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Presales Guidelines

Presales Guidelines

Guidelines
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Understanding Pre-Sale Purchases

While there are advantages to “purchasing pre-sale” there are also some risks and other issues that should be considered before signing any contract.

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  • Guidelines

    BCFSA’s Guidelines provide a practical application of the information and give suggested best practice guidance to assist real estate professionals. These guidelines provide BCFSA’s interpretation of RESA and all other applicable legislation.

    In addition, BCFSA’s Guidelines may be a useful information source for the general public looking for information about standards of conduct for real estate professionals.

Purpose

The Real Estate Development Marketing Act (“REDMA”) governs how developers market and sell most new developments. This legislation is applicable if you are a representative for a developer and can also apply if one of your buyer clients is interested in a development unit that is governed under REDMA.

But there are also presales which occur outside of REDMA’s jurisdiction. This guideline also will help you understand the risks consumers face when purchasing presale properties from sellers who are not governed under the Real Estate Development and Marketing Act (“REDMA”).

  1. Consumer risks in buying presales.
  2. Risks of buying a development unit that is not covered by REDMA.
  3. Differences between developer contracts and standard form resale contracts.
  4. Steps to protect your developer client’s interests.
  5. Discussing CSAIR with your client.

Guidelines

Consumer Risks in Buying Presales

Developers in British Columbia commonly pre-sell residential units such as strata-titled apartments and townhouses (often referred to as condominiums or condos). These “presales” include any residential unit for which there is an agreement to purchase prior to the completion of construction.

Typically, developers enter into contracts that provide for units to be built within two years at a fixed price and require deposits to be paid by the prospective purchasers. Purchasing what is commonly referred to as a “presale” is not the purchase of an existing physical property, but rather a contract for the right to receive, and an obligation to pay for, a finished unit at a point in the future. This difference means there are issues your clients should be aware of in order to make an informed decision about purchasing a unit in a new development. You should be aware of these potential issues and ensure that your clients are aware of the additional risks in purchasing a “presale” unit from a developer.

(a) Development Problems

A development may be delayed, or not proceed at all. This could be for a variety of reasons (e.g. inadequate sales, delays in obtaining financing or building permits, higher than expected costs for construction materials and an inability to hire skilled construction workers due to labour shortages). Presale contracts should be carefully reviewed to understand the implications for consumers if there is a development delay or the project does not complete.

(b) Financing and Assignment of Contracts

A number of things can happen between the initial presale contract signing and the project completion date that can impact a purchaser’s ability to finance their purchase. For example, the cost of the development unit might increase, interest rates can go up, property value can go down, and a purchaser’s employment status may change.

In cases where a property value decreases, this could mean that lenders may only lend out funds up to the current reduced market value, which may mean that a purchaser will have to make up the difference. Presale contracts should be carefully scrutinized to understand whether assignment of the contract is allowed and under what terms, as well as if the contract allows for any changes to the price based on things like increased construction costs.

(c) Finished Product

Presale contracts normally allow a developer to substitute materials and finishing; there is always a risk with a presale that the finished product may not align with what was marketed. Presale contracts should be carefully reviewed to understand whether and how the developer can alter the size, layout and finishing of the unit that was purchased, and what recourse may be available if a purchaser is unhappy with the finished product.

(d) Contract Terms

Presale contracts are typically drafted in a manner that protects the developer’s interests and not the interests of the consumer. Consumers should carefully review the terms and conditions of the contract to ensure they are fully understood as well as the legal consequences for a breach of contract.

Risks of Buying in a Development Unit that is Not Covered by REDMA

(a) No REDMA Disclosure Statement

Obligations, commitments, and contractual rights and remedies should still be included in any presale contract, but the information may not be as accessible or as thorough as in a development unit governed by REDMA, making it more challenging for a consumer to understand the development and the final product they are purchasing.

(b) Deposits Not Held in Trust

Deposits governed by REDMA are protected (held in trust or, in some cases, covered by deposit protection insurance). When helping a client with a presale purchase, consideration should be given to ensuring any deposits are protected and can be returned in the event of non-completion by the developer. There are additional risks in allowing a developer to utilize a deposit to assist with construction costs, and these risks should be communicated to clients (e.g. if a developer later becomes bankrupt, the deposit may not be recoverable). Licensees should also clarify if the terms of the purchase agreement include any interest on the deposit and how this money will be handled (e.g. returned to purchaser, applied to purchase price, etc.).

To ensure purchasers are protected when purchasing a presale in a smaller strata (4 or fewer units), you should ensure that the builder/developer is licensed with BC Housing and the development is covered by home warranty insurance. Independent legal advice should also be recommended where a client is interested in purchasing a presale contract.

Differences Between Developer Contracts and Standard Form Resale Contracts

Traditionally, contracts of purchase and sale, including any standard form contracts you may use, are drafted by a buyer, or by you if you are representing a buyer in a trade in real estate. When you draft such an agreement, terms are included, through subject clauses, to protect your client’s interests and provide them an opportunity to ensure that the property they are getting meets their expectations, and that they are able to finance the purchase.

Purchase contracts, known as presale contracts, as drafted by developers or their legal representatives, are normally written with the developers’ interests in mind. While there are legislative protections provided for the buyer, such as mandatory rescission rights, many of the terms protect the developer. This includes allowing the developer to unilaterally make changes to floor plans or other elements of the property without consulting the buyer.

For presales governed under REDMA the contracts can be significantly longer than traditional resale contracts. They also contain provisions you may not be familiar with if you specialize in resale transactions. As a representative for a buyer, you must ensure that your buyer understands the agreement they are entering into. You must also be careful not to act outside your area of expertise per the Real Estate Services Rules. It is prudent to recommend that your client seek independent legal advice if you are not comfortable explaining the terms outlined in the contract.

Steps to Protect Your Developer Client’s Interests

When listing properties for developers, you should be aware that multiple pieces of legislation impact how your developer sells their properties and how you may market the property. A few of the key pieces of legislation to be aware of include RESA, REDMA, HPA, Competition Act, and Canada’s Anti-Spam Legislation.

To act in the developer’s best interest, it is important to keep them apprised of any limitations these pieces of legislation may impose when marketing the property. For instance, anti-spam legislation will limit how you send electronic mail to potential buyers. The HPA legislates that developers must have third-party insurance against deficiencies before a new development can be sold. Even the federal competition tribunal imposts restrictions on the information you may provide about remuneration and services.

It is your responsibility to know what legislation your client’s transaction is impacted by and only act within the scope of your expertise. Not being aware of what legislation impacts your client could put both you and your client at risk and could result in sanctions. When in doubt, consult with your managing broker to determine what steps must be taken to ensure both you and your client are not violating any legislation.

For more information on the duties you owe to your clients, please click here.

Discussing CSAIR with Your Client

CSAIR is a database of assignments of purchase agreements for all residential condo and strata lots in B.C. that are governed by REDMA. If you are working with a client who is involved in the assignment of a presale contract, their information may be collected and captured in the CSAIR database.

It is important that you discuss with your client how their personal and confidential information may be used and ensure that they understand who will have access to that information so that they may provide informed consent to move forward with the transaction.

For further information on client confidentiality, please click here. For more on privacy, please click here.

Please go to Condo and Strata Assignment Integrity Register (“CSAIR”) for more information on CSAIR.

Managing Broker Considerations

Real estate transactions that involve real estate professionals are always governed under RESA, but sometimes other legislation can impact how a transaction is conducted and can also impact the clients your brokerage represents. This includes legislation such as PCMLTFA, HPA, and REDMA.

As a managing broker, you must ensure your real estate professionals are familiar with all legislation that impacts their clients. They are responsible for ensuring their clients understand how that legislation can impact them and what their clients may have to do to be compliant under the legislative provisions.

Under REDMA there are also sections that impact the brokerage, specifically how the brokerage deals with deposits and markets development properties. While most deposits in a presale transaction are held by the developer’s lawyer or notary, in some cases the contract may stipulate that your brokerage hold the funds in trust. Should that happen, the brokerage does not hold the funds as stakeholder, but rather as a trustee with different requirements. If your brokerage agrees to hold deposit funds for a transaction governed under REDMA, you must be familiar with the requirements governing how the funds are held and the provisions for withdrawing them. When a brokerage’s related licensees are dealing in pre-sale units, managing brokers should consider the additional implications of a commission advance. For more information, see our Remuneration Guidelines.

As it relates to early marketing, a developer must have completed specific tasks (such as the filing of a disclosure statement) outlined in REDMA and received permission from the superintendent before they are permitted to begin marketing the development. You must ensure that your real estate professionals are aware of those marketing requirements so that they can ensure any seller or developer client is not offside when they list a property for sale.

Applicable Sections of RESA/Real Estate Services Regulation/Real Estate Services Rules

  • Section 30, Real Estate Services Rules, Duties to clients
  • Section 34, Real Estate Services Rules, Duty to act with reasonable care and skill
  • Section 56, Real Estate Services Rules, Disclosure of remuneration
  • Section 2.5, Real Estate Services Regulations, Exemption for employees of developers

Definitions

Real estate services: means

  1. rental property management services,
  2. strata management services, or
  3. trading services.

Purchase agreement: means a contract of purchase and sale or a contract to lease