The Story of a Collapsing Deal

(based on real life events)

At the end of August 2010, Dave and Jane were buying their first home. Nervous about finding the “right” home for themselves and their two kids they look at property after property. Finally, at the beginning of August 2010, the house at 3245 McLeod Road came up for $375,000. It was the right price, close the schools, and close to Dave’s work at the Gorman Mill. The Seller, John, had been anxious to sell for a long time, and needed to simply walk away from the home, his credit union mortgage was $355,000 and he needed a fresh start in a new town. Both parties were anxious to see the deal get done.

They came into see Peter, their real estate lawyer on August 22, 2010 and at that meeting they signed all the documents. He explained the process to them, including if the “what ifs” happen, and how the court process worked. Although there was only a very small chance these bad things would happen he wanted them to be armed with knowledge.

Dave and Jane were very excited and they booked their moving truck for September 1, 2010 (their Possession Date) and they have picked out paint colors for their daughter’s new bedroom and began to plan their lives in their new home.

On August 31, a series of unfortunate events occurred. First, the Land Title Office (which is electronic) went “offline” and no land title transfers were permitted to be registered at the end of the month. Closing was delayed, but not to worry the contract had been drafted to allow for this hiccup.

Then, on September 1, with the moving truck in the driveway, the Vendor’s lawyer “discovered” that they had an “IRD” penalty (of $21,000) on their mortgage and now the Vendor (John) did not have enough money to “payout” the mortgage on title. The Vendor (John) could not complete and could not fulfill the promise he made to give the “title free and clear of all encumbrances”. Dave and Jane had already moved out of their rental house and they were now homeless, forced to live in a motel. The moving company (for a small ransom) placed all their belongings in storage.

Crestfallen, Dave and Jane came to see Peter and Eric (a real estate litigator in the same firm) to ask what to do, they had remembered that part of their prior meeting dealing with the “what ifs” in real estate. The two lawyers explained that Dave and Jane could sue for damages or specific performance to get their dream home and they immediately started to put pressure on the Vendor to complete by “tendering” a “ready, willing and able to complete” letter, placing a caveat on the property title, and commencing legal proceedings.

Within 3 weeks there was a very happy ending, the Vendor was able to negotiate with the bank, and to avoid a lawsuit paid the additional costs (including legal fees) for Dave and Jane.

The moral of this story: For buyers, hope for the best, be prepared for the worst. For Realtors, ensure your sellers can clear title prior to signing the deal, or, at least, place a “subject to the seller ensuring they can clear title” so that you have pointed out the issue to them.

Getting Ready to Sell – Cleaning Up Your Land Title

As we move into another Buyer’s market cycle, it is important to remember the lessons Seller learnt the “last time around”. Realtors often recommend to Sellers to “declutter” and “stage” the interior of their homes, however, it is important to remember that, at its foundation Buyers are purchasing “PROPERTY RIGHTS” and therefore its important to ensure, as a Seller, that your Land Title is also “squeaky clean”.

A couple of things to do:

1. Remove any “extra” encumbrances on title – usually Buyers are expecting to see typical first mortgages on title, however where Uncle Buck lent you some money and registered a non-institutional second mortgage, or, where you have a small claims judgment registered against you, these “extra” encumbrances on title, including 2nd mortgages, judgments, builders liens, or certificates of pending litigation, can raise big RED FLAGS for Buyers, if they can be removed prior to closing (or even listing), it can make for a much smoother process.

2. Ensure you (as Seller) and only you are on title as the registered owner – did you inherit the property in a Will? Or, did your parents go on title as this was your first home? Or, have you gone through a legal separation? If you have the full legal rights to sell the home, ensure that you (and only you) are on title. In most cases the transfer to a surviving joint tenant, or to from parent to child, or a transfer in the course of a legal separation is easy (and most of the time a Property Transfer Tax exemption is available and no tax is payable!) Best to take care of these items prior to listing so there is no question when you sign the Contract that you are the person with the ability to sell the property.

3. Return the Duplicate Certificate of Title – A Duplicate Certificate of Title may be removed from the Land Title Office by some banks as security for loans (with or without registration of the mortgage). In the event that the Duplicate Certificate of Title is outstanding, no further transfer or mortgage may be registered on title. Therefore if this has been removed from the Land Title Office, it will bar any sale or mortgage of the property until it is returned and refiled with the Land Title Office.

Non-Resident Sales

When a non-resident of Canada is the Seller of real property special considerations apply to ensure that the government of Canada is paid all applicable taxes on sale.

s.116 Income Tax Act – provides that the BUYER must withhold between 25-50% [depending on the nature of the property] of the Purchase Price from the Seller until the Seller provides the Buyer with evidence that they have obtained a s.116 clearance certificate from the Canada Revenue Agency.

Currently these certificates are taking up to 8 months to process, therefore, Vendors are advised to apply early, and ensure that they can clear financial charges from title without the entire purchase price prior to entering into a binding contract

Estate Sales

Unfortunately, there are only two universal truths in life, death and taxes…

When the former arises, an estate sale is usually the result. As the heirs of the deceased, a binding contract for the sale of the home can only be entered into once the estate has done the following:
a) obtained a grant of probate or letters of administration;
b) disclosure of affairs to mortgage lenders; and,
c) filing of transfer of property into the name of the estate.
Therefore, any contract should be written as “John Doe, as executor of the estate of Jane Deceased” and should be “subject to the grant of probate or letter of administration in favor of the Vendor

Affordable Housing Covenants

Affordable Housing Covenants are generally registered on your land title as s.905 LGA notices and s.219 LTA Covenants. These covenants limit a) WHO can live in the property and b) HOW MUCH the property can be sold for.

The OWNER (meaning all persons on title) must:
a) RESIDE in the Property;
b)Be part of a HOUSEHOLD whose gross annual income does not exceed the Affordable Ownership Income level. This includes everyone over 15 years old living in the residence;
c)Total Household income cannot exceed: $63,737 ( in 2009, City of Kelowna)
d)File a statutory declaration (evidence under oath) that the Owner continues to meet the criteria while remaining an owner (1-4 times each year).

A Seller of an affordable housing unit is responsible for vetting Buyer to ensure they meet the above criteria.

Freehold vs. Leasehold

At common law, in British Columbia, land tenures can be generally divided into two large catagories, fee simple land and leasehold lands.

Fee simple lands (also called freehold lands) are lands where the owner owns all the property rights associated with thoses lands, except the rights which are reserved for the Crown (for example oil and gas rights). The restrictions on use on freehold land are imposed by the Province and the local municipality.

Leasehold lands are lands where the rights of the owner are limited by the another party, usually a landlord. Long term leases (49 – 99 ys) are commonly found in the Province of British Columbia when land is sold on Native Reserves as the inalienability of native lands, under the Canada Constitution, prohibits Native Reserve being “sold” to anyone except to the Crown. Additional restrictions on the use of leasehold land are found in a LEASE or HEADLEASE document which creates contractual obligations between the Landlord and Tenant.

Discharging your Mortgage

For sellers the essential bargain in a real estate transaction is “I give you my house, free an clear, and you give me money”…

The “free and clear” part is key, it means that the Seller is giving the Buyer title free and clear of all financial encumbrances on title. A financial encumbrance includes things like your mortgage or a secured line of credit. When the mortgage is held by the bank the discharge is relatively straight forward: your lawyer requests a payout statement from the bank and on the closing date pays the money to the bank on their promise to discharge the mortgage.

When the mortgage is not held by the bank, things get a little more complicated. For example, if Uncle Buck loaned you 200k for your home and registered a mortgage, your lawyer would have to have a registered discharge “in hand” on closing and this creates a “catch-22” with the Buyer (who won’t part with the cash until he gets assurance of title). This problem is usually solved in British Columbia by the exchange of lawyers undertakings (court enforceable promises) with the lawyer holding all documents in “escrow” until everything is ready to go.