Published by the B.C. Real Property & Planning Group
McCarthy Tétrault VOL.4,
ISSUE 2
2014
January
22
Real Estate MATTERS

Welcome to Volume 4, Issue 2 of Real Estate MATTERS, a periodic publication of our B.C. Real Property & Planning Group. This publication is intended to give you a summary of recent developments in real estate law in British Columbia and, more importantly, what they mean to you.

We hope you will find Real Estate MATTERS informative and useful. Please let us know if you have any suggestions to make this publication even more helpful, or if there are topics or issues you would like to see covered in future issues.

Scott Smythe and Craig Shirreff, Editors



Strata Property Act Amendment Offers Remedy for Deadlocks on Special Levies
by: Jordanna Cytrynbaum

On December 12, 2013, amendments to section 173 of British Columbia’s Strata Property Act, SBC 1998, c. 43, came into force that allow strata corporations with majority support to apply to the British Columbia Supreme Court to require strata owners to pay for certain repairs.

Prior to the amendment, strata corporations required a ¾ vote in favour to impose a special levy to raise money for needed repairs to common property. This could result in deadlock and delay when owner opinion was divided, exacerbating damage and unsafe conditions.

On application by a strata corporation within 90 days of its receiving at least 50% support for such a levy, a court can now issue an order to proceed with maintenance or repair of common property or assets that is "necessary to ensure safety or to prevent significant loss or damage, whether physical or otherwise" (s. 173(2)). The strata corporation may then proceed with the special levy as if the resolution had been passed under section 108(2)(a) (which requires a ¾ vote in favour).

The amendment offers an important new recourse for strata corporations facing difficulty gaining sufficient support for special levies to fund urgently needed repairs.


Is Time on Your Side? Best Practice for Purchase Contract Date Extensions
by: Craig Shirreff

The "time is of the essence" clause in a standard purchase contract is often treated as boilerplate, but this short, simple statement can be critically important, as it makes it "essential" that the parties perform their obligations by the relevant dates and times specified in the contract (e.g., the date by which a deposit must be paid or closing must occur). What is not well understood is that, if the parties subsequently agree to extend a date specified in the contract, they may lose their ability to rely on the "time is of the essence" clause. This somewhat surprising result arises from the decision of the British Columbia Court of Appeal (BCCA) in Salama Enterprises (1988) Inc. v. Grewal, 1992 CanLII 4035 (Salama).

In Salama, the purchase contract included a "time is of the essence" clause, and after the parties signed it, they agreed to extend the closing date by one month. This change was marked onto the original purchase contract and initialled by the parties. The vendor refused a later request for a further oneday extension, the purchaser did not close on the date agreed upon in the contract, and the vendor terminated the contract in reliance on the "time is of the essence" clause. The purchaser then sought specific performance. The BCCA ruled that where time is of the essence and the parties subsequently agree to extend the time for performance of an obligation, a court may decline to give effect to a "time is of the essence" clause if insisting on strict compliance would be unjust or inequitable. The BCCA found that, given the particular facts, allowing the vendor to rely on the "time is of the essence" clause would have led to an unjust or inequitable result. The Court ordered specific performance and the purchaser received the property.

The BCCA revisited Salama recently in G-8 Properties Inc. v. Fort St. John Retail, 2013 BCCA 353 (G-8 Properties). In G-8 Properties, the purchase contract included a "time is of the essence" clause, and the parties later entered into various amending agreements regarding a subdivision the vendor needed to complete before closing. The last amending agreement further extended the closing date and included up to four automatic 30-day extensions. On the day the last extension period expired, the vendor was unable to complete because of subdivision delays; thereupon the purchaser purported to terminate the contract and demanded repayment of the deposit. The trial judge found in favour of the vendor but the BCCA overturned her decision, ruling that where the extension of time was built into the contract itself, a party could rely on a "time is of the essence" clause and terminate the contract.

It is doubtful that G-8 Properties will resolve the uncertainty created by Salama. The key fact in G-8 Properties was that the parties had drafted a contract amendment that contemplated in advance several possible closing dates up to six months in the future; in practice, parties often negotiate extensions of time in purchase contracts as the need arises, as occurred in Salama.

Presumably, a court would only rarely find the type of injustice or inequity that would lead it to relax the strict enforcement of a "time is of the essence" clause. In fact, the case law indicates that only a few decisions have relied on Salama to justify such an exercise of judicial discretion. However, to guard against such a result, parties should take care in how they implement a date extension in a purchase contract. In Salama, the parties effected the amendment by marking up and initialling the original purchase contract. Instead of that approach, parties should prepare a supplementary amending document that confirms that time remains of the essence. This would make it clear the parties had again turned their minds to the issue of whether time was to remain of the essence when agreeing to the extension of time.


Distressing Decision for Landlords
by: Scott Smythe

Landlords that exercise the remedy of distress rarely recover sufficient funds to satisfy the arrears of rent owing by the tenant. A recent decision of the British Columbia Supreme Court (BCSC) held that, in such a case, a landlord cannot immediately terminate the lease without first giving the tenant any required written notice of default and allowing the applicable cure period to expire.

In Delane Industry Co. Ltd. v. PCI Properties Corp., 2013 BCSC 1397, the tenant fell into arrears and, after giving a written demand letter specifying the amount owing and providing a five-day cure period as required by the lease, the landlord elected to exercise its right of distress and seize and sell the tenant’s goods. The distress proceedings were completed but the amount recovered was insufficient to cover the arrears. Later that same day, the landlord gave written notice terminating the lease with immediate effect.

The BCSC held that the termination was invalid. It began with the well-settled proposition that a landlord cannot levy distress against a tenant’s property and terminate the lease at the same time (as distress and termination are mutually exclusive remedies). While the BCSC accepted that the landlord was entitled to terminate the lease for any unpaid arrears following the distress, it did not agree that the landlord could do so on the basis of the demand letter, which had been acted upon with an alternative remedy (the distress). In the BCSC’s view, the termination notice did not comply with the lease because it did not provide five days’ notice and an opportunity to cure, and did not state the precise amount then owing (taking into account the amount recovered by the distress). In order for the landlord to terminate the lease validly, it would have had to first comply with the terms of the lease by issuing a fresh demand letter (specifying the amount owing) and allowing the five-day cure period to expire.

The decision is under appeal.


Managing Management Fees
by: Scott Smythe

Landlords hold their management fees dear, and need to ensure they are fully recoverable. Offers to lease routinely provide that the tenant will pay a management fee equal to a fixed percentage (say, 5%) of the "Basic Rent" payable by the tenant. Despite this clear contractual arrangement, landlords occasionally (and inadvertently) shortchange themselves when preparing the final form of lease.

Consider an offer to lease for a multi-tenant building. The offer says that the lease will be a "net" lease and that the tenant will pay its "Proportionate Share" of "Operating Costs." The offer also says that the tenant will pay 5% of its Basic Rent as a management fee. So long as the form of lease prepared by the landlord provides for payment of the management fee, separate and apart from Operating Costs, there is no issue; however, all too often, the management fee obligation in the offer to lease is carried over into the lease, verbatim, as a component of Operating Costs (for which the tenant is to pay its Proportionate Share). The net result is that, instead of obligating the tenant to pay 5% of its Basic Rent as a management fee, the lease requires the tenant only to pay its Proportionate Share of 5% of its Basic Rent (which will necessarily be less than the management fee contemplated by the offer to lease). To avoid an unexpected, adverse impact on cash flow, landlords need to ensure that the management fee is payable separately from Operating Costs or, if it is to be a component of Operating Costs, that the definition of Operating Costs provides for a management fee equal to a fixed percentage of all basic rents payable by all tenants.


Update on Directors’ and Officers’ Environmental Liability: Lessons From Northstar Aerospace
by: Selina Lee-Andersen

The recent Ontario Environmental Review Tribunal (ERT) case of Baker et al. v. Director, Ministry of the Environment (Northstar) raised more than a few eyebrows when former directors and officers of Northstar Aerospace, Inc. (Company) and its parent, Northstar Aerospace (Canada) Inc., were held personally liable by the Ontario Ministry of Environment (MOE) for contamination at the now insolvent Company’s former manufacturing and processing facility in Cambridge, Ontario (Site). The environmental contamination arose from the migration of trichloroethylene from the Site to nearby residential properties, which resulted from the Company’s aircraft parts manufacturing activities at the Site from 1981 to 2009. The Company commenced voluntary remediation of the Site in 2005, but no funding was set aside for the multi-million-dollar remediation work. After the Company began to encounter financial difficulties, the MOE issued a remediation order in March 2012 to secure continued performance of the work. Following the sale of substantially all the Company’s operating assets (other than the Site) in July 2012 under the Companies’ Creditors Arrangement Act (CCAA), no personnel or resources were left to continue the work. Due to human health concerns, the MOE intervened in August 2012 and took over the remediation work.

Once the stay of proceedings under the CCAA expired in October 2012, the MOE issued a remediation order (Order) against certain directors and officers of the Company on the basis that, from 2004 to 2012, they had management and control of the Site and the remediation systems that were in place. The directors and officers appealed the Order to the Ontario ERT, claiming they would suffer irreparable harm if the Order were not stayed as they would have to incur remediation costs of approximately $1.4 million per year (environmental remediation costs were excluded from the directors’ and officers’ insurance policy). The directors and officers claimed a range of defences, including that some of them were not on the board when the contamination occurred and had no specific responsibility for environmental matters. The MOE argued that the directors and officers had allowed the company to file for CCAA protection and stop remediation activities at the Site, which made them responsible for remediation under the Ontario Environmental Protection Act. The ERT did not grant the stay and ordered the former directors and officers to pay immediately for the continuation of the remediation work until any appeal process was completed. As a result, the directors and officers were forced to pay approximately $800,000 out of their own pockets for the completion of interim remediation work. The directors and officers subsequently reached a settlement with the MOE which involved, among other things, the payment of $4.75 million to the MOE in exchange for the withdrawal of the Order.

Under the broad sweep of environmental legislation, directors and officers are potentially liable for the remediation of contaminated sites, particularly where they have had management of or control over contaminants or where they have made decisions that resulted in contamination. In British Columbia, the persons responsible for remediating contaminated sites are set out in section 45(1) of the Environmental Management Act and include current and past owners/operators and persons (a category which includes directors and officers) who caused a substance to be disposed of, handled or treated in a manner that caused a site to become contaminated.

Since a settlement was reached by the parties in Northstar before the appeal could be heard, it is unclear whether the facts would have supported the MOE’s assertion that the former directors and officers were liable for the remediation of the Site. It is also too early to tell whether other provincial regulators (such as the British Columbia Ministry of Environment) will follow the MOE’s lead in expanding the scope of director and officer liability for environmental contamination, especially where a company runs into financial trouble. Northstar does suggest, however, that regulators may seek out all potentially responsible parties to recover remediation costs where a company is no longer able to finance remediation work, even where the directors and officers did not cause or were not involved in the decision-making that led to the contamination.

For individuals who currently serve on boards or are considering taking up a board position, Northstar offers the following lessons to mitigate the risks of environmental liability for directors and officers and their companies:

  • Ensure that the company has robust environmental policies and practices in order to respond effectively to environmental incidents.
  • Ensure sufficient protection for directors and officers in indemnity agreements from the company.
  • Determine whether insurance policies cover environmental remediation liability and, if not, acquire such coverage if the company conducts high-risk activities.
  • Establish a fund or set aside money in a trust that is dedicated to covering potential environmental remediation costs.
  • Report any environmental issues of concern to senior management and regulators, as needed, in a timely manner.


Keeping It Enforceable: The Essential Terms of a Purchase Contract
by: Cameron Whyte

It is not uncommon for parties to enter into contracts for the purchase and sale of real estate that contain defects which may affect their enforceability.

To be enforceable, a purchase contract must set out the essential terms of the agreement; in particular, it must clearly describe the "three Ps" (parties, property and price) and other key terms such as the completion date and the particulars of any vendor financing or leaseback. Although these legal requirements are well known, even the most experienced real estate professional will occasionally fail to adequately describe one or more essential terms in a purchase contract.

There are several basic steps that can be taken when preparing a purchase contract to help ensure it is enforceable.

Parties

Obtain a current title search to confirm the registered owner of the property.

  • If the registered owner is a company:
    • Obtain a company search to confirm that the company exists and has not been dissolved or amalgamated with another company or changed its name.
    • Determine if the registered owner is also the beneficial owner of the property or if it is a bare trustee that holds registered title in trust for a beneficial owner.
  • If the company registered on title is a bare trustee:
    • Obtain the trust declaration to confirm the identity of the beneficial owner and the terms of the bare trust relationship. The beneficial owner should be identified as the vendor under the contract.
    • If the purchaser wants to acquire the shares of the bare trustee so as to avoid triggering property transfer tax, include the essential terms of the share purchase in the purchase contract.
  • Avoid using "or nominee" language when describing the purchaser as it can create uncertainty as to the purchaser’s identity. Instead, include a provision in the purchase contract that specifies to whom the purchase contract may be assigned and whether the purchaser will be released from its obligations upon the assignment.

Property

  • Ensure that the legal description of the property set out in the purchase contract matches what is shown on a current title search and that the current permitted encumbrances are listed. Failure to perform this step is a common source of errors in purchase contracts.
  • Obtain a copy of the subdivision plan for the property to confirm that all the legal parcels to be acquired have been included in the purchase contract. All too often, one or more parcels are inadvertently omitted.
  • Obtain a B.C. Assessment search of the property to confirm its civic address. This search may also disclose whether additional legal parcels are associated with the civic address.
  • If the property is to be subdivided from a parent parcel prior to closing, identify who is responsible for pursuing subdivision approval and what happens if it is not obtained by a certain date (e.g., does the purchase contract terminate?). Also, a plan outlining the layout of the proposed parcel (rather than a mere description of its size) should be attached to the purchase contract, and the list of permitted encumbrances should include any encumbrances to be granted in connection with the subdivision.
  • If the vendor is responsible for constructing improvements on the property, clearly describe what is to be built and by what date. The agreed plans and specifications should be attached to the purchase contract or incorporated by reference.

Price

  • Clearly state the purchase price and how the purchase price may be paid (e.g., wire transfer, bank draft, solicitor’s trust cheque).
  • State whether the purchase price includes or excludes GST. If the property is GST-exempt, include a representation from the vendor to that effect.
  • Identify who will hold the deposit and how it will be treated. For example, if the purchaser defaults, will the deposit be forfeited to the vendor as the vendor’s sole and exclusive remedy or without prejudice to the vendor’s other remedies? If the deposit is to be paid directly to the vendor, will the purchaser be entitled to secure it with a deposit mortgage? In what circumstances will the deposit be returned to the purchaser?
  • If the vendor will provide take back financing, state the term, interest rate and payment dates and whether it is to be secured by a mortgage. If there will be mortgage security, attach the form of mortgage or provide that the parties will use the standard mortgage terms prescribed under the Land Title Act (British Columbia) or other standard terms already filed in the Land Title Office.
  • If the purchase price is tied to the size of the property following subdivision or the amount of density that can be achieved, specify the formula for determining the purchase price and insert
    a sample calculation to ensure both parties understand how the formula works.
  • If the purchase price is to be allocated between different components of the purchased property (e.g., land, building, chattels, shares), state that any failure to agree on an allocation will not affect the enforceability of the purchase contract and that each party may make its own allocation.

Other Essential Terms

  • If the completion date is tied to the occurrence of a certain event (e.g., 30 days after a rezoning bylaw is enacted), stipulate an outside date by which such event must occur and what happens if it does not occur (e.g., does the purchase contract terminate?).
  • If the vendor wishes to lease the property (or part of it) back from the purchaser, describe the essential terms of the lease (including the names of the landlord and tenant, the premises, the rent, the commencement date and the term) and attach the form of lease.

The foregoing is not an exhaustive list of the steps to take or items to consider when preparing a purchase contract. Each purchase contract will have its own special considerations, and it is advisable to obtain legal advice when in doubt.


Lien on Me: Purchasers as Secured Creditors
by: Vanessa Lunday

Pan Canadian Mortgage Group v. 679972 B.C. Ltd., 2013 BCSC 1078 (Pan Canadian), addresses the nature and priority of a purchaser’s lien, which, in general terms, is a financial charge that results when a purchaser pays a deposit toward the purchase price under a contract of purchase and sale.

In Pan Canadian, a construction lender had foreclosed on a development property and the money owed to it was fully satisfied by a portion of the proceeds of the resulting sale. The remaining balance was paid into court, leaving two groups of creditors, whose collective claims exceeded the remaining balance, to dispute their relative priority to repayment.

The first group consisted of purchasers who had paid deposits for townhomes which were never built by the owner-developer. The second group consisted of secured creditors who had registered judgments against the property.

In order to determine the priority of the two groups of creditors to repayment of the amounts owed to them, the chambers judge considered whether the purchasers held purchasers’ liens. She stated that
a purchaser’s lien is a "well-established equitable charge over property that arises at the time a purchaser of property provides a deposit or funds to the vendor or their agent in part or whole payment of the purchase price." According to the chambers judge, such payment is security for the completion of the purchase and, if the purchaser fails to perform, the vendor has security against the funds, whereas if the vendor fails to perform, the purchaser can recover the funds and is entitled to a lien over the property and is a secured creditor.

The purchasers of the townhomes were able to establish that they had purchasers’ liens because they had provided funds to the vendor for the purchase of land, but the contracts did not complete through no fault of the purchasers. The parties had agreed that, if the purchasers established that they had purchasers’ liens, the liens would rank in priority to the judgments of the other secured creditors. Accordingly, the purchasers were entitled to be paid out in priority to the secured judgment creditors.

Pan Canadian is important because it confirms that, where a purchaser’s lien is established, the purchaser may become a secured creditor of the vendor with a lien over the property. Purchasers should nonetheless be aware that, because a purchaser’s lien is an equitable remedy, granted in the discretion of the court, purchasers may succeed in establishing such a lien only if they have performed their obligations under the contract and, as such, come to the court with "clean hands."

The decision is under appeal.