Canadian Lawyer

w w w . C A N A D I A N L a w y e r m a g . c o m A U G U S T 2 0 1 6 21 The Globe and Mail put a spotlight on the controversial use of assignments earlier this year, dubbing it "shadow" flipping. In May, B.C. enacted new regulations under its Real Estate Act requiring real estate agents who draft offers to buy real estate to include a term requiring the seller's consent to transfer the property and another requir- ing any profit resulting from an assignment to be returned to the seller. The purpose is to ensure transparency in the sale and to provide disclosure to the seller. "People have always had the right to assign their contract; to this day, they still have the right to assign every other contract in the world, just not real estate contracts in B.C. where there's a realtor involved," says Edward Wilson, who prac- tises real estate law with Lawson Lundell LLP in Vancouver. He expects that under the new rules every transaction will result in a new sales agreement and assignments to flip properties before closing will dis- appear. Then new regulations apply to all properties, so even commercial real estate will be impacted. As the Canadian Bar Association rep- resentative on the British Columbia Real Estate Association standard-forms com- mittee, Wilson has been involved in imple- menting the changes to the forms. While previously silent on assignments, the new contracts now have an express provision that prevents their use, so the default posi- tion has been reversed. Those wanting to allow for assignment will have to delete or amend the new provision in the agree- ment. "Lawyers have to be alive of the fact, in B.C. at least, the standard-form situation is switched from being assignable to not being assignable. And that's going to have an impact on the deals" and require con- versation about the issue, he says. If shadow flipping were to occur else- where in Canada, it would likely be in Toronto — where residential real estate is also seeing rapidly escalating values. The Real Estate Council of Ontario, which regulates the profession in the province, has been closely watching the situation in B.C. It hasn't had any complaints of similar occurrences, but representatives say they are ready to react should it hap- pen. Just the same, RECO sees potential in B.C.'s new rules and is interested to see how it impacts real estate transactions. The fiduciary and ethical obligations of real estate representatives essentially prohibit the practice and requires them to disclose personal interest in a pur- chase or sale in Ontario, says Kelvin Kucey, RECO's deputy registrar of regula- tory compliance. Representatives are also obliged to tell the buyer and seller if the same brokerage represents both the buyer and seller in the same transaction. "They have to disclose any personal interest that they have, whether they are buying or selling or whether they know somebody who is buying and selling who is related to them," says Kucey. Shadow flipping isn't expected to sur- face in Alberta's residential real estate market, which has largely stalled because of the slowdown in the oil patch. But the Real Estate Council of Alberta is on alert given the impact that shadow flipping has had on its neighbour. RECA considers its rules robust relating to disclosure and the fiduciary duty of those working in real estate. Representatives are required to disclose any interest in a real estate trans- action in writing to an unrepresented buyer or seller. They must also disclose the details of negotiations to a further trade. While any conflicts of interest must be disclosed, they have a duty to avoid conflicts from the outset. What RECA considers is the behaviour of the real estate representative, says profes- sional conduct proceedings manager, Drew Saly. "Our most critical issue as it relates to assignment is whether or not an industry member who is a fiduciary for a buyer or client or a seller is fulfilling those duties and remaining loyal to them and disclosing any conflict of interest or any information that is relevant to their client," he says. The issue is largely one of fairness and the concerns are about exploitation of very active housing markets. While there's noth- ing that could prevent shadow flipping to occur elsewhere, since assignments are not generally restricted by legislation, Vancou- ver's housing demand is considered unique due to the heated demand. "But for the fact that in B.C. real estate agents would be involved, which would be a distortion of the market, I don't really see what the backlash or purpose would be in trying to prevent that," says James Mosher, a partner with McInnes Cooper in Saint John, N.B. If a seller agrees to sell it at a certain price and the buyer can flip it, that's the buyer's risk, he adds. "Ultimately, at the end of the day, a property is worth what a buyer and seller are willing to agree to in a sale." Where assignments are more readily used in jurisdictions across the country is in new builds, which usually have a lengthy period between the time of the sale and the completion of the structure. Having a pur- chaser assign their obligation to purchase to another buyer in condos and homes under construction is generally considered acceptable. When a builder is involved, restric- tions on assignments are often part of the negotiations leading to the purchase and sale agreement. "Although it's legally basically the same, it's intuitively different in the sense that you're dealing with an institutional builder who understands this very well as opposed to a residential ven- dor who is just the average mom and pop selling their house," says Scarborough, Ont. lawyer Patrick Aulis of Aulis Law Office Professional Corporation. While B.C.'s new rules are expected to eliminate shadow flipping, they are not expected to slow down Vancouver's overheated market, which has been part- ly attributed to foreign investment. In its attempt to get a handle on the impact of foreign ownership, British Columbia also now requires lawyers to file forms address- ing the citizenship of the buyer or buyers upon closing of every transaction. While that is fairly straightforward for most sales, where it involves a corporation, the citizen- ship of all the company's directors must be included, which Wilson says could take a little more time to gather. "From a lawyer's perspective, we have to ask more questions of our clients as we're prepar- ing the form for them," he says. Amendments to B.C.'s Real Estate Services Act restrict the use of assignments by including two terms: • The contract must not be consigned without the written consent of the seller; • The seller is entitled to any profit resulting from an assign- ment of the contract.

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