Archive for June, 2017
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Purchase provision allows automatic increase in offer to beat another buyer’s top bid.
Home buyers are advised by the Real Estate Council of Ontario to consult their lawyer when considering making an offer with an escalation clause
The Ontario Real Estate Association (OREA), which represents 70,000 real estate agents and brokers, has become involved in a public spat over the use of the controversial “escalation clause” in purchase agreements.
The dispute began after the real estate regulator — the Real Estate Council of Ontario (RECO) — sent a province-wide newsletter to agents to provide “clarity” about the use of escalation clauses.
An escalation clause is designed to defeat competing offers by automatically increasing a buyer’s price by a pre-set amount over the highest offer.
Here’s how it works: Two buyers are bidding on a house. One buyer offers $600,000 and a second one offers $550,000 with a $2,000 escalation clause. The second buyer is then told she won the bidding at $602,000. She is not specifically told the other bid was $600,000 but the escalation clause makes this evident, enabling a violation of the privacy rule.
The RECO newsletter notes that the use of an escalation clause could violate the industry Code of Ethics prohibiting agents from disclosing details of competing offers. Yet, in the newsletter, RECO gives detailed advice on how to handle offers with escalation clauses without specifically revealing the top offer.
In an open letter to RECO last month, Ettore Cardarelli, president of OREA, urged the regulator to immediately set the record straight that escalation clauses are not allowed in Ontario because they violate the industry code of ethics.
Blogs, LinkedIn and Facebook discussions lit up with similar criticisms.
In his torontorealtyblog.com, Toronto realtor David Fleming wrote: “This may be the dumbest bulletin ever released by RECO.”
Realtor Katie Steinfeld on her LinkedIn page, wrote: “This clause is dangerous for many reasons . . . Let’s ban escalation clauses altogether.”
In his real estate blog movesmartly.com, well-known Toronto real estate broker John Pasalis wrote that RECO’s position “has just made the bidding process even less transparent and worse.”
In a worst case scenario, Pasalis says, when the seller’s agent is less than honest, “escalation clauses act like a blank cheque,” and that this can be “at the expense of all home buyers.”
RECO’s mission is to protect the public interest through a fair, safe and informed marketplace, but eight out of 10 RECO board members are real estate agents or brokers.
Pasalis calls on the Ontario government to end the real estate industry’s right to regulate itself because it comes at the expense of the rights of consumers.
When asked about this issue, RECO registrar Joe Richer responded: “RECO does not endorse escalation clauses, because they can create complex situations for buyers, sellers and their representatives. In fact, we recommend that consumers consult with a lawyer if they are a buyer thinking about submitting an offer with an escalation clause, or a seller who is entertaining an offer with an escalation clause.
“The bottom line is, escalation clauses are not prohibited under the law, we know that they are occasionally used, and we do receive regular enquiries from registrants seeking information about them. For these reasons, as the Registrar, I believed it was important that we issue a communication to registrants about how they work, and the challenges that come with them.
“Our article contains a clear example on how to handle an escalation clause while remaining in compliance with the Code of Ethics.”
Unfortunately, unless RECO acts to prohibit the use of escalation clauses, no one submitting a purchase offer can be confident that their price in the offer will remain confidential and not be used against them.
Bob Aaron is a Toronto real estate lawyer. He can be reached at firstname.lastname@example.org , on his website aaron.ca, and Twitter @bobaaron2.
“I will pay $5,000.00 more than the highest offer received.”
This is what is known as an escalation clause and has been developed to give a person in a bidding war an advantage over the other bidders. It usually will also include a “cap” such that the maximum price to be paid will not exceed a certain amount. The question is whether escalation clauses are permitted in an Ontario bidding war where agents are being used. It has long been my own view that these clauses are not permitted. Yet the Real Estate Council of Ontario has recently issued a bulletin stating that while they do not endorse the use of escalation clauses, they are not illegal. Here is what you need to know;
- Real estate agents are not permitted to disclose the substance of any offer in a bidding war.
In the Real Estate and Business Brokers Act 2002 Code of Ethics, it is clear that a real estate salesperson can only disclose the number of bids received in a bidding war, but cannot disclose the substance, or contents of any offer received. It is for this reason that auctions are not permitted in the sale of real estate when you use an agent. If you want to have an auction, hire an auctioneer, as they do with many farm sales. In my own experience, I note that auctions are not successful in a regular resale home situation and that is why they are not used.
- How is RECO permitting this?
The RECO bulletin seems to state that if an escalation clause is used, the seller can just insert the “escalated price” into the agreement and accept the deal. So in my example above, if the highest other offer received was $400,000, the seller could just write in $405,000 and the contract would be accepted. My question is “How can you write in $405,000.00, without disclosing that your highest offer received was $400,000.00. To me, this would clearly be a violation by the agent of their Code of Ethics obligation,
- Could an agent be sued if they insert an escalated price?
In my opinion, an unsuccessful buyer in a bidding war could bring a lawsuit against a seller or brokerage who comply with an escalation clause, stating that they only put in their bid on the understanding that their bid price would remain confidential. They never agreed to their price being communicated to any other bidder, whether directly or through an escalation clause.
- Can a buyer verify the price paid by the other offer?
Here RECO says that you cannot disclose any part of the other offer to the buyer who wins using an escalation clause. Yet they also warn the seller agent that they should consider keeping a copy of that offer in case it is challenged by a buyer later. So what this means is that the only way a buyer winning using an escalation clause can find out whether the other offer was legitimate, they would have to sue. This clearly opens up in my mind the possibility for fraud, with sellers perhaps encouraging friends to put in an offer at a high price to use as a basis for the escalation price.
- How do you know this is an escalated price or a counter-offer?
More confusion. When the seller puts in a price, are they actually inserting an escalation price or just submitting a counter-offer for the buyer to accept. And where is this escalation price to be inserted in the contract. This could also lead to more confusion as to whether the contract was legitimately accepted or not in the first place.
In conclusion, until we have a court decision that may explain these issues, it is my advice that brokerages representing sellers in a bidding war, should make clear prior to any bid received that escalation clauses will not be permitted or shown to the sellers, due to concerns about possible litigation. That way every buyer is treated the same in a bidding war.
At our firm, we close real estate deals all over Ontario If you have any questions about bidding wars, do not hesitate to contact me toll free at 1-888-876-5529 or at email@example.com
Before you read… This article by Mark Weisleder is actually directed at real estate agents but I believe it’s also valuable for buyers and sellers to understand what can happen in a situation when a deal goes wrong. Robert.
As a result of the changing market conditions, buyers may not be able to close their deals this summer. Here are 5 key lessons for agents to remember when things go wrong in any real estate deal.
- Be careful if anyone tries to blame you for what has happened
It goes without saying that when problems arise, it is easy for buyers or sellers to try and blame the agents for what has happened. In my experience over 34 years, it is rarely the agent’s fault when deals don’t close. You may feel sorry for the clients, but that is all you should feel.
- What if the client threatens to sue you for what has happened?
Buyers and sellers think that if they threaten a lawsuit, somehow the agent will agree to pay part of their damages to end the matter. Remember, as long as the agent has not committed fraud, they are protected against any lawsuit by their errors and omissions insurance policy, meaning that you don’t pay for your lawyers to defend you. The client will typically be asked to pay at least $5,000.00 just to retain a lawyer to sue you, with thousands more still to come. In my experience, once clients see how much this is going to cost them, they end any talk of lawsuits.
- What if the client threatens to report you to the Real Estate Council of Ontario
Somehow buyers and sellers are of the mistaken belief that RECO and other Provincial regulators are collection agencies for consumers. Not so. While RECO is supposed to investigate every complaint made against a salesperson or brokerage, they are for the most part looking at whether the salesperson or brokerage followed their duties under the REBBA 2002 Code of Ethics for the protection of consumers.
- How do you demonstrate to RECO that you have followed your obligations?
Always make sure that all your paperwork is properly documented and that you have a written record of it. This includes making sure that the Working with a Realtor, Buyer Representation Agreement, Listing Agreement, any amendments thereto and the Agreement of Purchase and Sale have all been carefully explained, signed and copies delivered to the client. Also make sure that you try and document any instructions in writing as well, to avoid any misunderstanding later.
- Always speak to your broker or manager before responding to any complaint or potential lawsuit
It is always stressful when someone alleges that you made a mistake and that they are going to suffer a loss as a result of what you did, or trying to blame you for their situation. Resist the temptation to say something you may regret later. Try something like this as an answer: “ I am sorry you feel that way .. I will review my file and my notes and will get back to you.” Then go discuss this with your manager or company lawyer and figure out what your next step should be.
If you have any questions do not hesitate to contact me.
Watch the video: Click Here https://youtu.be/ZVnZ4rsmNlQ
Mark Weisleder is a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP. Contact him at firstname.lastname@example.org or toll free at 1-888-876-5529
The Ontario government requires information be culled about prospective buyers that is nearly impossible to authenticate.
Last month’s introduction of the 15-per-cent Non-Resident Speculation Tax has turned real estate lawyers into agents for the provincial government.
Lawyers now have to be snoops and report sensitive client information which, until April 20, did not have to be revealed.
Even worse, lawyers are now responsible to the government for certifying the truth of the client’s personal information — but with no way to verify it.
Here is the information that now must be collected and sent to the Ontario government for purchases of land with one to six dwellings, and agricultural land. The information is required from all clients — “foreigners” or not. Disclosure to the provincial government was never previously required.
- Will the land be occupied as a principal residence?
- Does the owner intend to rent out the property?
- Has the owner been physically present in Canada for 183 days in the preceding 12 months?
- Is the owner a Canadian citizen or permanent resident of Canada? If not, what is the owner’s citizenship? (Strangely, Canadian citizens are not deemed foreigners under this law even if they never live in Canada.)
- Is the registered owner holding the land in trust for someone else?
For corporations, the information lawyers and their clients have to provide is even more detailed, and this is the first time disclosures of this type have ever been required.
- Is the owner a foreign corporation — one that is incorporated outside Canada, or in Canada but controlled by a foreign national?
- How many directors are “foreign nationals”?
- What percentage of voting rights is held by “foreign” entities?
- Is the corporation a trustee for unnamed owners?
Under proposed amendments to the Land Transfer Tax Act, lawyers must sign the disclosure statements and certify their truth to the government. I’m not sure how we can verify a statement made by a client about things like his or her citizenship, or presence in Canada during the last year. But the law says that anyone who makes, or participates in making, a false or deceptive statement to the government in the deed registration process, including a lawyer, is guilty of an offence.
The penalty is up to twice the evaded tax and two years in jail. So if, for instance, a buyer misleads their lawyer about the number of days he or she has spent in Canada in the last year, both of them can be imprisoned.
Even worse, although the changes to the law became effective on April 20, not only had they not been passed by the legislature, but a provision in the 1999 Taxpayer Protection Act prohibits a member of cabinet from introducing legislation to establish a new tax without a referendum.
That section in the Taxpayer Protection Act had to be repealed before June 1 so the new tax on “foreigners” could be enacted. At press time, it had not been done.
To me, the new foreign tax is a solution in search of a problem, since the number of foreign “speculators” in the market is less than five per cent. Some observers have called the tax racist, like the Chinese head tax of 1885 to 1923.
A good real estate lawyer who carefully analyzes the speculation tax legislation could structure ways to comply with the strict letter of the law, but completely and legally circumvent its operation and intention.
In any event, it’s not clear how the government expects lawyers to verify and certify client information which will require foreign clients to pay the 15 per cent non-resident tax.
Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at email@example.com, phone 416-364-9366 or fax 416-364-3818.