Mortgage Enforcement Issues
In my foreclosure practice, typically the material circumstances have already been cast in stone by the time a client comes to see me about going to court. Often times, the remedies (or restrictions) that are available to a lender have already been determined well before a borrower has defaulted on a loan. One situation that lenders in BC will want to be aware of is that of a loan on new construction by an owner builder.
The Homeowner Protection Act, SBC 1998, ch. 31, deals with consumer protection for new home buyers in Part 8 of the Act. More specifically, section 22 of the Act stipulates that a person must not sell or offer to sell a new home within 10 years from the date of an occupancy permit (or the date that the registrar was satisfied the new home was first ready for occupancy if there is no occupancy permit). The exception to this restriction where the new home is covered by home warranty insurance provided by a warranty insurer or the new home is exempt by regulation.
The potential pitfall for lenders comes as a result of Section 20 of the Act. Section 20 states that a person who intends to build a home for personal use may be issued an authorization if that person pays the prescribed fees and meets the criteria for an owner builder. The important consequence is that an borrower with an owner builder’s authorization is not required to obtain home warranty insurance. Of course, this introduces an issue for lenders under Section 22, namely that the property would not be covered by home warranty insurance and, thereafter, the property must not be sold within 10 years from the date of an occupancy permit being issued or from the date that the registrar is satisfied that the property was first ready for occupancy.
Thus it is possible to envision a hypothetical situation where a loan is made to an owner builder on new home construction without consideration for the provisions of the Act. In this hypothetical, the owner builder complies with section 20 and does not obtain home warranty insurance. Subsequently, the owner builder goes into default, but well before 10 years from obtaining an occupancy permit. The lender could make a demand and start a foreclosure proceeding, but would encounter a problem at the stage of seeking conduct of sale. Specifically, Section 22 of the Act would prevent the lender from offering the property for sale for up to 10 years due to the lack of home warranty insurance coverage.
Interestingly, Section 22 of the Act does include a subsection that allows a person to apply to the registrar for permission to sell a new home or offer the new home for sale despite the requirements of the Act, if the registrar is satisfied that the person would suffer undue hardship if the permission is not granted. However, in practice, this permission is extremely difficult to obtain. In the rare circumstances where I have heard of permission being granted, the registrar had been able to see behind the walls to ensure that the wiring, plumbing and other key elements of the construction were completed to a standard acceptable to the registrar.
In summary, lenders should be mindful when lending to owner builders on new construction. There could be issues down the road that significantly impede enforcement remedies for up to 10 years. If you have any questions or concerns about the provisions of the Act, make sure to ask your lawyer before lending on new construction by an owner. Contact me at email@example.com or 250-869-1170.