The Big Chill

Cooling-off period could turn up the heat for sellers

BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC

THE BIG CHILL

THE PROBLEM A couple finally locates one of the few properties on the market that suits them, they make an unconditional, well above the asking price, outside of their financial comfort zone offer. They think this is necessary to compete with other interested buyers. They win the prize – the seller accepts their offer. What now? A little buyer’s remorse sets in. Was the next best offer way lower than theirs? Will they be able to get a mortgage for the amount they need to close the transaction? Will their due diligence disclose property defects that will significantly add to their cost of ownership or make potential lenders balk at lending (such as soil contamination, mould or foundation damage)? Will their lawyers identify something on title that makes the property problematic for them (such as building restrictions)? If they do not close the deal, will they be sued for breaching their purchase contract? This couple’s circumstances are far from unique. Many homebuyers face remarkably similar pressures and concerns.

GOVERNMENT RESPONSE Governments have been targeting housing affordability – arguably ineffectively and sometimes in a misguided manner. For example, the federal government’s housing plan provides some assistance to first-time buyers, but it is insufficient to remove the substantial hurdles for those who cannot get into the market in the first place (see: “Liberal Government Housing Plan – A Home for Everyone” Canadian Mortgage Broker, Winter 2022, p.30). At best, it will slightly help those on the fringe of affording a purchase.

Likewise, the B.C. government’s intention to address money laundering, while important for other reasons, proved to be misguided as a step in making housing more affordable. The Cullen Commission’s final report to the B.C. government (see: “Cullen Commission recommends major changes to mortgage brokering” p.12 of this issue) concluded at p.959:

… money laundering activity is not a significant contributing factor to housing unaffordability. It seems that fundamental factors such as supply and demand, population, and interest rates are far more important drivers of prices. And at p.960: …. Anti-money laundering measures should not be considered a “silver bullet” that will somehow fix housing unaffordability in the province. On November 24, 2021, the B.C. government announced – in an effort to control housing prices and otherwise protect real estate purchasers – it would be introducing legislation requiring

a cooling-off period for residential real estate purchases. That legislation has the potential to dramatically change the process of buying and selling residential properties. It would adjust the power balance between buyers and sellers, possibly overly so, and put the seller at a significant disadvantage. In addressing a set of problems for the buyers, the government may very well be creating a fresh set for the sellers. Other provincial governments are undoubtedly watching.

B.C.’S ‘COOLING-OFF’ LEGISLATION The B.C. government is in the process of putting legislation into place to protect buyers from circumstances that cause them to overpay (in relation to what the next highest bid would be) or take unreasonable risks (such as not making offers conditional to due diligence regarding the state of the property and the availability of financing).

The Legislature on April 25 passed Bill 12-2022 Property Law Amendment Act, 2022. If brought into force, the amendment would:

• apply to residential real estate sales only;

• apply to private sales (that is those not involving real estate agents) as well;

• give buyers a right to rescind a purchase contract by serving notice on the seller within a prescribed number of days after the date on which the offer was accepted (Note that the sellers are not given any right to rescind an agreement); and

• give Cabinet the right to make regulations

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concerning, among other things:

• waiving the right to rescission;

• an amount to be paid by the purchaser to the seller if the purchaser rescinds the contract;

• the timing and procedures for paying deposits;

• payout of the deposit upon rescission, including whether a portion is to be paid to the seller, and a dispute resolution process, in relation to the return of the deposit; and

• exempting classes of residential real property, purchasers, or contracts from rescission.

B.C.’s financial services regulator, BC Financial Services Authority (BCFSA), sent its report “Enhancing Consumer Protection in British Columbia’s Real Estate Market” to government on May 22, 2022. The terms of reference for the report were to:

• consider appropriate parameters and provide advice for implementing a cooling-off period, including the appropriate length of the cooling-off period and whether there should be a penalty for exercising the right to walk away;

• examine blind bidding and other practices that may be identified as consumer protection risks; and

• examine rules, requirements and other activities related to the process of buying a home including those related to condition waiving, such as:

• home inspections;

• financing; and

• other conditions.

The terms of reference did not ask BCFSA to report on whether a cooling-off period was an appropriate measure. In making the reference, the government had already decided it was an appropriate measure. Nor was BCFSA asked to report on issues relating to housing affordability.

At the outset, we should note several misnomers concerning the report.

Firstly, the report (including in its title) refers to protections being enhanced. That may be true from the buyers’ perspective, but a seller is more likely to think that the changes create new limitations and risks for them.

Secondly, the report speaks of protecting consumers. However, it considers only the interests of the buyer in single transactions. That is far too narrow a definition of consumers. It would be more accurate to consider that real

transactions often occur in a chain, where the seller in one transaction uses the proceeds to be the buyer in the next transaction in the chain. That seller/purchaser is in very real sense a consumer worthy of protection.

Thirdly, the report ignores the fact that other would-be buyers of the property are also consumers. The report does not truly protect their interests. For example, it does not give due weight to the fact that their position may be prejudiced by the fact a prospective buyer may put in an extravagant offer only to rescind it later. This can alter the expectation of the seller as to what a reasonable offer should look like.

The report made recommendations in three categories:

• Parameters of a cooling-off period

• Additional measures to address risk associated with unconditional offers

• Potential alternatives and enhancements to blind bidding

PARAMETERS OF A COOLING-OFF PERIOD The report considers the inappropriateness of the term “cooling-off period” and embraces instead the term “homebuyer protection period.” This is probably appropriate as many of the changes have to do with the buyer having time to perform due diligence rather than coming down from some heated, delirious or compromised state during which they could not think rationally. Of note is that the Property Law Amendment Act, 2022 appropriately does not refer to a “cooling-off period,” and the term is no longer used extensively in government communications.

The report recommends the following six parameters of a cooling-off period for government to implement.

The buyer should have three clear business days to rescind the contract, starting on the day after the seller has accepted the offer to purchase. The report indicates this would balance minimizing the marketing delay caused for the seller with time for the buyer to do some due diligence.

Unfortunately, this balance does not substantially assist the buyer as very little due diligence can be completed within three days. For example, arranging financing, obtaining a home inspection report, and meeting with a lawyer who has the opportunity to obtain and review relevant information all will generally take well over three

days. A little due diligence, or just getting started on performing due diligence, is of limited help to a buyer. On the other hand, unfortunately the report oversimplifies the seller’s interests that are compromised by the delay. Would-be buyers may move on to other properties. The reduced number of interested buyers may reduce the price the seller ultimately obtains, assuming the initial buyer rescinds the agreement. The seller might be delayed or otherwise prejudiced from proceeding to purchase a property in which they are interested.

The buyer should not be able to waive the cooling-off period. The report indicates this recognizes the importance of the cooling-off period (that is providing time for the buyer to perform some due diligence) and ensures a level playing period. Unfortunately, the report ignores that the balance between buyers and sellers may be vastly different in a buyers’ market. In such a market, the interested buyer could make the accepted offer, ward off other interested buyers who then move on, rescind the agreement, and renegotiate with the seller who then has much less negotiating power.

The cooling-off period should apply to all residential properties with narrow exemptions based on characteristics of the sale process. The Property Law Amendment Act, 2022 would already exempt contracts where section 21 of the Real Estate Development Marketing Act already provides the seller with the right to rescind the contract. Fortunately, the report recommends further exemptions (including court order sales, sales by auction, and sales where a buyer has previously made an offer to purchase the same property within a prescribed time period). The list is not extensive enough. Some buyers do not need the protection of government in making an offer and such protection could be viewed by them as patronizing. Perhaps a plainly worded, standard form, notarized certificate setting out the rights the buyer is waiving and risks being taken on should be sufficient.

The buyer should pay a modest termination fee (such as between .1 and .5 per cent of the purchase price) to exercise the right to cool off. The report indicates this could prevent frivolous offers and it would recognize the disruption to the seller. It suggests consideration be given to not requiring the payment of thecontinued on page 26

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termination fee where a buyer who exercises their right to cool off can demonstrate that they identified legitimate concerns in performing due diligence. While the concept suggested by the report appears appropriate, determining how significant and real the concern must be for a buyer to rescind an agreement is likely to generate much case law. Even in the absence of such legislation, courts have long distinguished what defects are latent versus manifest (not discoverable with reasonable prudence versus discoverable with reasonable prudence) and material versus immaterial (enough to warrant rescinding the contract versus too trivial to warrant rescinding the contract). While the concepts are easy to state, applying them is far more challenging. The legislation would do nothing to ease the challenge and would make it arise more frequently.

Consideration should be given to requiring buyers to make a disclosure to sellers of any other offers that they have made that are currently active. The report indicates this disclosure would provide information to the seller to guide their decision-making about accepting the offer, given the potential that the buyer may walk away from the purchase for reasons other than the results of their due diligence inspections.

It may also give buyers pause in submitting multiple concurrent offers or prompt sellers to query prospective buyers about whether they are seeking to purchase multiple homes. This seems consistent with the report’s view that disclosure between the parties is appropriate. On the one hand, this requirement appears to go too far by requiring buyers to give up personal information for the sake of making an offer. On the other hand, it appears to not go far enough. If sellers are to be required to show their entire negotiating hand, perhaps the same should be required of buyers. Perhaps buyers should have to demonstrate that they can afford to close on the purchase by disclosing their financial circumstances, bank approvals for loans and so forth. After all, the lender is throwing the dice that the buyer they accept will be able to close the transaction; should they not have full disclosure to minimize their risk?

There should be an explicit requirement for sellers to provide reasonable access to the property for professionals engaged

by or on behalf of the buyer to perform due diligence inspections. The report sees this as being necessary to allow due diligence to be performed. No issue is taken with this recommendation. For any agreed upon due diligence to be performed in a meaningful way, whether by agreement or imposed by legislation, access needs to be given.

ADDITIONAL MEASURES TO ADDRESS THE RISKS ASSOCIATED WITH UNCONDITIONAL OFFERS The report (under this heading) makes recommendations concerning property disclosure forms, conditions, pre-offer periods and disclosure of strata documents.

Property Disclosure Forms A property disclosure is a document completed by the seller that provides information specific to the property being sold.

The report recommends requiring sellers to provide a prescribed property disclosure filled out to the seller’s best knowledge and ability, at the time of listing/offering for sale, for all properties subject to the cooling-off period. The recommendation includes ensuring that the property disclosure be incorporated into the contract of purchase and sale.

The report recognizes that requiring disclosure in certain circumstances would be inappropriate and suggests considering exemptions in situations such as foreclosure or court-ordered sales, newly constructed property that has never been occupied, sellers with cognitive impairments, government transfers, properties that pose health and safety risks where demolition is intended, and non-owner-occupied properties.

Frankly, the exemptions are unnecessary. If a seller is required to complete the form to the best of their knowledge and ability, they should merely be required to list any factors that limit their knowledge and ability. The buyer can then understand the completed form with those limitations in mind.

The form should not apply to manifest defects. The buyer is able to discover these on their own and should be required to do their part.

CONDITIONS Conditions are clauses in an offer to purchase that provide specific conditions that must be fulfilled before a contract of purchase and sale is considered binding for the buyer and seller.

The report recommends requiring all contracts of purchase and sale for residential real estate to contain standard, optional conditions clauses related to financing, home inspection, insurance and legal advice.

One might wonder what this adds to a contract already with a cooling-off period, mandatory property disclosure, mandatory access and so on. It could give notice to the seller as to the types of due diligence for which they have to provide access and may limit the buyer’s ability to avoid a penalty if they back out for some other reason.

If such clauses are to be included, they should be worded to set thresholds (types of defects that are material enough to warrant rescinding the contract). For example, should the buyer be disqualified from relying on the financing condition if financing of a principal amount, specified rate, term and other key conditions stated in the contract is made available? Should the buyer be disqualified from relying on the inspection condition unless the inspection discloses a defect that would cost more than an amount specified in the contract to fix? Should the buyer have to obtain a certificate from the legal advisor specifying a valid and significant basis for relying on the condition relating to legal advice?

PRE-OFFER PERIOD (MINIMUM TIME ON MARKET) The report recommends implementing a “pre-offer” period (minimum time on market) of five business days, in combination with a cooling-off period, to provide adequate time for prospective buyers to perform due diligence on properties and to prevent the practice of bully offers. The time is to start from when the property is listed or offered for sale. This would amount to an eight-day period (five days pre-offer plus three days of cooling off) before a binding offer can be in place.

At the very least, this recommendation needs to be worded so as to apply only to publicly offered properties. Many properties are sold/transferred without ever being listed or publicly offered for sale. Family transfers and private transactions between acquaintances are examples.

DISCLOSURE OF STRATA DOCUMENTS The report recommends requiring sellers of resale strata units to provide key strata documents

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to prospective buyers at the time of listing or marketing their property for sale. At a minimum, this should include Form B: Information Certificate, Strata Corporation Bylaws; and two years of Strata Council minutes, including annual general meeting minutes.

It also recommends requiring sellers of resale strata units to provide prospective buyers with an updated disclosure of strata documents if there is a material change between listing or marketing their property for sale and the date on which the contract for purchase and sale becomes firm or binding.

The forms determine the strata fees that owners are required to pay each month for expenses related to maintenance and repair, insurance and the contingency reserve fund. A buyer considering a strata property may want to know if there are any restrictions on pets, rentals, age or ways in which the unit can be used. They may also want to know how much money is in the contingency reserve fund, the condition of the strata corporation’s assets, when the assets are expected to be repaired or replaced, what parking or storage owners are entitled to, and how the strata property is managed.

These documents take time to obtain. Making them mandatory from the outset avoids that delay.

The report is very correct on this point. The information, rights and obligations contained in these forms is very much part of the package the person would purchase. Providing the information upfront could only prevent otherwise inevitable delays.

POTENTIAL ALTERNATIVES AND ENHANCEMENTS TO BLIND BIDDING Blind bidding is a term commonly used to describe an industry practice in which a prospective buyer submits an offer to purchase a property without knowing any information about the content of competing offers from other prospective buyers.

The report says that this lack of transparency in real estate transactions can skew the perception of market fairness and potentially lead to distrust of the real estate transaction process. This includes concerns that:

• buyers are overpaying by offering a price that significantly exceeds the next highest offer;

• all offers are not presented to the seller; and

• sellers and their agents are misleading prospective buyers about the number or content of offers on a property, with limited potential for being discovered. Blind bidding may also contribute to rapid price escalation as the price of subsequent home sales in the area are based on, among other things, recent sales. This can lead to inflated valuations.

Open bidding The report recommends that the government further explore open-bid/open-end auction formats used in Scandinavian countries to increase transparency during the offer process. It recommends that the exploration include additional research to identify the implications of open-bid/open-end auction formats and real-time disclosure of offers on sale prices and housing affordability.

The report further recommends that as a measure to enhance transparency, consideration be given to implementing a disclosure in multiple-offer situations where prospective buyers are asked to compete directly against another buyer’s offer following an initial round of offers (that is, during a bidding war). In these situations, an anonymized disclosure of the number of legitimate offers and the price of competing offers could be provided to the prospective purchaser on invitation to submit a second offer or on counter-offer from a seller that is intended to solicit a higher price in reference to a competing offer.

Both models end when no more bids appear. In comparison to blind bidding, these models provide a high degree of transparency to prospective buyers regarding the number and content of competing offers.

Enhancements to blind bidding: Disclosure of offers in multiple offer situations The report recommends requiring sellers to provide an anonymized disclosure to all prospective buyers who submitted an offer once an enforceable contract is in place. At a minimum, this disclosure should include the number of offers, the representation status of prospective buyers, including the real estate brokerage involved (if any) and the sale price.

The report states that this type of disclosure could increase confidence in the real estate transaction process by providing assurance to unsuccessful buyers that their offers were presented to and considered by the seller. As

well, it could verify information that may have been shared during the offer process about the number of prospective buyers and/or the substance of their offers.

With respect, the assumption as to fair market value the report must be using in making these recommendations as to potential alternatives and changes to blind bidding is a marked departure of how that term is applied in our society.

Market value generally involves the amount a buyer is willing to pay and a seller is willing to accept for selling the subject property, based on how the subject property compares to other properties that have recently sold in that market. In effect, it is a version of the basic supply and demand concept. In contrast, the report assumes fair market value as being marginally above the value assigned by the person who is the second most willing buyer. We have historically referred to comparable properties in determining a property’s value; the report would have us instead refer to comparable potential buyers. A marked departure from basic economics indeed.

TAKEAWAYS The cooling-off legislation involves far more than allowing time for buyers to come down from an altered state to more rationally consider making an offer to purchase a property. More accurately, it is legislation that would allow the buyer time to perform due diligence, require the seller to make mandatory disclosures (some of which are warranted and others which need to be further detailed before an assessment can be made), and alters the balance between buyer and seller in agreeing to the true market value of the property.

To the extent the legislation provides greater protection for the buyer, it does so at the undue expense of the seller.

Unfortunately, the legislation does not address the root cause of unaffordability of housing – that is, there is a dramatic shortfall in supply to meet the demand. Until that root problem is addressed, properties will continue to rise in price accordingly, and buyers will continue to stretch themselves thin in pursuing purchases.

Postscipt: The B.C. government is proceeding with a mandatory three-day homebuyer protection period to come into effect on January 1, 2023. It includes a rescission (cancellation) fee of .25 per cent of the purchase price.

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