Perhaps one of the biggest challenges to face Realtors in the last several years is starting to have serious and negative impacts on our industry. The change in question is the amendment to the Real Estate Purchase Contract by the AREA Forms Committee to include the new clause 6.1(g). The consequences of this change, if they weren’t fully understood, should have been as it is literally causing havoc in the industry.
If you aren’t familiar with it, clause 6.1(g) outlines that the property complies with any registered restrictive covenants (“RC’s”). This sounds inconsequential but in reality it is already causing deals to close late or, in the worst case, to be terminated.
Effectively, as a result of this clause your sellers are now warranting that the property complies with any restrictive covenants on title (old and new RCs). This doesn’t seem to be that big an issue until you understand that prior to this change there was no such warranty meaning that Buyers who purchased properties with these old RCs on them before the change in the Contract are now required to deal with these and are responsible for the costs associated with the attempt to remove or amend the RC; the problem is that it isn’t always possible to do so.
On a number of properties in the City there are old RCs from as far back as 1908 that contain restrictions on how a property can be developed. Some of them, and these are fun to read like a time capsule, restrict an owner from having pigs, horses, brothels, drinking houses on the Property; some however, are far more problematic in that they limit the distance from the street, the number of dwellings per frontage, the size of the property, etc. Some of these are referred to as “building schemes” and they can affect 100’s of properties in a neighbourhood.
The history on this issue will help you understand why this is such a problem. Prior to this change, the issue of old RCs was effectively ignored once a Buyer had executed a Purchase Contract and had waived conditions. The reason for this was simple; the Standard Contract did not contain a warranty with regards to them. The prior Contract simply sought out City Compliance on a RPR and if you have ever read a Compliance Stamp it clearly excludes any opinion as to compliance with RCs.
Effectively, these could be ignored unless the Buyer, pre-offer, made it an issue in a contract through the insertion of either a term or condition relating to this. In fact, we often recommended this to Buyers who had intentions of using the property for the purposes of further development. At that point, if the Seller accepted that term or condition they would be obligated to resolve the issue (the key being “if the Seller accepted”).
Now with the change approved by the AREA Forms Committee the obligation to resolve any issues with a RC is imposed on the Seller with the situation being that these issues are sometimes very difficult to resolve. In some cases, the Courts will require notice of the application to amend or remove a RC be given to all of the affected parties that can sometimes number in the 100’s; any person coming forward to dispute the removal can effectively result in the application failing. Effectively, there are now some unmarketable properties in Calgary notwithstanding the fact that they may have been bought and sold any number of times in the last 50-100 years. Every lawyer in the province now has these potential issues on any number of files and, as a result, so do a number of Realtors.
In a recent case in our office, my clients bought a new home from a Builder. The standard AREA Resale Contract was used; including clause 6.1(g). On title was a 1951 RC that outlined any development could be no closer than 27 feet from the any street or avenue fronting the land and no more than one home per 50 feet of frontage (I assume that when the Builder bought the lands there was only 1 home and that they didn’t review the title prior to buying the land).
The RPR was not delivered to our office in time for the closing so the deal was delayed until that was available as per clause 4.5 of the Contract. We had identified the potential issues to counsel for the Seller earlier with regards to the RC but these concerns were not addressed until close to the Completion Day. The Sellers’ lawyer assumed (wrongly) that all we needed was a compliance stamp and not a confirmation that the property was not in contravention of the RC.
When the RPR was received at our office, the front of the home was only 21 feet from the property line and not the required 27. Second, this was an attached dwelling on 25 feet of frontage. Both of these put the property offside of the RC.
As a direct result of clause 6.1(g) our client was left on the scheduled Completion Day not taking keys while the issue was being resolved. In this case the transaction was delayed over 45 days while the Seller’s lawyer dealt with how to remove the RC; my client was not prepared to accept a risk that the marketability of the Property would be reduced if the Covenant could not be removed.
To understand the risk here, if the RC couldn’t be removed (as will be the case in some situations) my client was prepared to walk from the transaction meaning a lot of work and effort would have been wasted by every professional on the file. Fortunately, our efforts resolved the issue for both our client and the new owner of the lot next door whose purchase had closed without their counsel noticing the issue or resolving it. But again, the delay cased both stress and a level of uncertainty that was unnecessary but for the existence of clause 6.1(g).
Coincidently I have another client in our office as this is being written whose sale cratered because of an old RC. My Sellers purchased the property prior to the change when there was no warranty in the Standard Contract and are now selling with that warranty in place. A prospective Buyer received legal advice about the old RC that indicated it may be problematic. Needless to say, my clients are shocked that they now have to resolve this issue notwithstanding the fact that everyone before them had no such obligation to an old 1938 RC.
All of this could have been avoided by either not making the change or, alternatively, grandfathering any property constructed before the date that the change in the Contract was made. Now, we have a serious and ongoing problem that is causing serious issues for innocent Sellers; sometimes changes that sound good in theory have serious and unintended practical consequences.
In the end, as a Realtor you have to ensure that:
When acting for a Seller you pull title and ALL RC’s that may be of concern and review the RC’s on that title prior to accepting the listing. Failure to do so means you may have a property that is effectively unsellable if clause 6.1(g) remains in the Contract;
When acting for a Buyer, you pull title and ALL RC’s that may be of concern and review the RC’s on that title prior to submitting the Offer. Notwithstanding the fact that the Seller has to deal with the issue, because they may not be able to remove the RC you have to ensure that your Buyers aren’t left with nowhere to go on the day of Closing or are forced to close in less than optimal circumstances;
If you are acting for a Builder client who wants to build and subdivide lots, you MUST insert a condition of review of the title and encumbrances to the satisfaction of your client;
REMEMBER – Compliance from the City is not evidence of compliance with the restrictive covenants registered on title; and
Start to take an active interest in changes to your Contracts and contact AREA and voice your concerns with regards to changes like 6.1(g) that don’t really make sense given the history of this issue.