Kahane Law Office Nominated for Calgary Choice Awards!

Kahane Law Office has been nominated by Calgary Choice Awards for Best Employer for Business Under 30 Employees!

Please follow the link below, and vote for Kahane Law Office.

http://calgarychoiceawards.ca/voting_category/best-employer-%e2%80%93-small-business-under-30-employees/

Your support is much appreciated!

Jeff Kahane Interviewed on Alberta Primetime

A Calgary lawyer with a passion for Pez! Watch the interview now:

http://www.albertaprimetime.com/Stories.aspx?pd=2288

Real Estate Conveyancing: Trust Condition Recommendations

The following report was prepared and approved by the South Alberta Real Property Subsection of the Canadian Bar Association, by resolution in December 2006. It replaces and updates an earlier trust condition report prepared by a similar committee in approximately 1995. The following is made available on the website of the Law Society of Alberta in order to provide current information to the membership regarding the activities of the CBA, in matters which may be of interest to Alberta practitioners.

FORMAL RECOMMENDATIONS

Trust Conditions Committee

The recommendations set forth in this report are designed to deal with practical problems encountered on a daily basis by residential real estate practitioners. They are not intended to be an absolute requirement for all transactions or situations. They should not be applied where the contract between the parties clearly deals with the issue in another manner. They do not, in all instances, deal with case law that suggest different conclusions, but where the law is not clear in a particular area, we have recommended a practice which we consider to be logical and practical, given the attendant risks involved.

1. Senior Citizens Tax Adjustments

            It is recommended that as the benefit of the senior citizen tax credit is a personal benefit to the senior citizen, it is therefore not an item to be adjusted at closing, unless otherwise mutually agreed to between the parties. In other words, taxes are to be adjusted without taking into account any senior tax credit.

2. Weekend Closings

             Where the possession and adjustment date are on a non-business day, and the offer is silent as to how the mechanics of closing are to occur, it is recommended that the purchaser's lawyer has two options:

(a) to release funds on the business day preceding the non-business possession and adjustment date even though there is no guarantee that possession will be available in accordance with the terms of the offer, provided that the purchaser's lawyer has obtained informed consent from his client; or

(b) to release funds on the business day following the non-business closing and adjustment date and pay interest from the possession and adjustment date to such next business day at the rate stipulated in the offer.

3. Timing of Adjustment

            The current form of offer to purchase used in Alberta requires adjustment as at 24:00 hours on the adjustment date. It is recommended however that to adjust one-half of that day to each party is unwieldy and that the possession and adjustment date should be considered the purchaser's day for adjustment purposes. Accordingly, no late interest should be paid if funds are received by the Vendor's solicitor prior to 12:00 noon. This recommendation should not necessarily apply to large commercial transactions. 

4. Condominium Transactions 

            It is recommended that the vendor should have an obligation to provide any condominium documents listed in the offer to purchase at the vendor's expense. The 2006 committee agreed that paragraph 4.7 of the standard real estate purchase contract currently clarifies the specific obligations of the seller’s lawyer to provide an estoppel certificate within a reasonable time after the completion date.

5. Builder’s Lien Holdbacks in New Home Construction 

            Due to the uncertainty of the law in this area, it is recommended that in all cases where a purchaser has contracted with a builder or is purchasing a new completed home from a builder, an appropriate builder's lien holdback be maintained by the builder's solicitor. Unless the contract specifically deals with interest on the lien holdback, the builder should be entitled to interest earned on the holdback funds while they remain in trust unless the holdback is held back at source by a lender in which event the purchaser should pay interest on the lien holdback amount at the mortgage rate for the statutory period. The committee also noted that they considered it to be unreasonable for a builder to require a purchaser to contract for payment of interest at a penalty rate on lien holdback amounts.

6. Assignment of Sale Proceeds

            It is recommended that in a situation where the parties have agreed to close a transaction on the basis of an assignment of sale proceeds, the vendor's solicitor should allow possession on the strength of the assignment of sale proceeds, but the transfer of title should not occur until the sale proceeds are unconditionally available, unless the vendor has provided an informed consent to its solicitor to proceed with registration in order that the transaction is not unduly delayed. It is further recommended that where transfer of title takes place after possession, the purchaser's lawyer be placed under trust that there clearly will be no ability to hold back. It is also recommended that the vendor's solicitor advise the vendor as to the ramifications of passing title and possession on the strength of an assignment of sale proceeds even though the vendor may be contractually bound at that point in time.

7. Trust Conditions at Variance with Contract

            It is recommended that solicitors have a duty to review the contract notwithstanding that it may be binding, to advise the client as to any potential difficulties arising therefore and that if amendments are required as a result of such review, they should be done by way of addendum to the contract and not through trust conditions.

8. Encroachments and Relaxations

             The 2006 committee agreed that the standard real estate purchase contract currently addresses the obligations of the seller in paragraph 6.1.

9. Restoration of Title

              It is recommended that a purchaser's solicitor should never provide an undertaking or covenant to restore title and that it is unreasonable for a vendor's solicitor to impose such a trust condition. It is recommended that the purchaser's solicitor should undertake nothing more than to deliver a properly executed transfer of land to the vendor's solicitor in the event that completion cannot occur. It is recommended that it is an appropriate trust condition for the vendor's solicitor to require the purchaser's solicitor to deliver out of the cash difference, a reasonable amount in order to restore title.

10. Documentation in Cash and Cash Assumption of Mortgage Transactions

            It is recommended that where the transaction is a full cash transaction or cash to assumption of mortgage transaction, there is no necessity for a transfer back, tenancy-at will agreement or unpaid vendor's lien caveat. The only purpose for such security in transactions of this type is to guard against a solicitor who misappropriates funds. It is assumed that the Law Society would swiftly come to the aid of the innocent solicitor in this situation.

11. Unpaid Vendor's Lien Caveats

            The committee recognizes that different practices have developed in certain parts of the province with regard to the filing of unpaid vendor’s lien caveats, and that Calgary practitioners do not typically file them any longer. In the event a solicitor deems it appropriate to file such a caveat, it is recommended that, where the offer discloses that the Purchaser is obtaining a new mortgage, the vendor should file and discharge an unpaid vendor's lien caveat where required at the vendor's expense and that such caveat should be filed as soon as the transaction is unconditional. The unpaid vendor's lien caveat can claim an interest as unpaid vendor or as unregistered transferee or both. Where the offer is silent as to new mortgage financing, it is recommended that the purchaser be required to pay for the cost of registering and discharging the caveat.

12. Contemplating Late Closings

            It is recommended that a vendor not be entitled to refuse to close the transaction if the vendor has not given the purchaser sufficient time to register documentation at the Land Titles Office, and, where applicable, obtain a mortgage advance. It is recommended that it is not appropriate for the vendor's solicitor to require the purchaser's solicitor to submit documents to Lands Titles on or before a specified date in advance of the closing. Where a vendor is late in providing conveyancing documents to the purchaser's solicitor, it is recommended that late interest be payable on the mortgage amount at the mortgage interest rate and that the vendor be entitled to retain whatever interest can be earned on the cash difference. It is recommended that the time for completion of the transaction be the current land titles turn-around plus two business days and if there is a lender involved which takes longer than two business days to advance, the obligation should be on the purchaser's solicitor to advise the vendor's lawyer of this as soon as this becomes known. For ease of administration, it is recommended that the ATB rate be calculated as at the date of release of funds.

The 2006 committee felt that this recommendation may be redundant in light of potential amendments to the AREA contract which have not yet taken effect at the time of drafting.

13. Form of Tenancy-at-Will Agreement

            It is recommended that the Form of Tenancy-at-Will Agreement attached hereto and marked as Schedule "A", being a tenancy having a seven day fixed term, be considered to be an appropriate tenancy-at-will form.

14. Holdbacks

            It is recommended that partial release of funds not be allowed except with the informed consent of both parties involved. It is recommended that the purchaser's solicitor not be entitled to prevent the release of any portion of the purchase monies to the vendor once the purchaser's solicitor has used the documentation and title and vacant possession have passed. It is recommended that under the current rules of the Law society of Alberta, a vendor's solicitor can ignore trust conditions purported to be placed by the purchaser's solicitor where the subject matter of those trust conditions has already been dealt with by the vendor's trust conditions and undertakings, but as a courtesy that the vendor's solicitor should advise the purchaser's solicitor that he/she is proposing to ignore same.

15. Certification of Trust Cheques

           

            It is recommended that unless the agreement between the parties specifically requires a certified cheque, it is inappropriate for a vendor's solicitor to require the purchaser's solicitor to certify cheques. As a matter of courtesy, a purchaser's solicitor should consider complying with a request for certification where the vendor's solicitors are in a different city.

16. Solicitors Undertaking Re: Discharge of Existing Encumbrances

            While it is recognized that there is a risk involved in undertaking to discharge existing encumbrances, it is recommended that vendor's solicitors continue to do so, as any other proposed solution (such as having the purchaser's lawyer provide the undertaking to the new mortgagee or attempt to obtain the informed consent of all parties to a situation where potentially an existing mortgage may not be discharged) are, in the committee's view, unworkable. It is recommended that any undertaking with respect to discharge of municipal utility charges should be limited only to amounts indicated orally by the municipality as outstanding as of the closing date. It is also recommended that it is reasonable to expect an undertaking from a vendor's solicitor with respect to adjustments that are made to the purchase price and which are based upon payments assumed to have been made, such as a monthly mortgage payment or a City of Calgary TIPP payment. It is further recommended that any lake or community fee encumbrances should be assumed by the purchaser. It is also recommended that this committee write to the Mortgage Loans Association requesting their co-operation either in guaranteeing the accuracy of payout statements or alternatively providing discharges in advance of, or concurrently with, closing, as we continue to be of the view that it is dangerous for a vendor’s solicitor to undertake to payout existing encumbrances.

17. Investing the Cash to Close

            It is recommended that it is reasonable that a vendor's solicitor should be entitled to charge a reasonable fee for this service and, in any event, the vendor's solicitor should be entitled to refuse to invest.

18. Satisfaction of Mortgagee's Requirements

 

            It is recommended that where timing is not a problem, it is appropriate that a vendor's solicitor place the purchaser's solicitor under trust to ensure all known preconditions to funding (other than registration requirements) have been met before registration is commenced. It is recommended however that where timing is a problem, the vendor's solicitor must be flexible in this regard (for example it may not be possible to obtain a new real property report with a municipal certificate of compliance thereon between the time that the purchaser's lawyer becomes aware of the transaction and the date he wishes to submit documentation to registration in order to complete on time).

19. GST Declaration and Vendor’s Residency

            The 2006 committee agreed that the standard real estate purchase contract has eliminated the need for any GST declaration. If GST is applicable, it is automatically included in the purchase price and it is the seller’s responsibility to remit it.

It is reasonable for the buyer's lawyer to expect that a declaration of the seller's residency status will be included on or with the transfer of land. Where the seller's lawyer is aware of a client's non-residency status, it is not appropriate for the seller's lawyer to simply not provide a residency declaration, hoping that the buyer's lawyer does not notice or ask for one. In the event a vendor is a non-resident, the seller's lawyer ought to undertake to hold back the requisite funds (presently 25% of the sale price) from the seller, pending the receipt of a Clearance Certificate from the Canadian Revenue Agency.

20. Vendor Take Back Mortgages

            It is recommended that where the terms of a vendor take back mortgage are not specified in the contract, the parties should accept such standard provisions as covenants to insure, covenants to pay taxes, prohibition against waste, assignment of leases and rents, Land Titles Act short form covenants, cross default provisions in respect of prior mortgages, and general remedy provisions. It is recommended however that unless dealt with by the contract, a vendor take back mortgage should not include any rights of prepayment, any due on sale clause or provisions requiring financial reporting.

21. Exculpatory Language and Statement of Adjustments

 

            It is recommended that it is inappropriate to rely on any "errors and omissions excepted" statement in a statement of adjustments prepared by a vendor's solicitor. To the extent that the statement includes an amount that the vendor's solicitor is not prepared to stand behind, it is recommended that that be made absolutely clear in the explanatory notes to the statement of adjustments.

22. Modification of Trust Conditions by Non-Lawyers

 

             It is required by the Law Society’s Code of Professional Conduct that lawyers do not delegate authority to non-legal staff to amend trust conditions or undertakings, and accordingly no amendments to trust conditions or undertakings should be made or confirmed by non-legal staff. It is recognized that non-legal staff play a key role within their firms in facilitating real estate transactions, and often participate in discussions with other firms and other counsel when amendments to undertakings and trust conditions are required. While certain trust conditions are routinely amended on the basis of initial discussions with or between non-legal staff, this is a practice which is carried on at the risk of the lawyers involved. It should be recognized that amendments must be confirmed in writing by the responsible lawyer before they are binding. There are other matters which are more complex or controversial in which lawyers ought to be involved more directly from the outset. It is a lawyer’s responsibility to ensure that he or she is available to supervise staff and to respond to requests and communications from other lawyers in a timely manner. If unavailable, it is the lawyer’s responsibility to ensure that another lawyer is available to fulfill these obligations.

Link to article:

http://www.lawsociety.ab.ca/files/practice_advisors/Report_on_Status_of_Trust_Conditions_2006.pdf

Pez Royalty

Jeff Kahane is interviewed by CTV about his extensive Pez collection and his intention to bid on the Royal Pez set.

Click here to watch the interview:

http://watch.ctv.ca/news/top-picks/pez-royalty/#clip450032

Recommended Rules Of Practice Respecting Real Property Reports

Recommended Rules Of Practice Respecting Real Property Reports

As Endorsed By Unanimous Consent Of The Canadian Bar Association Alberta Branch

Real Property Sections:

South Alberta, April 9, 2003

North Alberta, November 12, 2003

OVERALL RATIONALE: To reduce the uncertainty and disagreements that often arise between lawyers concerning Real Property Reports. The Committee met for three meetings in February March and April of this year to come up with some basic rules and rationale. Brad Sinclair chaired the Committee with the following in attendance at some or all of the meetings:

Lou Pesta Howard Lowenstein

Bill LeClair Sandra Albus

Jocelyn Frazer Dave Oke

David Busheikin Alice Ho

Ken Keeler Steve Raby

Larry Hurd

There was unanimous agreement in the committee for recommending the rules.

The draft was brought forward to the CBA Real Property section in Calgary on Wednesday, April 9, 2003 and was passed with unanimous consent of those in attendance. It was brought forward to the CBA Real Property section in Edmonton on November 12, 2003 and passed with unanimous consent of those in attendance.

Although the rules are not an exhaustive list that applies to all circumstances, they give clear direction as to the way in which RPRs should be interpreted in the vast majority of cases.

It is also noted that these rules are intended to apply to the terms set out in the standard AREA Real Estate Purchase Contract and NOT to contracts involving builders for new home construction.

RULES:

1. The Buyer's lawyer should not and cannot be compelled to proceed to registration without having the opportunity to review the RPR. In such circumstances the Seller's lawyer shall use their best and reasonable efforts to accommodate the Buyer obtaining possession of the property and the Buyer shall only be required to pay late interest/occupancy rent at the mortgage rate of interest on the Buyer's mortgage amount. If the Buyer does not wish to take possession until the RPR has been provided, then the possession and adjustment date shall be postponed and the Buyer shall pay no late interest. Notwithstanding this rule, where an existing RPR reflects the substantial improvements on a property but an update may be required for improvements of a minor nature, the lawyers are encouraged to negotiate an appropriate holdback amount prior to obtaining compliance, and proceed to registration.

RATIONALE: It was the consensus of the Committee that this ought to be the primary practice standard and that the RPR should be fundamental to the closing process. The Buyer should not be held responsible for delaying or refusing to close a transaction if the Seller has not at the very least provided the RPR. Indeed if the Seller cannot provide the RPR in accordance with the terms of the Agreement, or agree to a sufficient holdback to cover any potential damages, then the Buyer may have the option of forcing the Seller to comply or rescind the Agreement. The Committee also agreed that if a closing is delayed due to this, the Buyer ought to have the choice of taking possession and pay mortgage rate/mortgage amount late interest or postpone possession and pay no late interest.

2. A clear and legible photocopy of a Real Property Report reflecting the current state of improvements on the property along with either an original or a photocopy of a Certificate of Compliance from the municipality satisfies the requirements of the standard Residential Real Estate Purchase Agreement.

RATIONALE: Legal Counsel to AREA advises that the standard contract was never intended to mandate original RPRs. The Alberta Land Surveyor's Association has relaxed their copyright endorsements on RPRs, and now most new RPRs specifically authorize photocopying of the document for the use of future owners and lenders.


3. The age of the RPR and the date of the Certificate of Compliance shall not be considered relevant as long as the RPR reflects the current improvements to the property as defined in the Purchase Contract.

RATIONALE: The Committee decided that is should not matter if an RPR or Compliance Certificate is 3 months old or 10 years old, the only relevant factor with respect to the document is whether it properly reflects the current improvements as set out in the contract.

4. When an RPR was prepared prior to the date of final acceptance on the Purchase Contract, the Seller's solicitor shall, wherever practicable, have the Seller sign a Statutory Declaration in the form attached as Appendix "A". RATIONALE: The Seller is in the best position to know and advise whether any improvements have been constructed since the date of the RPR. Since the new ALSA standards of practice only require certain improvements like concrete driveways, landings and ground level decks to be shown where they encroach, the Buyer and the Buyer's lawyer need to know whether the improvements existed at the date of the RPR. Having the Seller sign the Statutory Declaration will allow the Seller's lawyer to address the need for a new or updated RPR early, and will provide greater transparency in the process from the Buyer's perspective. This does not eliminate the requirement of the Buyer completing their own statutory declaration for their own lender. 


5. The exclusion of sidewalks, driveways, landings on RPRs cannot be used as a reason to refuse the document as long as the RPR was completed in accordance with the Alberta Land Surveyor's Manual of Standard Practice at the time the RPR was surveyed.


RATIONALE: Although some surveyors include driveways, sidewalks, or small sheds and other minor improvements on the RPRs they complete, it is not strictly something that must be shown according to their practice standards. It should not therefore be something that must be shown if it is not necessary in the opinion of the surveyor. If a situation exists where the Seller has added a sidewalk or driveway or other minor improvement which obviously is not a compliance issue, then they might simply indicate so on their Stat Dec when they provide it to the Buyer.

6. The provision of an RPR, which was completed at the construction stage, shall not in and of itself be deemed not to comply with the requirements of the Purchase Contract if the RPR shows all of the current improvements as contemplated in the Contract.

RATIONALE: It seemed to the Committee that the words "construction stage" should not render an RPR invalid as long as the depiction of the property is still accurate even several months later. An RPR completed at "foundation stage" is a different matter in most cases because important developments such as the eaves were not finished at the time the RPR was made.

7. The removal of an improvement shall not necessitate an RPR update. If the improvements have not been removed, but have been otherwise altered or modified or enlarged, then an update of the RPR shall be required.

RATIONALE: If a Seller had an RPR with compliance showing a deck or a fence on it and that fence or deck has now been completely removed, there could not logically be any compliance issues arising for the Buyer as there is no development in existence. Again, the Seller could simply indicate as such in their Stat Dec when they provide the RPR to the Buyer.

8. All fences in urban areas must be shown on an RPR if they appear to define a boundary, regardless of who constructed the fence or whether the fence is actually on the property line.

RATIONALE: The Committee felt that the issue of fencing is fundamental to the RPR because it is recognized in paragraph 7.6.9 of the ALS Manual and gives the Buyer an accurate portrayal of where their actual property line lies in relation to the fences which have been constructed. 


9. A Certificate of Compliance on an RPR does not guarantee that there are not other building location issues that may need to be addressed. Also, if an unpermitted Encroachment exists from the Seller's property into neighboring lands or municipal lands, the Seller's lawyer shall use their best efforts to resolve the matter. 

RATIONALE: There may be encroachment advisory stamps on RPR's which require attention or there may be issues related to restrictive covenants registered on title which are concerned with building location issues. The Buyer should also not be forced to accept potential defects such as encroachments as they are fundamental to the warranties given by the Seller in the Agreement. In a worst case scenario, an encroachment can, in the case of fencing, lead to the discovery of serious misrepresentations as to the size of a lot or, in the case of buildings, result in the requirement to remove or demolish a structure if it is onto neighboring property or a URW. The risk for a Buyer is simply too great to ignore. The best efforts of the Seller's lawyer may include attempting to obtain encroachment agreements, arranging to remove encroachments or otherwise negotiating compensation (or title insurance) for the Buyer.

10. If an RPR discloses that a third party adjacent property owner has an encroachment onto the Seller's land, it does not constitute a breach of Seller's warranties and the Seller is not obligated to obtain an encroachment agreement for this kind of encroachment.  

RATIONALE: The Agreement makes no reference to encroachments from neighboring lands onto the Seller's property and the Seller has made no representations or warranties with respect to these situations and has no obligation to the Buyer in that regard.

11. Both the Seller's lawyer and the Buyer's lawyer ought to address the availability and adequacy of the RPR immediately on receiving instructions to act on a file.

RATIONALE: By addressing the matter at the outset instead of in the final week prior to closing, it is presumed that unnecessary delays will also be avoided and the closing process will be made easier. Finally, it would be important for all lawyers to attempt to educate clients and realtors to take these matters more seriously and provide further assurances so that delay and confusion will not result on closing. 

12. It is unethical for the Seller's lawyer to provide a survey, plot plan or RPR, which they know to be inadequate without bringing the deficiencies to the attention of the Buyer's lawyer.

Jeff Kahane Interviewed for CBC Radio: Calgary Collector Bids on Royal Wedding Edition Pez

Jim speaks with a Calgary man who is hoping to get his hands on what may be the rarest of royal wedding swag - a Kate and William pez dispensers currently up for auction on EBay.

Click to listen to interview:
 

http://www.cbc.ca/eyeopener/episode/2011/04/11/calgary-collector-bids-on-royal-wedding-edition-pez/

Jeff Kahane Quoted in Financial Post Article: Escaping From Mortgage Prison

Let's just say you owed somebody a ton of money but there was no legal way to force you to pay it back?

Would you? What if it was one of those evil corporate banks that make for an easy target? Did the answer just get a little easier?

Not for 60% of Americans who say it is never OK to simply stop making payments on your home, according to a survey by Eagan, Minn.-based findlaw.com, a free legal information website.

Another 34% say it's OK to walk away from a mortgage, but only if you can't make the monthly payments. Only 3% believe you should be able to walk away from a mortgage anytime you want, according to the survey, which interviewed 1,000 American adults and had a margin of error of plus or minus three percentage points.

It's an interesting survey given that U.S. law in a number of states allows consumers to simply hand over the keys to their homes without the lender going after their other financial assets -something that is all but impossible in Canada.

That is not to say that walking away from a mortgage isn't affecting the credit of Americans who do so. They might not be able to buy another house for years unless they do so with cash.

Despite what the survey says, Americans have been walking away from mortgages in droves because it makes financial sense.

Think about it. You have a home with a $500,000 mortgage on it. The present value of it is $250,000. Why would you not walk away, if you could?

"We just asked people what do you think of the idea, not would you do it yourself or have you thought about doing it yourself," said Leonard Lee, the researcher behind the survey. "There is a practical argument, but there's a whole philosophical argument."

If you were shareholder in a company that owned a $250-million building but kept making payments on a $500-million mortgage even though the company had the ability to walk away from the debt, how would you feel? Would the executives be breaching a fiduciary responsibility?

The U.S. real estate industry even has a term for all this: strategic default. "You are asking at some point, doesn't it make more sense to walk away from the mortgage where you are unlikely to recoup your original investment," Mr. Lee says.

Ted Rechtshaffen, certified financial planner and president of TriDelta Financial, says once you put aside the moral issues, it would come down to a simple choice.

"It will impact your credit rating, but from a financial perspective, why wouldn't you do it? You are getting a $250,000 head start. Another investment is probably going to be better than your current house," Mr. Rechtshaffen says.

But Benjamin Tal, deputy chief economist with CIBC World Markets, says while it might not make economic sense, there is evidence Americans are not actually walking away from property as much as they probably would if they were listening to a financial advisor.

"Whatever the default rate is now in the U.S., people say it's 8% and that's extremely high. I say that's surprisingly low," Mr. Tal says. "You have up to six to seven million households that could default any day, namely because they are in a negative equity position."

What's in it for them to keep paying? There is something to say for wanting to stay in your home where you have been living and raising a family. There is also a stigma that comes with somebody slapping a foreclosure sign on your property -suddenly your neighbours know a little more about your financial situation.

"At the end of the day though, that's the rational thing to do. You are talking about houses that are under water more than 20%. Based on an economics textbook, that would be the rational thing to do," Mr. Tal says.

In Canada, it's pretty tough to do. For starters, if you have an insured mortgage backed by the government, the bank will get paid off for its loan. But the insurance company, whether it's Canada Mortgage and Housing Corp. or a private insurer, will go after you for any deficiency created by proceeds from the property being less than the mortgage.

It's the case in most of the country for uninsured mortgages, too, says John Turner, director of mortgages for Bank of Montreal. Rules are slightly different in Alberta and are designed to protect consumers, but Mr. Turner says banks can elect to go after other assets in some circumstances.

There's also the scenario where you might have bought a condominium as an investment before it was built and put down, say, a 20% payment. If you think you can walk away if prices dropped by 50% once the building is up, forget it. You'll be sued.

"As lawyers, we can't advise someone to break a contract. The law is not you don't have to obey it, the law is the consequences of not obeying [the contract]," says Calgary lawyer Jeff Kahane. "You haven't broken the law, you've broken your promise. Is it any different than saying why would I want to pay for a chocolate bar at 7-11 when I can put it into my pocket and steal it if I can get away with it."

Go to article: http://www.financialpost.com/related/topics/Escaping+from+mortgage+prison/4587056/story.html

Residential Real Estate: Terminating an AREA Purchase Contract for Breach Prior to Closing

Baker v. Warshawski, 2010 ABQB 219 (“Baker”) is a recent decision of Alberta Court of Queen’s Bench that considered a purchaser’s right to rescind a purchase contract prior to close for breach of the sellers’ requirement to provide the property in “substantially the same condition” and for a misrepresentation inducing the purchaser to enter the contract.

This first blog post will focus on the breach of a sellers’ obligation to provide property in substantially the same condition on closing. The Court’s decision provides some instructive lessons in this regard for agents of both sellers and buyers and, obviously, for their clients.  

Section 4.2 of the AREA Residential Real Estate Purchase Contract provides that “When the Buyer obtains possession, the Property will be in substantially the same condition as it was in when this Contract was accepted.” In other words, the Buyer must not substantially alter the property between the time of acceptance and the time of closing. But what does substantially the same mean for the courts? How should agents advise their clients? What lessons can be learned to help agents and clients avoid nasty and expensive litigation when deals fail to close because of this situation.  

In Baker, the sellers demolished a courtyard wall after the purchaser discovered that the courtyard crossed onto the neighbours’ property by four inches. The sellers were aware of the encroachment prior to the offer being accepted and they were also aware that the neighbour would not sign an encroachment agreement.  Unfortunately, the encroachment was not disclosed to the buyer by the sellers at the time the offer was made despite the buyer’s agent asking if there was a real property report (“RPR”) with a compliance stamp on it. Instead, the sellers’ advised the buyer that there was a RPR with a compliance stamp, but they were silent about the fact that the RPR indicated a significant encroachment problem and that the neighbour was not cooperative.

The courtyard was an important selling feature of the house, it was emphasized by the sellers in promotional material, and the buyers were particularly attracted by the courtyard and the security that it would provide for their young children. The courtyard wall provided a privacy screen for the three principle rooms of the main floor which all opened onto the courtyard in a ‘c’ shape, including the kitchen, the living room, and the dining room. Without the courtyard wall those same rooms would have opened directly onto the neighbours’ driveway.

In order to remedy the encroachment created by the courtyard and in order to comply with the warranties and representations given in section 6.1, the sellers decided to demolish the courtyard (without notifying the buyers) prior to the closing date. However, the buyers refused to close on the basis that demolition of the courtyard was a fundamental breach of the contract entitling them to rescind or treat the contract as discharged. The seller refused to return the $100,000 deposit and litigation ensued.

So what did the court have to say about the requirement to provide the Property in substantially the same condition?

The court noted that the destruction of the courtyard and the resulting “material alteration to the aesthetics and utility of the main floor” went to the root of the obligation to provide a property in substantially the same condition. The material alteration was a “substantial breach” of that contractual ‘promise’.

However, here it gets complicated. The court determined that the ‘promise’ to provide the property in substantially similar condition is the kind of contractual term that can be treated either as a term that gives rise to a right to damages only (a payment of money) or a right to terminate or rescind the contract. In other words, not all breaches of the promise to provide a property in substantially the same condition will entitle the innocent purchaser to repudiate the contract prior to closing and have the deposit returned.      

The Court stated that it was not clear from the contract or the commercial circumstances what kind of term it was. The substantially similar provision is not in the ‘Conditions’ section of the contract and it is not in the ‘Representations and Warranties’ section of the contract. If the promise was a Condition it would more clearly entitle the innocent party to refuse to close. If the promise was a Warranty it would more likely entitle the innocent party to monetary damages only. 

As a result, the Court looked at other factors like the gravity of the breach and the intentions of the innocent party to determine how to treat the breach of the promise. The court noted that the breach was substantial with respect to both aesthetics and utility, even though the cost to rebuild the courtyard wall was small compared to the total value of the property. In addition, the court noted that the Courtyard was a key feature of the property, that it was marketed as such, and that it was of importance to the buyer. Finally, the court noted that the seller had not disclosed the encroachment originally and had demolished the courtyard without notice, and both factors allowed the purchaser to view the sellers as unreliable and unlikely to remedy the breach satisfactorily. 

As result of all of the above, the court held that the breach was sufficiently serious to allow the purchasers to treat the contract as at end and have the deposit returned. What lessons can be learned by real estate agents in light of the Courts decision?  

The obvious lesson is that the issue is complicated and the advice of a lawyer should be sought prior to advising your client on how to proceed. This is true whether you are the agent for a seller who ise proposing an alteration to a property or the agent for the buyer who discovers that an alteration has been made.

Second, and this may be less clear, advice should be obtained as soon as possible and definitely prior to closing to determine whether termination of the agreement might be possible. After closing, terminating the agreement will be much more difficult.   

Third, if a seller is in a situation where an alteration to the property might be necessary, consult with the buyer, involve them in the process, and get the buyer’s agreement (in writing if possible) to all the changes to be made.

In a best case scenario, the realtor has advised the property owner to make changes to the property prior to listing and all these problems will be avoided.

Jeff Whyte practices in the areas of business law, litigation and real estate at Kahane Law Office. Jeff would be happy to meet with you and discuss your real estate related concerns.        

Is a Unanimous Shareholder Agreement Right for Your Business?

Is a Unanimous Shareholder Agreement Right for your Startup Business?

What is a unanimous shareholder agreement?

A unanimous shareholder agreement, or USA, is an agreement or contract entered into by all of the shareholders or owners involved in a startup company. It’s used as the ‘go to’ document or rule book governing the relationship among the shareholders. In fact, the USA often extends beyond shareholder relationships and includes restrictions on the freedom of the directors to manage the business of the corporation. Many lawyers and entrepreneurs refer to the shareholder agreement as a ‘pre-nup’ because rules governing how shareholders exit the corporation are typically included.

Really, there are three primary reasons that unanimous shareholder agreements are used in closely held start-up corporations:

1)    setting the rules for governing or managing the corporation;

2)    providing a mechanism for resolving deadlocks; and

3)    providing mechanisms for the liquidity or transfer of shares.

When is useful?

A unanimous shareholder agreement is particularly useful in closely held startup companies where the shareholders do not want to rely on corporate lawyers and litigators to settle shareholder disputes. Why? The framework for decision making and the clarification of expectations at the initial stages of organizing the corporation provide and inform the mechanisms to resolve many disputes that typically arise in start-ups.

What are the drawbacks?

As with any good thing, there are potential negatives for entrepreneurs to consider when contemplating executing a unanimous shareholder agreement. One of the primary concerns is that some companies will require equity injections from new investors in order to continue growth. New shareholders will become subject to the unanimous shareholder agreement and will have the same rights as the original shareholders in the management of the corporation. Many shareholders of closely held companies will not want to add new shareholders into the management equation. In fact, many shareholders may have entered into the unanimous shareholder agreement precisely for the reason of protecting themselves against having unwanted partners in the business. 

Additionally, to the extent that the unanimous shareholder agreement removes powers and responsibilities from the directors and gives it to the shareholders, the shareholders may become subject to the liabilities the directors would otherwise have.  Protection from liability for shareholders is an important factor in deciding to incorporate a business in the first place. Consequently, any loss of that protection should be carefully weighed.

Typical clauses

1)    Governance

a.    Vetoes’. Allows shareholders to set rules over how important decisions are made, for example by providing shareholders with a certain amount of holdings veto rights over specified decisions.   

b.    Mediation or arbitration clauses. Allows the shareholders to provide an alternative mechanism to the courts for resolution of disputes.

2)    Shares Issues and Restrictions

a.    a unanimous shareholders agreement can set out preemptive rights on new issues and restrictions on the transfers of existing shares. Such restrictions allow existing shareholders to participate in new offerings and approve new or replacement partners to the business.

b.    “Buy-sell” or “Shotgun” provision. A Shotgun provision allows one shareholder to offer to either buy the shares of the other shareholders or sell their own shares for a certain price. The non-offering shareholders can then decide to either buy or sell. The theory behind this provision is that the offering party will set a fair price because they will not be certain whether they will ultimately buy or sell. The shotgun provision is an important provision to resolve deadlock and allow for the removal of a shareholder.

c.    “Piggy Back” or “Tag-along” provision. If a shareholder is able to sell shares to a third-party, a piggy back or tag-along allows the non-selling shareholders to include their shares in the agreement with the third-party buyer. In other words, a shareholder could tag-along with the seller and exit the corporation.

d.    “Drag-along” provision. If a majority shareholder decides to sell its shares it can require the minority shareholders to sale their shares to the buyer as well. This allows a majority shareholder to exit the corporation without a minority shareholder blocking the sale. 

Summary

There are advantages and disadvantages to entering into a unanimous shareholder agreement.  We recommend that you discuss your options with your trusted advisors as early in the business organization phases as possible. Fortunately, your lawyer will have precedents that he or she can use to draft and an agreement that fits your unique requirements. Consequently, having a unanimous shareholder agreement prepared will not cost much. 

About the Author:

Jeff Whyte practices business law and litigation at Kahane Law Office. Jeff would be happy to meet with you and discuss the best approach for you in organizing your business.