Contracts of Purchase and Sale, Frustration, Relief from Forfeiture and the Foreign Buyer Tax
On July 25, 2016 the Property Transfer Tax Act, R.S.B.C. 1996, c. 378 introduced a 15% tax on foreign entities or taxable trustees in addition to ordinary property transfer tax on transfers of residential real property in the Greater Vancouver Regional District. While the purpose of effects of the so-called “Foreign Buyer Tax” are beyond the scope of this article, suffice to say the tax substantially increased the costs of certain purchases for those purchasers falling under its purview.
The Foreign Buyer Tax caught many purchasers and those involved in the real estate industry off guard as was the case in Wilkie v Jeong, 2017 BCSC 2131 (CanLII) which touches upon the Foreign Buyer Tax and a number of key legal principles that apply to contracts of purchase and sale.
In Wilkie v Jeong, the purchaser was a foreign national. The purchaser and vendor entered into a contract of purchase and sale for a home in North Vancouver for $2,668,000 prior to the Foreign Buyer Tax coming into effect and without the parties apparently having turned their mind to the possibility of that tax coming into force. Unfortunately for the purchaser, the Foreign Buyer Tax came into effect between the time the contract of purchaser and sale was entered into and its completion date resulting in an increase in transfer tax from $58,040 to $458,240 (a $400,200 increase).
The purchaser refused to complete and argued that the contract was frustrated as a result of the introduction of the Foreign Buyer Tax. The doctrine of frustration posits that when, through no fault of any party to a contract, a contract is no longer being required to be performed because an intervening and unforeseeable event makes it such that performance would amount to something radically different from what was bargained for. For example, a home being destroyed by a wildfire before a completion date would amount to frustration relieving a purchaser from the obligation to pay for the home and the vendor from being required to sell a home which was not destroyed.
At the time of trial, the vendor in Wilkie v Jeong had been unable to sell the property to a third party and claimed losses and damages as a result.
The court acknowledged that frustration does not require it to be impossible for a contract to be performed to apply; however, it also observed that the contract in question was not subject to financing and included a provision that the purchaser would pay, among other things, all taxes from the adjustment date. The purpose of the contract was simply to transfer land in exchange for a purchase price. The eight-fold increase in the property transfer tax was acknowledged to be onerous, but the court held that the law states that increased and unanticipated expense, hardship or inconvenience does not constitute frustration.
Although her evidence was less than complete, the court also found that the purchaser was unable to raise sufficient fund to complete with the additional costs of the Foreign Buyer Tax. Again, the court found that there law states that lacking sufficient funds does not constitute frustration. Although not stated by the court so clearly, the purpose of clauses making contracts of purchase and sale subject to financing is to ensure that a purchaser is not required to complete until they can assure themselves they have sufficient funds to do so.
The purchaser in Wilkie v Jeong also attempted to seek the return of her deposit on through s. 24 of the Law and Equity Act, R.S.B.C. 1996, c. 253 which provides that “The court may relieve against all penalties and forfeitures, and in granting the relief may impose any terms as to costs, expenses, damages, compensations and all other matters that the court thinks fit.”
The court found that the deposit was not disproportionate to the purchase price (being 6.7% of the purchase price) and went on to find that the applicable principles in respect of relief from forfeiture may be summarized as follows:
- When money is paid by a buyer as a true deposit or pursuant to an express forfeiture clause, if the buyer is in default he or she cannot recover the money at law at all.
- However, the buyer may have a remedy in equity for relief from forfeiture.
- Two things are necessary to give rise to that equitable relief: first, the sum forfeited must be out of all proportion to the actual damage suffered by the seller, which cannot be assessed until the seller’s actual losses have crystalized, and, secondly, it must be unconscionable, in the traditional equitable sense of unconscionability, for the seller to retain the money. Therefore, if the transaction is not unconscionable in the traditional sense, it is not necessary to consider whether the sum forfeited is out of proportion to the vendor’s actual loss.
While the court was not in a position to assess whether the vendor’s damages were disproportionate to the deposit amount, it was able to conclude that the deposit amount was not unconscionable and found that the vendor would retain the deposit.
Lastly, the court found that the vendor’s damages would be assessed at a later date.
Wilkie v Jeong is illustrative of the importance of a contract to balance risks among contingencies that may arise during the performance of a contract. Parties may protect themselves from further performance obligations by making contracts subject to certain events or completing/waiving certain conditions. No contract can fully account for any and all possible occurrences; however, a well-drafted contract appropriately balances risks among the parties to it. Further, parties entering into contracts who receive proper legal advice ought to be made informed of what risks they are and are not accepting in any bargain they enter.
Jeremy Burgess is a litigation associate at Pushor Mitchell. If you have any questions about a potential legal dispute concerning a contract of purchase and sale or another contractual dispute, he’d be happy to assist you. Feel free to contact Jeremy in a confidential manner toll free at 1-800-558-1155 or at email@example.com. You may also contact our litigation group.
The foregoing is for informational purposes only and is not legal advice, nor should be construed as such.