Home Buyers – Beware of Broken Promises

One of the most exciting decisions we make involves the purchase of a new home. While the experience can be exhilarating, finding the perfect home can be challenging even for a sophisticated buyer. We find a home we like, but often with a few small problems. For example, the landscaping is not quite finished, or there is a large pile of rubble that should be removed from the yard. Do we go ahead, or not?

To induce a buyer to sign a Contract of Purchase and Sale, a seller may be prepared to take care of minor problems with the property. A clause will be added to the Contract of Purchase and Sale indicating that before the completion date (the day the Buyer must pay the purchase price), the seller will correct the problem. In this situation, the buyer needs to beware of his or her legal rights or responsibilities if the seller does not fulfill the promise.

The standard form of Contract of Purchase and Sale provides that there are no promises or agreements other than those written in the Contract of Purchase and Sale, but that those promises and agreements that are written in the Contract of Purchase and Sale will survive the completion of the sale. In the case of a seller who breaks a promise to fix something, the second part of this clause is helpful for a buyer. The clause means the seller is legally bound to correct the problem even after the completion date. If the seller does not, the buyer can sue for damages in Small Claims Court or, if the loss exceeds $25,000, in Supreme Court. But court proceedings are time consuming, slow, and costly. Even if the buyer gets a judgment against the seller, it may be difficult to recover the money.

To avoid the need to take a seller to court, buyers should have their realtor include a clause in the Contract of Purchase and Sale that allows the buyer:

• to inspect the property before the completion date to make sure that the problem has been corrected, and

• to hold back an amount equal to the cost to fix the problem if the seller has not fixed it by the completion date.

A buyer is generally not entitled to cancel the Contract of Purchase of Sale if a seller breaks a promise to correct a problem and, unless the Contract contains such a remedy, a buyer cannot demand that the purchase price be reduced, or that a sum of money be held back from the seller.

If you are buying or selling real estate and have questions about your contract, give us a call.

Renovating Your Home

This article deals with legal issues that arise when doing a home renovation, and is based on a presentation given by Mr. Elgersma at the Canadian Home Builders Association (Victoria) Renovation Seminar.

Renovation Contracts

There are several types of renovation contracts. They include fixed price contracts (a.k.a. stipulated price or lump sum contracts), cost-plus contracts and construction management contracts.

• The stipulated price contract provides that the contractor will perform the renovations for a fixed price.

• Cost-plus contracts require you to pay the contractor a percentage of the building costs.

• Construction Management Contracts are contracts with a construction manager. The construction manager provides management and consulting services to you but is not the contractor. Instead, you contract directly with the various trades, such as the framer, electrician, plumber, drywaller and painter. The construction manager arranges the contracts but is not necessarily liable if there are problems with them. These types of contracts may be riskier for you because there is not one person that is ultimately responsible to you.

Many homeowners don’t have a contract with a general contractor, but “contract their own home”. That means that they act as the general contractor, contracting directly with the various trades, and without even a construction manager. If you are familiar with the Builders Lien Act and with construction generally, this is fine. However, there are some practical reasons for having a contractor. One is that the best trades work for contractors because contractors will hire them again. But you won’t, so you are considered a “one-off”, and so you will probably receive a trade’s lowest priority. Also, you may not get the discounts on work and materials that are available to a contractor or construction manager, and the work may not be covered by a warranty.

I will now review the most common terms of a fixed price contract:

• First of all, a detailed description of the renovations to be done by the contractor. This is usually done by referring to certain plans and specifications that are attached to the contract as a schedule.

• Next, the contract will state when work is to start, and by what date it is to be finished. If the work is not completed by the date promised in the contract, your remedies against the contractor depend on the wording of the contract. If the contract says nothing, the builder will normally be responsible for any damages suffered by you as a result of the contractor’s delay. This may include the cost of your accommodation during the period of delay. Some contracts set out a specific penalty for each day the work remains unfinished after the date promised. However, most contracts will excuse the contractor for delays beyond the contractor’s control.

• The contract then sets out the price and how it is payable. Often a deposit of some kind is payable to the contractor, with the balance payable in draws upon the completion of various stages of the work.

At the completion of these stages, you are required to pay to the builder a pre-determined amount as specified in the contract. However, you hold back 10% of each draw as a builders lien holdback.

Other provisions of the contract are also important.

• The contract should also give you the right to cancel the contract if the builder goes bankrupt. You would then hire another builder to finish the job.

• The contract should specify that the builder is responsible for clearing off any builders liens that are registered against the property by any of the trades or suppliers.

• The contract should include a warranty for the work done, so that the contractor is required to fix any deficiencies that show up.

• The contract should also set out the procedures for dealing with additions to the work, which are called extras. Of the disputes that arise between owners and contractors, a large portion of them seem to be about extras. The contractor may claim that certain work was extra and on top of the contract price, while the owner may claim that the work is not extra but is included in the original scope of work, or was not authorized. To minimize the chance of this type of dispute arising, the contract should clearly set out the scope of the work through the plans and specifications. The contract should state that no additional work will be done unless you and the contractor agree in writing, including agreement on the price.

New Home Warranty Issues

If your renovation is to repair a leaky building envelope, your contractor may need to prove that it is licensed with BC’s Homeowner Protection Office and that the repair will be covered by a warranty issued by an insurance company.

These requirements do not apply if:

• the building has less than 3 units

• the building is a rental building

• the building is covered by a new construction warranty

• repair costs are less than $10,000 or $2,000 per unit in the building

So these requirements will not apply to single-family homes.

If your home is covered by a new home warranty, check the warranty to ensure that the proposed renovation will not affect the coverage under the warranty.

Builders Liens

B.C. has had builders lien legislation in various forms since 1879. B.C.’s latest Builders Lien Act came into force in 1998. The objectives of the legislation are to ensure that construction funds are used for their intended purpose, and to protect those who add value to a building under construction.

To fulfill its objectives, the Act uses two strategies.

• First, it provides a form of security to builders, subcontractors, workers and suppliers who work on a building that is under construction – this is the builders lien.

• Second, it requires you as an owner to hold back from the contractor 10% of each payment payable to the contractor. This is called the builders lien holdback.

Builders Liens

A lien is a charge on property for the payment of a debt. A builders lien is a claim by a person who has supplied work or material to a building under construction. A builders lien may be claimed by a contractor, subcontractor or worker. These are all defined terms under the Act and may also include architects, engineers and suppliers of materials.

Under the new Act, the deadline for filing builders liens is 45 days from the date of substantial completion of the work. The lien is registered against the property for the amount of money owed to the claimant for the work or material he or she has supplied. If you have an experienced contractor there will most likely not be any builders liens, but if any of the trades are nervous about being paid, they will file a lien.

Builders Lien Holback

The builders lien holdback provides 2 functions.

• First, it ensures that there is a pool of money out of which builders lien claims can be paid.

• Second, it limits your liability for lien claims. If you comply with the holdback provisions of the Act, your maximum liability for lien claims will be limited to the amount of the 10% holdback or the unpaid balance of the price, whichever is greater, EVEN IF the total amount of all builders liens exceeds that amount.

Although lien claimants may have a valid claim against the person who hired them for the full amount owing, the lien claimants can only claim against you as the homeowner for the amount of the builders lien holdback or the unpaid portion of the purchase price. If you pay the holdback into court, the liens can be cleared from title and it is then up to the contractor and the trades to sort it out. It is no longer your problem.

You may have to pay the holdback into a special bank account. The Builders Lien Act requires that the owner and the contractor administer the account jointly, so any withdrawals will require the signature of both you and your builder.

There are 2 exceptions to the requirement to set up a bank account for the builders lien holdback. The first is where the total value of work and materials is less than $100,000. So most renovations will not require this special bank account. The second is where you have a construction mortgage and you authorize the lender (and the lender agrees) to disburse your mortgage money. In that case the lender must hold back 10% of the mortgage money from each mortgage draw.

If no liens have been filed within 55 days of the date of substantial completion, the holdback is released to the contractor. It cannot be released before that time. If liens have been filed within that period, the holdback must be used to satisfy the lien claims. If a settlement is not possible, the holdback can be paid into court and the court will then order that the liens be discharged from your title.

Mortgages

If you have a mortgage, it will say that you are not allowed to renovate without the bank’s consent.
For example, in the prescribed standard mortgage terms, the borrower/property owner promises:

• not to tear down any building or part of a building which forms part of the land,

• not to make any alteration or improvement to any building which forms part of the land without the written consent of the lender

All mortgages have similar terms, so ensure that you have obtained your bank’s consent before you get started.

Strata lots

In addition, if you are renovating a townhouse or duplex, the Strata Property Act provides that:

• you can’t alter common property or limited common property without written consent of strata council

• you can’t alter certain parts of strata lot without written consent of strata council. This includes:

  • renovations that affect the structure or exterior of a building;

  • chimneys, stairs, balconies attached to the exterior of a building;

  • doors, windows or skylights;

  • fences or railings that enclose a patio, balcony or yard;

  • floor and wall coverings and electrical and plumbing fixtures, if part of the original construction of the building.

There are many important issues to be aware of. A good contract and some knowledge of the Builders Lien Act is essential.

Homeowner Protection Act – Rules for Builders

In response to the leaky condo crisis, the B.C. government passed a new law called the Homeowner Protection Act. The Homeowner Protection Act creates the Homeowner Protection Office, and requires compulsory licensing for builders and mandatory warranty coverage on new homes. (In addition, recent regulations under the Act introduced licensing and warranty requirements for building envelope repairs – click here for more information.)

Builder Licensing

All residential builders (including developers and general contractors) must be licensed by the Homeowner Protection Office. Licenses are for one year only and must be renewed annually. The Homeowner Protection Office has the authority to monitor builders and cancel their licenses.

New Home Warranties

To obtain a building permit, builders must provide proof of third-party warranty coverage for the home. The warranty provider must be licensed with the government. Warranties must provide the following minimum coverage:

• 2 years for materials and labour

• 5 years for building envelope (including water penetration)

• 10 years for structural defects

Owner-Built Homes

The Act sets out special rules for owner-built homes. An owner-builder is a person who builds a single, detached home for their own personal use, not more than once in any 18 month period. An owner-builder does not have to be licensed or provide a third-party warranty on their home. Instead, they must file an Owner-Builder Declaration and Disclosure Notice with their building permit application. If an owner-builder sells a home within 10 years of completion, they must give the buyer a copy of the Owner Builder Declaration and Disclosure Notice. The Disclosure Notice alerts buyers to the fact that the home is not protected by a third-party warranty.

If you have any questions about the requirements under the Homeowner Protection Act, please contact us, or visit the Homeowner Protection Office.

Building a New Home

This article deals with legal issues that arise when building a new home, and is based on a presentation given by Mr. Elgersma at a Canadian Home Builders Association (Victoria) New Home Construction Seminar.

Construction Contracts

There are several types of building contracts. They include stipulated price (a.k.a. lump sum) contracts, cost-plus contracts and construction management contracts.

• The stipulated price contract is the most common. It provides that the builder will construct a house for a fixed price.

• Cost-plus contracts require you to pay the builder a percentage of the building costs. These contracts are rare because the client doesn’t know what the final price will be.

• Construction Management Contracts are contracts with a construction manager. The construction manager provides management and consulting services to you but is not the builder. Instead, you contract directly with the various trades, such as the excavator, framer, electrician, plumber, drywaller and painter. The construction manager arranges the contracts but is not necessarily liable if there are problems with them. These types of contracts may be riskier for you because there is not one person that is ultimately responsible to you.

In some cases, the builder owns the property and the contract provides that the property will be transferred to the client upon completion of the home. In these cases, it is wise for the client to register an agreement for sale, a.k.a. right to purchase agreement, at the Land Title Office to secure the payments made by to the builder. Note that the property transfer tax will be higher if the transfer takes place after construction is completed, because the tax is based on the value of the property at the time of transfer.

Some owners don’t have any type of building contract, but “contract their own home”. That means that they act as the general contractor, contracting directly with the various trades, but without even a construction manager. If you are considering contracting your own home, think twice. There are too many things that can go wrong if you don’t have experience, and you may have limited or no warranty protection for the work done. There are also practical reasons for not doing it yourself. One is that the best trades work for builders because builders will hire them again. But you won’t, so you are considered a one-off, and you will receive the trade’s lowest priority. Also, you may not get the discounts on work and materials that are available to a builder or construction manager.

A typical building contract will include these terms:

• First of all, an accurate description of the property and of the parties to the contract, which will require a title search so that the builder knows the legal description of the property and who the owners actually are.

• Second, a description of the house to be built by the builder. This is usually done by referring to detailed plans and specifications that are attached to the contract as a schedule.

• Next, the contract must state when work is to start, and by what date it is to be finished. If the work is not completed by the date promised in the contract, your remedies against the builder depend on the wording of the contract. If the contract says nothing, the builder will normally be responsible for any damages suffered by you as a result of the builder’s delay. This may include the cost of your accommodation during the period of delay. Some contracts set out a specific penalty for each day the work remains unfinished after the date promised, of say $50 or $100 per day. However, most contracts will excuse the builder for delays beyond the builder’s control.

• The contract then sets out the price and how it is payable. Usually a deposit of some kind is payable to the builder, with the balance payable in draws upon the completion of various stages of construction. The most common stages used for determining when draws are payable include lock up (which means the house is framed, roofed and can be locked up), the completion of drywall, and the final completion of the house.

At the completion of these stages, you are required to pay to the builder a pre-determined amount as specified in the contract. However, you are also required to pay 10% of each draw into a special savings account at a bank or credit union as a builders lien holdback. If you fail to do this, the Act says the builder can stop working and sue you for its damages arising from the work stoppage.

Other provisions of the contract are also important.

• For example, the contract should allow for a pre-occupancy inspection by you and the builder and require the builder to remedy any deficiencies noted on the inspection within a certain period of time. You may also want the right to hold back from the builder an amount equal to the cost of fixing the deficiencies, called a deficiency holdback. The builders lien holdback cannot be used to pay for deficiencies unless authorized in the contract and provided that no liens have been, or will be, filed.

• The contract should also give you the right to cancel the contract if the builder goes bankrupt. You would then hire another builder to finish the job.

• The contract should specify that the builder is responsible for clearing off any builders liens that are registered against the property.

• The contract should require the builder to provide proof of third party liability insurance and workers compensation coverage, so that the homeowner will not be liable for accidents.

• The contract should also set out the procedures for dealing with additions to the work, which are called extras. Of the disputes that arise between owners and builders, a large portion of them seem to be about extras. The builder may claim that certain work was extra and on top of the contract price, while the owner may claim that the work is not extra but is included in the original scope of work, or was not authorized. To minimize the chance of this type of dispute arising, the contract should clearly set out the scope of the work through the plans and specifications. The contract should state that no additional work will be done unless you and the builder agree in writing, including agreement on the price.

New Home Warranties

Under the Homeowner Protection Act, all residential builders must be licensed, and provide a warranty on homes they build from a warranty company approved by the government. Builders cannot obtain a building permit unless they can prove they are licensed and that the home they are building has the required warranty.

The warranty must be for:

• 2 years for materials and labour

• 5 years for building envelope (including water penetration)

• 10 years for structural defects

If you build your own home (i.e. without a builder or contractor), you do not have to be licensed or provide a warranty, but if you sell the property within 10 years of completion, you must notify the new owner that there is no warranty.

Builders Liens

B.C. has had builders lien legislation in various forms since 1879. B.C.’s latest Builders Lien Act came into force in 1998. The objectives of the legislation are to ensure that construction funds are used for their intended purpose, and to protect those who add value to a building under construction.

To fulfill its objectives, the Act uses two strategies.

• First, it provides a form of security to builders, subcontractors, workers and suppliers who work on a building that is under construction – this is the builders lien.

• Second, it requires you as an owner to hold back from the builder 10% of each payment payable to the builder. This is called the builders lien holdback.

Builders Liens

A lien is a charge on property for the payment of a debt. A builders lien is a claim by a person who has supplied work or material to a building under construction. A builders lien may be claimed by a contractor (builder), subcontractor or worker. These are all defined terms under the Act and may also include architects, engineers and suppliers of materials.

Under the new Act, the deadline for filing builders liens is 45 days from the date of substantial completion of the house, although in larger projects it will be more complicated than that. The lien is registered against the property for the amount of money owed to the claimant for the work or material he or she has supplied. If you have an experienced builder there will most likely not be any builders liens, but if any of the trades are nervous about being paid, they will file a lien.

Builders Lien Holdback

The builders lien holdback provides 2 functions.

• First, it ensures that there is a pool of money out of which builders lien claims can be paid.

• Second, it limits your liability for lien claims. If you comply with the holdback provisions of the Act, your maximum liability for lien claims will be limited to the amount of the 10% holdback or the unpaid balance of the price, whichever is greater, EVEN IF the total amount of all builders liens exceeds that amount.

Although lien claimants may have a valid claim against the person who hired them for the full amount owing, the lien claimants can only claim against you as the owner for the amount of the builders lien holdback or the unpaid portion of the purchase price. If you pay the holdback into court, the liens can be cleared from title and it is then up to the builder and the trades to fight over it. It is no longer your problem.

As discussed earlier, you must pay the holdback into a special bank account. The Act requires that the owner and the builder administer the account jointly, so any withdrawals will require the signature of both you and your builder.

There are 2 exceptions to the requirement to set up a bank account for the builders lien holdback. The first is where the total value of work and materials is less than $100,000. For example, renovations and small projects. The second is where you have a construction mortgage and you authorize the lender (and the lender agrees) to disburse your mortgage money. In that case the lender must hold back 10% of the mortgage money from each mortgage draw.

If no liens have been filed within 55 days of the date of substantial completion, the holdback is released to the builder. It cannot be released before that time. If liens have been filed within that period, the holdback must be used to satisfy the lien claims. If a settlement is not possible, the holdback can be paid into court and the court will then order that the liens be discharged from title.

If you are purchasing a new home, it is important that the purchase contract authorize you to hold back 10% from the seller-builder, so that you are protected from any liens filed after the purchase goes through.

For more information about builders liens, click here.

There are many important issues for you to beware of, so a reputable builder, a good building contract and some knowledge of the Builders Lien Act is essential.

A First-Time Home-Buyer Story

Bob and Robin had been married six years when they decided to buy a home. Their daughter Zoe was two years old and both were employed as software engineers in Vancouver. Some anxiety about the home purchase did arise, but their lawyer Kelvin Scheuer helped to sort it out. Here’s how…

Down payment in the bank

Bob’s employer was opening an office in Victoria where they wanted to raise their daughter. They had saved enough to make a down payment, and found a lovely little apartment near where Robin had grown up. Their first foray into real estate, the accepted offer was for $400,000 –barely in their price range!

Aiming for a tax exemption

Though they had saved for the down payment, there was no extra money. They continued to live frugally. Even so, they were counting on an exemption from the $6,000 due for BC Property Transfer Tax. Then Robin researched the exemption on-line, and discovered (in the small print) that, to qualify, the buyer must never have owned a residence anywhere in the world. Robin was so upset: Bob and his colleague had owned a tiny apartment together in Hong Kong where he had lived for a short time several years ago for his work!

Time to panic?

Kelvin stepped in to ensure that Bob and Robin could receive the tax exemption despite Bob’s previous home ownership. He noted that Robin, a Canadian citizen who had been living continuously in B.C. for well over a year, had not owned a residence before, and explained that the exemption could still be claimed as long as Robin was the sole purchaser. The couple were both fine with this, as they had shared all their assets since they married. The seller of their condo was agreeable to having Bob’s name removed from the offer, and Bob and Robin’s bank consented as long as Bob acted as guarantor of the mortgage.

The next generation

A few months after the sale had closed and they moved in, Bob and Zoe surprised Kelvin with a visit one day. Zoe was excited to show him their new dog, and she talked about taking the dog for walks in the park where Robin had played as a child. He couldn’t be more pleased!

Note: This story is fictional, it is not the story of any Beacon Law Centre clients. But Kelvin is real, and he really does like dogs. We have a dog-friendly office!

Co-ownership Agreements

Owning a home as co-owner with family members or others

The cost of residential property on Vancouver Island and the Gulf Islands has increased dramatically. Many people are not able to buy a home, or to cover the costs of owning a home, on their own.

There is growing interest for two or more people to purchase and own a residential property together, as “co-owners”. For various reasons, multiple branches of a family often want to share a property, whether as units in one house or in separate buildings on the same property.

In the past, co-owners were usually family, and this is still popular, but persons who are not related can also be successful as co-owners.

Whether or not co-owners are related, we strongly recommend that they make a written agreement to govern their ownership and use of the property. Verbal understandings regarding real property may not be legally enforceable. Co-owners who do end up in a dispute often discover that their legal remedies are limited. Litigation can be time-consuming, expensive, and extremely damaging to relationships.

A co-ownership agreement provides valuable clarity, prompts early discussions that could otherwise turn into disputes later, and alleviates many risks that can arise for co-owners.

A legal co-ownership agreement will cover matters such as:

• how decisions are made about the property’s development and use;

• who is responsible to pay various expenses (or how they are shared);

• who is responsible for payment of the mortgage;

• whether a co-owner can share/rent their unit, and keep the rent;

• what happens if a co-owner wants to sell, and how proceeds are paid out;

• any difference between legal (on title) and beneficial ownership; and

• how any disputes that arise will be resolved quickly and cost-effectively.

We have helped many families, friends, and business associates get through the process of making a co-ownership agreement, and watched them share their ownership successfully.

Contact Beacon Law Centre for trusted advice on co-ownership agreements.

Protecting Waterfront Land from Erosion

Two recent court decisions in Fonseca v. Gabriola Island Local Trust Committee affect the rights of waterfront property owners to take steps to protect their land from erosion. The result is that the “ancient common law right” to take steps to prevent erosion is now limited by all applicable local government regulations, such as those governing construction of new structures.

Background

• On one side in this court case was Mr. and Mrs. Fonseca (the “Fonsecas”), who owned waterfront property on Mudge Island. On the other side was the Gabriola Island Local Trust Committee (the “Committee”), which is the local government with jurisdiction over their property.

• Under its powers under the Local Government Act, the Committee had a bylaw prohibiting any structure within 30 meters of the sea.

• Over the years the Fonsecas built a concrete boat ramp, and various other structures along the shoreline, including a deck, fences and two seawalls. They did not obtain the Committee’s approval under the bylaw.

• In 2012 a neighbour complained to the Committee about the Fonseca’s structures. The Committee took enforcement action against the Fonsecas under its bylaw, requiring that they remove the structures.

Court Decision

• Justice Masuhara ordered the Fonsecas to remove a deck and fences, but not the seawalls. The seawalls were saved because their purpose was to prevent erosion. The judge exempted the seawalls because he held that the old common law right of a waterfront landowner to protect their property from erosion had priority over the Committee’s bylaw.

• The decision was reversed on appeal. The Court of Appeal found that the bylaw had priority over the common law right, and ordered the Fonsecas to remove the seawalls. In jurisdictions where a municipal bylaw regulates the construction of a seawall, the Court of Appeal limited the common law right to disputes between neighbouring land owners. For example, the court quoted from a previous case that where “a landowner acts bona fide and does no more than is reasonably and honestly necessary for the protection of his property, then an adjoining land owner who suffers damage as a result has no claim”. However, the ability to exercise this right is subject to municipal regulation.

Our Comment

The right to prevent erosion is very important, because once land is lost to erosion, it cannot be reclaimed. It becomes part of the foreshore and is owned by the Crown. In an era of rising sea levels, waterfront properties that historically did not suffer from erosion will increasingly see it happening.

The old common law right is one of a group of rights of owners of waterfront property called “riparian rights” (Technically, riparian rights only apply to flowing water such as rivers, but the term is commonly applied to all bodies of water). The right to prevent erosion is just the latest of these rights to be overtaken (the legal term is “abrogated”) by government legislation.

Two riparian rights that still apply in British Columbia are: right of accretion (ownership of naturally deposited material that has taken on the characteristics of the uplands), and right of ingress/egress (access to and from navigable waters).

The Provincial Government has published a paper stating that “British Columbia recognizes the right of upland property owners to protect their land from erosion… to install protective structures on their own land; but they require the consent of the Crown to extend any structures below the natural boundary.” This would appear to uphold the right of owners to install seawalls.

However, the Fonseca case means that the right of local governments to regulate/prohibit seawalls (also granted to them by the Provincial Government) takes precedence over the owners’ right to prevent erosion.

Unless the Provincial Government changes the Local Government Act to modify the effects of this case, which is unlikely, the right of waterfront property owners to prevent erosion will be subject to bylaws of the relevant local government. If you are a waterfront property owner concerned about erosion, you should check with your local government to determine if it has a bylaw that regulates the construction of seawalls. If your local government does not currently have such a bylaw and you are concerned about future erosion, consider constructing a seawall before your local government adopts such a bylaw.

Joint Tenancy as an Estate Planning Tool – Pros and Cons

Estate planning means different things to different people, but most people agree that some of the goals of estate planning include:

• Simplifying the administration of an estate

• Minimizing probate fees

• Ensuring that property passes to the intended person

One of the most common strategies used to achieve these goals is to own property with another person in a joint tenancy.

Joint tenancy or tenancy in common Property owned by more than one person must be owned in one of two ways: joint tenancy or tenancy in common. In practical terms, the chief distinction between joint tenancy and tenancy in common is the right of survivorship. Only joint tenants can enjoy right of survivorship.

If you own property with another person as tenants in common, on your death your interest in the property becomes part of your estate to be passed on according to your will. If you own property with another person as joint tenants, on your death your interest in the property normally passes to remaining joint tenant(s) by right of survivorship, and does not form part of your estate.

In British Columbia, the law presumes that an asset (other than land) held in two or more names is owned as a joint tenancy, unless there is an indication that the owners own it in shares. So, for example, household goods, vehicles, bank accounts and investments owned by two or more persons will be presumed to be owned by them as joint tenants, unless their respective shares of the assets are specified or there is a statement that the asset is held by the owners as tenants in common.

However, in the case of land the common law presumption of joint tenancy has been altered by statute, so that land owned by two or more persons is presumed to be owned by them as tenants in common unless the title expressly states that they are joint tenants.

Right of Survivorship Because of the right of survivorship, a joint tenancy can meet the estate planning goals of simplifying the administration of an estate, minimizing probate fees and ensuring that property passes to the intended person. It is a strategy used by the majority of married couples, who own their major assets, such as their home, as joint tenants. The right of survivorship ensures that when the first spouse dies, these assets pass to the surviving spouse without being subject to the delays and expense of an application for probate (with a little extra planning, it is often possible to avoid probate altogether on the death of the first spouse). The right of survivorship also ensures that ownership of the assets will not be affected by claims under the Wills Variation Act, if there is a will, or by the rules for intestate distribution under the Estate Administration Act, if there is no will.

Beware of the Consequences While joint tenancy is most common between spouses, it is becoming increasingly common between parents and children. The purpose is the same – to simplify administration of the parents’ estates and to minimize probate fees. Often the joint tenancy is created after the death of one of the parents. However, this can result in some unintended and undesirable consequences. Consider the example of a parent who has transferred her assets into a joint tenancy with one of her adult children:

Loss of control The parent cannot later cancel the transfer if she changes her mind. As well, in the case of land, she will not be able to sell or mortgage the land unless the child also signs.

Income tax The transfer is a disposition for income tax purposes. The 50% interest in the property transferred to the child is deemed to have been sold at its fair market value and, unless the asset is the parent’s principal residence, a portion of any capital gains will be added to the parent’s income. This could result in the parent having to pay tax even though she received no payment from the child. In addition, one half of any future capital gains will accrue to the child. If the property is the parent’s principal residence and the child lives elsewhere, the principal residence exemption will be lost for the child’s share of any future increase in value of the home.

Property transfer tax In the case of land, property transfer tax will be payable at the time of transfer, although there may be an exemption available if the property is the principal residence of either the parent or the child.

Exposure to creditors The child’s interest in the property will be subject to claims by the child’s creditors. If the child is married and the property is used for a family purpose, it could be subject to claims by the child’s spouse if there is a breakdown of the child’s marriage.

Death of The child may pass away before the parent, negating the purpose of the joint tenancy. If other children were also on title with the parent as joint tenants, on the death of the parent the asset would pass only to the surviving children, and the family of the deceased child would receive nothing.

Blended Families Another unintended result can occur if spouses in a second marriage own property together as joint tenants, and each have children from previous relationships. On the death of the first spouse, the property will pass by right of survivorship to the surviving spouse. The spouses may have had wills that provided that the property would ultimately pass to the children of both spouses, on the death of the last of them. However, the surviving spouse can change his or her will so that the property goes only to that spouse’s children, and the children of the deceased spouse would receive nothing.

Resulting trust The law presumes that a joint tenant who contributed nothing toward the property holds his or her interest in trust for the contributing owner. An exception is the presumption of advancement (meaning a gift in advance of a person’s death). According to case law, the presumption of advancement applies to transfers of property from one spouse to both spouses, or from a parent to a minor child.

However, in 2007 the Supreme Court of Canada stated (in the Pecore and Madsen decisions) that the presumption of advancement does not apply to transfers between parents and adult children. An adult child who receives an asset by right of survivorship from a deceased parent can no longer rely on the presumption that the deceased wanted the child to take the asset at death. Additional evidence is required to prove that the transfer into joint tenancy was intended to be a gift and that the surviving child was intended to receive the asset on the death of the parent.

The Pecore and Madsen decisions also raised the possibility that the right of survivorship itself could be gifted from one person to another. This presents several unanswered questions, however, such as the tax implications of such a gift. As well, it is not clear whether the gift of the right of survivorship applies to real estate.

Put it in Writing To avoid the possibility of a dispute with other family members, and to clarify the tax consequences, it is now imperative to put the parent’s intention into writing. If the transfer to joint tenancy would not result in capital gains tax, or the parent is prepared to pay the tax, the parent could sign a deed of gift to confirm that beneficial ownership in the property is transferred to the parent and child as joint tenants with right of survivorship. On the parent’s death, it would be difficult for other beneficiaries to argue that the child holds the property in trust for the parent’s estate. Alternatively, the parent could require the child to sign a declaration of trust confirming that the child does not have beneficial ownership in the property, but simply holds his or her interest in trust for the parent. In addition to reducing the possibility of a dispute between the child and the other beneficiaries of the parent’s estate, the declaration provides the parent with a greater amount of control over the property, and may prevent the deemed disposition of the property for income tax purposes (because beneficial ownership of the property remains with the parent). However, Canada Revenue Agency (“CRA”) has suggested that the existence of a declaration of trust will not, in and by itself, be conclusive evidence that beneficial ownership of the property has not changed. It would depend on all of the circumstances. CRA’s position is that if legal title to an asset is transferred from a parent to the parent and a child, but beneficial ownership remains with the parent (as confirmed by the declaration of trust and other circumstances), a disposition for income tax purposes has not occurred. Having said that, CRA pointed out that in such a situation a true joint tenancy with the child would not exist and, in its opinion, the goal of reducing probate fees would not be achieved because the property would not pass to the child by right of survivorship. Joint tenancy can be an effective part of an estate plan, but must be used with caution. If you have questions about creating a joint tenancy or other estate planning strategies, call us first for professional advice.

For a discussion of other strategies to avoid probate and probate fees, contact Beacon Law.

Property Transfer Tax – First Time Home Buyer’s Program

British Columbia has a tax on the transfer of real property, called Property Transfer Tax. The tax is based on the fair market value of the real property. The rate of tax is 1% of the first $200,000, and 2% on the balance over $200,000.

However, first-time home buyers who qualify for the First Time Home Buyers’ Program are exempt from payment of the Property Transfer Tax. Typically, to qualify for the exemption, ALL the following conditions must be met:

The Buyer:

• You must have lived in BC for 1 full year prior to the purchase date, or have filed 2 income tax returns as a BC resident within the last 6 taxation years.

• You must be a Canadian Citizen or Permanent Resident. (If you obtain this status within one year after the purchase date, you can apply for a refund).

• You must have never owned a registered interest in real property anywhere in the world that was your principal residence.

• You must occupy the real property as your principal residence within 92 days of the purchase date.

• You must continue to reside in the real property for 1 full year after the purchase date. (If you move out sooner, you may have to pay some of the tax).

• You must have never received a first time home buyers’ exemption or refund.

The Property:

• It must have a fair market value of no more than $500,000. If it is vacant land, the value of the land plus total construction costs must be less than $500,000).

• It must be classified as residential.

• It must not exceed 0.5 hectares (1.24 acres) in size.

If the buyer fully qualifies but property does not fully meet all of these conditions, a partial exemption from the tax may still be available.

If you have questions about the First Time Home Buyers’ Program, or about buying or selling real property in BC generally, please contact us.

The Common Law Right to Protect Waterfront Land from Erosion

Del Elgersma summarizes the recent BC Supreme Court decision in the case of Fonseca vs Gabriola Island Local Trust Committee, which affirms the “ancient common law right” of waterfront owners to protect their land from erosion.

BACKGROUND

• The Fonseca’s are an elderly Burnaby couple (in their ‘80’s), married over 60 years, who have owned waterfront property on Mudge Island, near Gabriola, since 1991.

• In 2003 they received a provincial license and built a concrete boat ramp.

• Over the next few years they built various structures on their property along the shoreline, including a deck and two seawalls, without the approval of the local government, the Gabriola Island Local Trust Committee.

• The Gabriola Island Local Trust Committee has the status and powers of a local government under the Local Government Act.

• A bylaw prohibited any structure within 30 meters of the sea. There was an exception where the frontage on the sea was adequately protected from erosion by natural bedrock – in that case, the setback was reduced to 7.5 meters, but that did not help the Fonseca’s: they didn’t have bedrock, and their structures were right along the shoreline.

• In 2012 they had a dispute with a neighbour, who complained about the structures, which resulted in enforcement action by the local government and ultimately this case.

DECISION

• The judge ordered the removal of a deck and certain fences which were built within the setback area and which were not for the purpose of preventing erosion.

• However, the judge agreed that there is a common law riparian right for a waterfront landowner to protect their property from erosion by the sea.

(Technically, riparian rights are rights related to streams and rivers, while littoral rights are rights related to the sea or lake-shore. However, it is common for both types of rights to be referred to as riparian rights.)

The judge stated, “this riparian right is grounded in Roman and, subsequently, English law that allowed landowners to protect their property”. He referred to two old English cases, coincidentally both from 1828, which outlined this right, and included this quote from one of those cases:

“It seems to me that every landowner exposed to the inroads of the sea has a right to protect himself, and is justified in making and erecting such works as are necessary for that purpose”

Justice Masuhara then stated “I find that there exists a common law right to protect your property from erosion caused by the “inroads of the sea”.

The remaining issue was whether this common law right had been extinguished. Under rules of statutory interpretation, common law rights continue unless modified, altered or abrogated by statute. The abrogation must be express or necessarily implied; the judge found neither. While the Local Government Act gives local governments wide powers to regulate land use and structures, there is no specific abrogation of the right to protect land from erosion. The judge therefore concluded that the setback bylaw infringed the Fonseca’s common law rights and was inapplicable to the seawalls.

Unfortunately, within two weeks of the decision the local trust committee announced it would appeal the decision. In a press release they stated:

“We are disappointed with the Court’s narrow interpretation of the law and decision that B.C. local governments cannot enact zoning regulations to prohibit seawalls”.

The trust committee’s argument that the common law has been abrogated seems destined to fail. The BC Government itself has acknowledged that the right still exists!

The Ministry of Environment published a paper on riparian rights in 1990 (updated in 2008). The paper, titled “Riparian Rights and Public Foreshore Use in the Administration of Aquatic Crown Land”, has much to say about the common law right recognized in the Fonseca case.

Here are some excerpts from the paper:

“British Columbia recognizes the right of upland property owners to protect their land from erosion or flooding by building embankments, dykes, or other protective improvements. This right may be exercised only on the upland property. Owners have the right to install protective structures on their own land; but they require the consent of the Crown to extend any structures below the natural boundary.

“As defined in section 1 of the Land Act, natural boundary means the visible high water mark of any body of water…

“Accretion and Erosion
Land abutting a body of water is subject to accretion and erosion.
A waterfront property owner owns land that has slowly and naturally accreted once that land takes on upland characteristics.
This situation can also operate in reverse. When the upland is slowly and naturally eroded, the land lost becomes part of the foreshore or bed of the adjacent water body. The Crown then owns the land below the natural boundary.

“Summary
Of the historical or traditional riparian rights and related property rights mentioned here, three have been abrogated by statute;

• The principle of ad medium filum aquae (the concept that your boundary extends to the middle of any adjacent stream or river).

• The right to water flow of undiminished quality and quantity.

• The right to construct facilities on the foreshore to provide for access to deep water.

“Three riparian rights that do apply in British Columbia are:

• Protection from erosion by an owner.

• Accretion and Erosion – ownership of naturally accreted material which has taken on upland characteristics.

• Ingress and Egress – access to and from navigable waters.

“The right to protect waterfront property from erosion is relatively well established. The limits of that right are defined by the boundaries of the upland property being the location of the present natural boundary as it exists from moment to moment. To erect protective works beyond the present natural boundary needs the consent of the Crown.

Given these statements, it is hard to imagine that the Court of Appeal could decide that the common law right to protect your land from erosion has been abrogated.

This right is very important in BC, because land lost to erosion cannot be reclaimed, it becomes Crown foreshore land.

TAKEAWAYS

• In the Fonseca case, the judge found that there had been actual erosion – if there was no evidence of erosion (or at least no real threat of it), the result may have been different.

• If the local trust committee wins on appeal, the decision applies retroactively, so any structures built while the appeal is pending would be non-compliant.

• The judge confirmed that local governments can regulate how seawalls or other anti-erosion measures are constructed – if the local trust committee loses the appeal, expect to see municipalities update their bylaws to regulate this.

• If the trial judge’s decision is upheld, the best time to build protective structures might be immediately after the appeal, before the municipality brings in onerous bylaws (or before the province enacts legislation to abrogate the right).

• However,

  • be careful that structures don’t result in erosion to your neighbour’s property, and

  • be prepared to prove that there was actual erosion, or at least a real threat of erosion.