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Notes for Real Estate Board of Greater Vancouver Seminar on
November 19, 2010 at Whistler
Prepared by Ian T. Davis, Race and
Company LLP, Barristers and Solicitors.
The HST regime has
a couple of meaningful dates. November 18, 2009 is an important date
as presale contracts entered prior to this date will be exempt from
HST regardless of when they complete. Accordingly it is important for
the Real Estate practitioner to preserve such a contract and amend it
rather than redo and re-date a contract. Generally these contracts may
be assigned without losing the grandfathered status.
July 1,
2010 is the date that HST became payable on real estate transactions.
It remains an important date for the PST Transitional rebate,
which is determined by the percentage of completion a new property was
at before July 1, 2010. That rebate is due to the builder/developer
unless the contract is written expressly crediting it to the Buyer.
The contract should ideally state the level of completion at July 1,
2010.
The date is also relevant for determining if real estate
commissions attract HST. If 90% of the work was done by a realtor
prior to July 1, 2010, then the account will have only GST added. If
more than 10% was done after July 1, 2010, then the commissions need
to be split into amounts earned before and after July 1, 2010, with
amounts after attracting HST.
Rebates for HST do not disappear
like they did for GST for purchases over $450,000. Essentially the
rebates are the same as they were for GST (36% of the 5%GST on
purchase prices up to $350,000, followed by a pro rata erosion to zero
rebate at $450,000) but adding the provincial component of the rebate,
which is 5% of the purchase price on purchases up to $525,000. Over
the $525,000 the rebate does not disappear but is capped at $26,250.
Like GST, investors are eligible for the rebates, but cannot get
credit for them at closing by assigning them to the builder developer.
HST exemptions are the same as the GST exemption on the resale of
property. Realtor should always determine HST status and include an
appropriate warranty in the purchase contract. Whether HST is payable
or not starts with the status of the Seller. How did the Seller hold
the property and for what purpose? If held for a commercial purpose,
such as a spec home, spec renovation or nightly rental property, then
HST will be payable.
HST is not exempt just because a property
predates GST or HST or because it has already been paid once in
respect of a property. If an owner of a 40 year old cabin property
started full time vacation rentals 2 years ago and then decides to
sell, the sale will be subject to HST because the Seller is making a
predominantly commercial use of the property.
Rental to a
tenant to use as a residence is not a commercial use.
Vacant
land will be HST exempt only where the owner either paid GST or HST(or
purchased as an exempt supply) and intended a personal usage. The
owner/seller had to intend to make some personal use of the land at
some point, but then changed their mind to sell it instead. Holding as
an investment for gain is not a "personal" use. Corporations are not
capable of "personal " use, so HST will be due where there is a
corporate seller of vacant land (unless the corporation is holding in
trust for a person intending personal use)
If a property is
subject to HST but the Buyer intends to continue the predominant
commercial use, then the Buyer can register for an HST account and
defer the HST. The deferral will last until the predominant commercial
use ceases, either by sale to a Buyer not intending commercial use or
the owner simply stopping the commercial use. The latter situation
triggers the self-supply rules and the Buyer must pay the HST on the
value at time of self-supply. Realtors should never suggest a deferral
unless they make it clear that commercial usage has to be real and not
a sham. CRA does occasionally audit "commercial" properties and may
assess HST if not convinced that the use of the property falls into
the commercial realm.
Realtors should always include a
provision in the contract about HST. Unless it is a clear transfer of
commercial-use property and a deferral, the Buyer's agent should
include a warranty such as:
"The Seller warrants that the Property
is exempt from HST as "used residential" property." (or as "personal
use vacant land". This will put the Seller on notice to confirm with
their accountant, failing which, they have to live by the warranty.
Realtors acting for Sellers need to watch for these warranties and
recommend that the Seller consult their accountant prior to accepting
the warranty. Do not use a clause that says: " HST, if applicable,
shall be the responsibility of the Seller."
This clause does not say
if it is applicable or not and causes a problem for the lawyers and
ultimately clients and realtors, due to its uncertainty.
Clear
Title
The standard real estate contract provides that the
Seller must deliver clear title except for charges in the Crown Grant
or in favour of public authorities. The problem with relying on this
clause is that where there is a private charge like a building scheme
or neighbour easement, the Buyer will be able to back out of the deal
if they choose to insist on the clearing of these items, which usually
cannot be cleared. The solutions are:
- Make sure the title is
not subject to private items; or
- Add a clause such as: "The
Buyer agrees to accept subject to all of the non financial
encumbrances set out on the attached title search."
Realtors should
also consider making a contract subject to the Buyer's review of title
encumbrances with a lawyer in the absence of pulling and providing the
Crown Grant and all encumbrances to the client, and being confident in
interpreting the title for the client. There are many properties in
Whistler and other resorts that contain covenants preventing usage of
the property by the owner as a residence. Vacant land, especially
rural vacant land, heightens the need to have the Buyer understand the
encumbrances on title, as rights of way, septic field covenants, or
easements may interfere with location of a building and even
ultimately prevent building at all.
Rural Issues
In
rural situations realtors have to be alive to extra issues. Properties
may be "water access only", despite having a road in over a
neighbour's property. That road may not have a registered easement and
may be subject to the neighbour liking the Buyer and extending the
courtesy of allowing usage. The Realtor needs to draw the Buyer's
attention to the big issues of water, septic, power and access. Is the
water potable? Banks often make it a funding requirement to have a potability certificate. Is the Septic system working and can it
support any intended additions? Where is the closest power source?
Does water come from a water source requiring a water license? Is
there a riparian zone setback?
New septic field regulations in the
last few years have rendered many properties unbuildable or relatively
unbuildable because the expense of an engineered septic system where
the property will not allow a regular septic field is exorbitant.
These issues may arise not on the purchase of the existing home,
but when your purchaser decides to tear down the current house and
build a new one. Many properties have covenants that grandfather the
current dwelling, but prohibit new building that adds to the size of
the home unless the owner can meet the then-current legislation such
as septic regulations.
Realtors will need to make the
investigation of some of these issues conditions of the contract of
purchase and sale.
Special Assessments.
Realtors routinely
add an addendum to purchase contracts dealing with Special
Assessments. However, these come in a few different versions that lead
to different results. Realtors should always review the one in the
contract in play and make sure it suits their clients or the client
understands it. The two issues are an unexpected new special
assessment or proposed special assessment from the time of contract up
to the completion date; and known assessments that have payment plans.
Property Managers will not issue Form F Certificates of full
payment unless there is an undertaking to pay a special assessment if
it has been assessed. This will generally mean that special
assessments on payment plans will accelerate and become due at
completion. This is because the payment plans are most often just a
courtesy arrangement. The entire special assessment is usually
assessed as due and payable at the time of assessment. One version of
a strata addendum provides that the amount due prior to completion
will be the responsibility of the Seller and the amount due after
completion will be the responsibility of the Buyer. Even with payment
plans, most special assessment will be technically due prior to
completion, which can come as a nasty surprise to a Seller who may
then seek redress from their realtor. This clause should accordingly
be avoided. Where there is a payment plan, the Property Manager needs
to be consulted to determine if a payment plan can continue through a
completion without acceleration. Then write the clause in the way that
suits the deal to expressly say which party will be responsible for
which payments.
Realtors acting for Buyers should consider
writing the special assessment clause to capture "proposed" but not
assessed special assessments and provide for holdbacks equal to 125%
of the highest estimate of the assessment pending determination of it.
Subjective Clauses
Subjective conditions precedent lack
certainty, and this lack of certainty can make a contract
unenforceable. The primary offender is the clause that makes the
contract "subject to financing satisfactory to the Buyer in the
Buyer's sole discretion." This sort of clause can allow the Seller to
argue that the contract lacks enough certainty to enforce against the
Seller until removed. This is why subjects to financing should be
written with the detail that can be objectively determined. The
alternative solution seen in practice is to recognize the clause as an
option to purchase in favour of the Buyer and provide for a nominal
option fee that is independent of the deposit or other contract
payment to make it enforceable. Contracts made subject to vague due
diligence should be written as options to purchase instead.
Performance Clauses and Holdbacks
Contracts are often written
with clauses requiring the Seller to perform various changes or
repairs prior to completion. These pose a problem for all where the
Seller fails to perform either on purpose or simply due to the lack of
available trades. Short of a negotiated solution, the Buyer must close
or risk losing their deposit or worse as the work is rarely
significant enough to be considered "fundamental". The Buyer cannot
unilaterally holdback funds to cure the problem. They can only sue to
enforce the clause and seek damages for putting things right. This
will not make for a happy Buyer, or a Buyer happy with their realtor.
The realtor can do a couple of things. They can help the Buyer
identify items that are "fundamental" and have the performance clause
include language to clarify that failure to perform shall be a
fundamental breach of the contract entitling the Buyer to accept the
repudiation of the Seller and have the deposit returned to them. This
sends the right message to the Seller. However it does not ensure the
property to the Buyer. A holdback clause can. The contract can provide
for a failure of the performance by the Seller with language that
allows the Buyer to get an estimate of the cost of doing the work, and
entitles the Buyer's lawyer to holdback 150% of the estimate and to
pay or reimburse invoices from the holdback without input from the
Seller. Note that the realtor should also write performance clauses to
contemplate work being finished a few days before completion date to
allow time for the buyer to get an estimate done.
The realtor's
objective should be to avoid the Buyer and Seller having to agree on
the amount of a holdback or on payments from it. If they have to agree
and do not, then they have to sue each other to determine the matter,
and the realtor can expect to be sued in turn.
Title Insurance
Most realtors do an excellent job at helping their clients,
especially first-time home buyers, estimate the total costs of the
purchase. Realtors should now be aware that financial institutions are
beginning to make title insurance mandatory following a couple of
decisions from the B.C. Court of Appeal. Historically, title insurance
was used in B.C. to insure against the survey issue where no survey
existed. As strata plans are surveys, there was never a need to get
title insurance for condominium purchases. That has changed with the
court decisions and some banks now require title insurance to insure
against fraud. We expect that within the year, title insurance will be
mandatory for most financial institutions, adding a couple of hundred
dollars to the closing costs on most purchases, but considerably more
for high value properties.
Completion Dates
Month-ends
and mid-months should be avoided to ensure the file gets more
attention from lawyers and lenders, and to make life easier for
clients needing to hire moving companies. Clients who sell one home in
order to purchase another should be advised to allow at least one day
between the transactions.
Property Transfer Tax
Couples
putting only one partner's name on title in order to use only one PTT
exemption, thus saving the other exemption for a subsequent purchase,
should understand that it is counterproductive estate planning. If the
title holder then died unexpectedly, there will be a probate expense
that would have been avoided with joint tenancy.
Corporate
parties
Corporate Buyers or Sellers must be in good standing at
the completion date. If a corporate Seller has been dissolved, there
will need to be a significant amount of time to restore them before
completion. Foreign corporate parties will need to produce
Certificates of Good Standing from their authority over corporations (ie.
The Secretary of State, not an accountant). That can also take a
significant amount of time to obtain.
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