Can the New 15% PTT Frustrate Real Estate Contracts?

Blog by Arnold Shuchat | August 7th, 2016

Below are a few thoughts on this question. I am not attempting to provide legal advice here. My question is, what affect will the imposition of the new 15% offshore buyer tax have on real estate contracts that were executed prior to the announcement of this tax but which are intended to complete after August 2, 2016?   Can it be argued that such a tax legally frustrates the contract?

The issue is one of primary importance for locals who have sold real estate to offshore interests which called for completion of the transaction to be after August 2, 2016.  Could it be properly argued that the 15% tax that would apply to the purchase price legally frustrated the parties' intentions?  The seller most likely entered into another contract of purchase and sale for his next property and is dependent on the proceeds of that sale. He would take legal action to at least retain the deposit if there actually was one.  If there wasn't a deposit yet, a similar question arises as to whether the additional tax is sufficient grounds for the buyer to abandon the purchase with the usual "subject to financing" clause.

1. A case that is often depended upon as the basis for nullifying contracts based upon "Frustration" is the BC Court of Appeal case of KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295.  In that case, a contract was entered into between a developer buyer and Safeway where in negotiations Floor Space Ratios in the area of 3.0 were discussed. After the contract was inked, the City of Vancouver changed the zoning which resulted in an FSR of .3 which completely obliterated the buyer's intended development". 

The contract contained the following clauses:

"Buyer acknowledges and agrees that the seller neither makes nor gives any representation, warranty or covenant with respect to:(a)  zoning, inclusive of permitted uses, of the lands;(b)  the availability of the development permit or building permit in respect of the lands, for any development and construction by the buyer of any building or structure, which the buyer may desire at any time to develop and construct upon the lands. . . ."

The court stated with respect to this clause: "I do not find that the above clauses expressly allocate to [KBK] the risk of the Director’s application to re-zone the Property.  At best, these clauses are of general wording and serve as a disclaimer, by Safeway, as to anything it may have said during the course of negotiations with respect to the zoning or development of the Property."

And, further that the change in the allowable buildable square footage from 231,800 square feet to 30,230 square feet, did not amount to a mere inconvenience but, rather, transformed the contract into something totally different than what the parties intended."

The court's conclusion is that the parties' intentions had been frustrated, albeit, not by the additional costs of what we are now experiencing, that is 15% more for offshore buyers, but by a reduction of density of about 87% from what both parties might have expected.  

It is arguable that the additonal 15% would not amount to anywhere near the feasibility restriction that was found in the KBK case and might therefore not amount to sufficient cause so as to frustrate the contract.

2. A practical point which comes out of this case is that Realtors and lawyers might consider "expressly" allocating the risks in the event of a government intervention in the market place which could add significant costs to either party instead of limiting the text in the agreement to which events each party is or isn't providing a warranty for.

3. I have noticed many offers being sent to me without any detail about who the buyer is other than a very common name that would be impossible to trace.  Sellers and Realtors should demand identity detail in offers with a local footprint/address, other than the buyer's brokerage's address.  Sellers should know how to find the buyer in the event legal issues arise.

4. On a practical note, it is time to start advocating for deposits upon acceptance of the offer, as opposed to upon subject removal. We cannot be sure that offshore sellers are not placing countless offers on properties with "impunity" in that practically speaking, only bind the sellers who are present in the jurisdiction and not the buyers who are almost untraceable and likely have no assets in B.C.

5. For the past 15 years with only a very few exceptions, sellers have been able to depend upon a minium 5% deposit by buyers in a rising market to consider the purchase of their next property, and that such a deposit represents a drastic reduction to the risk that the buyer might not complete.  I suggest, that now might be the time to increase the amount of the deposit, and maintain caution with the timing of the seller's next pruchase to avoid the risk of a buyer defaulting on completion.  It would seem to be a prudent move to provide for a seller rent back following completion to allow the seller time to find his next property rather than assume all will be well in what might turn out to be a more volatile market than we have seen in recent times.

If you are involved in a contract where some of the issues here have come up, contact your lawyer as soon as possible and get the advice you need.