rate increase triggered by the passage of time alone does not infringe s. 8. That said, a rate increase triggered by default does infringe s. 8, irrespective of whether the impugned term is cast as imposing a higher rate penalizing default, or as allowing a lower rate by way of a reward for the absence of default. I would therefore allow the appeal.

The result of the case was that the 25% interest rate set by the second renewal agreement was held to be void, with Equitable Trust only entitled to interest under the second renewal agreement at the higher of 7.5% and the prime interest rate plus 5.25%.

Of significance is, firstly, the first sentence of the above statement by the Court, and subsequent statement that an interest rate increase “triggered by the mere passage of time (and not by default) such as that imposed under the First Renewal Agreement, clearly does not offend s. 8.”

Many lenders’ current practice to ensure that they are not offending the Interest Act is to provide for an initial interest rate to a certain date, with the interest rate increasing at a specific and identifiable date some time prior to maturity, specifically not linked with default. The comment by the SCC suggests that such a practice is likely still permissible.

Secondly, the SCC distinguished Krayzel from the British Columbia Court of Appeal’s decision North West Life Assur Co. of Can v. Kings Mount Hldg Ltd. (1987), 15 BCLR (2d) 365 (CA), where a term providing for relief on interest when the loan was repaid when due, was upheld. The difference being that in Northwest Life Assur Co. of Canada, the reduction was given as a term of one renewal – the original mortgage was 19%, the renewal provided for interest at the same rate of 19%, but if the loan was repaid on time, the interest for the renewal would be reduced to 13%. In Krayzel, each renewal resulted in an increased interest rate, with a significant overall increase from the originally agreed upon rate of prime plus 2.875% to 25% (with retroactive effect).

What this means is that there is still an available avenue to protect a mortgage lender’s ability to use interest rates to compensate it for the very real commercial risk associated with lending to high risk borrowers, whether by way of an interest rate increase prior to maturity (and not tied to default) or by way of interest rate relief if the mortgage is repaid on time. However, mortgages must be carefully drafted to ensure that their interest rate provisions fall within what the British Columbia Court of Appeal in Northwest Life Assur Co. of Canada, and subsequent case authority, has indicated is acceptable, and outside of what the Supreme Court of Canada in Krayzel has indicated is not.

Lawson Lundell’s Strata Wind up Group

Posted in Condominium (strata) law, Strata wind up
Comment

On November 16, 2015 proposed changes to the British Columbia Strata Property Act in Bill 40-2015 were approved by the provincial legislature. These changes will come into effect after related regulatory changes are made, which is expected to occur in early 2016. This amendment, among other things, will make it easier for strata corporations to terminate their strata by lowering the voting threshold required to terminate a strata corporation from a unanimous vote of all strata lot owners to an 80% vote of strata lot owners. For more information regarding this amendment please see “Proposed Amendment to the Strata Property Act: Terminating a Strata Corporation.

Effecting a strata wind up can be beneficial for many reasons. As many older strata buildings in Vancouver and across the province reach the end of their life cycle, these buildings and related common property may require costly capital repairs which many owners would rather not pay. Additionally, as developers search for new development opportunities across the Lower Mainland, aging strata buildings (and more specifically the land beneath them) are becoming appealing assets as many of these older strata developments were built using lower density levels than are currently achievable.

However, winding up a strata corporation is a technical, complicated process, and legal advice should be sought early on in the process to help ensure a successful windup. Lawson Lundell’s Strata Wind up Group has valuable experience dealing with strata wind ups, including the first court approved wind up in British Columbia, and can assist strata corporations, developers and real estate agents in navigating this process. For more information, please contact a member of the strata wind up group: