Canada: The Perils Of Pre-Sale Condo Contracts

Last Updated: April 25 2018
Article by Menka Sull

Pre-sale condo contracts are commonplace in the hot real estate market of Metro Vancouver. In the majority of cases, the condo development is completed without issue and the purchasers often reap the rewards of rising values. However, a recent application heard in the Supreme Court of British Columbia highlights some of the inherent risks associated with entering into pre-sale contracts.

In Forjay Management Ltd. v. 0981478 B.C. Ltd., 2018 BCSC 527, Madam Justice Fitzpatrick had to consider what to do with a number of pre-sale contracts after a Langley condo project, known as Murrayville House, went into receivership.

From March 2015 to May 2016, the developer of the condo project sold a number of units from its sales centre. It was anticipated the project would be completed sometime between January and April 2016. The pre-sale contracts had a clause which stipulated that if the project was not completed by July 31, 2016, the contracts would be terminated; however, the developer had the option to extend the completion day by up to 120 days.

By May of 2016, it was starting to become apparent that the developer did not have the funds to complete the project and the project's secured creditors subsequently began foreclosure proceedings. The development became ready for occupancy in August of 2017, but none of the condo sales had been completed and a number of issues remained outstanding. In October of 2017, the Court appointed a receiver manager for the project. After its appointment, the receiver began efforts to complete the development with additional funding provided by one of the creditors.

One of the receiver's main tasks was to review the substantial number of pre-sale contracts that the developer had entered into prior to the receivership. Upon its review, the receiver discovered that the developer had entered into 151 pre-sale contracts for 91 units, meaning a number of units had been sold more than once. In fact, some units had been sold two, three and even four times. In 56 of the pre-sale contracts, the developer had been paid the full purchase price and a substantial majority of the contracts provided for a credit or discount of between 10 and 100% of the purchase price from that indicated in the price list issued by the sales centre. It was also discovered that many of the pre-sale contracts had been signed after the closure of the sales centre in May 2016 and after market values had substantially increased beyond those indicated in the price list.

Of the 151 pre-sale contracts, the receiver identified 40 contracts which it considered to be "without issues" in that: (1) they complied with disclosure obligations; (2) the deposits of between 3 and 10% were held in trust by a law firm; (3) the purchasers had yet to pay the balance of the purchase price; (4) the purchase price was within 90% of the price list; and (5) the receiver believed the pre-sale contract prices were at fair market value at the time of signing.

This March, the receiver made an application before Madam Justice Fitzpatrick to seek directions about whether it should complete these 40 "without issues" contracts. The receiver and pre-sale purchasers took the position that the contracts ought to be completed, while the secured creditors and developer argued the contracts were either not enforceable or that the receiver should disclaim the contracts to allow a market sale of the units. An appraisal obtained by the receiver indicated the units' collective value was now 46% higher than the contract prices, translating into a total increased value of $5,461,005. Accordingly, the question before the court was: "Who should reap the benefit of this increase?"

Justice Fitzpatrick found that she did not need to consider whether the 40 pre-sale contracts were valid and enforceable, but rather she could resolve the matter by considering whether the receiver should disclaim the contracts. Once a receiver is appointed, one of its primary goals is to maximize the recovery of the assets under its charge. A receiver is not bound by contracts made by the debtor and it retains the option to disclaim those contracts if it is beneficial for the stakeholders to do so.

Justice Fitzpatrick weighed the interests of both parties and noted that although she sympathized with the purchasers, the purchasers knew the inherent risks associated with pre-sale contracts, they would recover their deposits and, if their contracts were valid, they could make a claim against the developer. On the other hand, the secured creditors, who helped complete the development, would lose money if the pre-sale contracts were completed. The purchasers faced a loss of opportunity, but the secured creditors would suffer a real monetary loss.

The receiver was ordered to disclaim the 40 pre-sale contracts and take immediate steps to remarket and sell the units. In the concluding paragraphs of her judgment, Justice Fitzpatrick noted that she had "great sympathy for the position of the pre-sale purchasers who have become embroiled in this litigation and who have now potentially lost the ability to obtain what they hoped would be their homes": at para. 133. Accordingly, the receiver was also directed to fashion a process which would allow the 40 pre-sale purchasers a right of first refusal within the future marketing plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Menka Sull
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