The Section 9 Trap #507
CATEGORY: Legally Speaking
TAGS: Contract of Purchase and Sale Easement Restrictive Covenant Title Clause
When a residential listing agent receives an offer in the standard form, Contract of Purchase and Sale (CPS), the licensee should always cross-check Section 9 and any related wording against the seller's title. In the CPS, Section 9 promises that at completion the seller will deliver clear title, subject only to the following exceptions:
- subsisting conditions, provisos, restrictions exceptions and reservations, including royalties, contained in the original grant or contained in any other grant or disposition from the Crown,
- registered or pending restrictive covenants and rights-of-way in favour of utilities and public authorities,
- existing tenancies set out in Section 5, if any, and
- except as otherwise set out herein.
This short list omits many commonly occurring non-financial charges, including easements, building schemes, ordinary restrictive covenants and so on. Section 9 requires the seller to remove all financial charges (e.g., any mortgage, judgment or lien) and every non-financial charge not caught by this list of exceptions; this is the Section 9 trap. If the seller's title contains an easement, a building scheme or other non-financial charge not listed in Section 9, the seller must remove that charge. To avoid the trap, a listing agent must identify in the seller's title any non-financial charge that is not already caught by Section 9's list of exceptions, and then add wording in the contract to "otherwise set out" that charge as an agreed exception to clear title.
In a recent case, JBP Developments Ltd. v. Li,1 the seller's title contained a restrictive covenant in favour of British Pacific Properties Ltd. (BPP). Without BPP's prior written approval, the restrictive covenant prohibited the construction, alteration or location of any building, fence or other improvement on the property. There were other significant restrictions too. In the CPS, the buyer agreed to purchase the seller's property for $6.5 million dollars with a $300,000 deposit, subject in part to the buyer approving a title search. But Section 9 was not altered in any way; the contract never mentioned the restrictive covenant. At completion, the seller attempted to deliver title containing the restrictive covenant. The buyer refused to complete, treating the seller's failure to deliver title in accordance with Section 9 as repudiation.
When the seller sued the buyer for damages, including the deposit, the court dismissed the claim. The seller breached the agreement by failing to deliver title in accordance with the contract. It was irrelevant that the buyer had previously approved title. Section 9 promised clear title at completion, subject only to the agreed exceptions. The restrictive covenant was not listed as an exception, so the seller had to remove it. The court said,2
"It would have been a simple matter for the vendor's realtor [sic] to have expanded the exceptions in that Contract clause to include BPP's restrictive covenants. For whatever reason they chose not to alter that term of the Contract."
When a seller's title contains a non-financial charge not listed in Section 9, a proactive listing agent tells the buyer's agent in advance to address the problem in their offer. When writing the offer, the buyer's agent can either expand the list of exceptions to include the relevant charge as an agreed exception to clear title or follow the approach recommended by the Real Estate Council of British Columbia and attach a current title search printout to the offer, as well as the following clause:3
Acknowledgement of Title Clause A
The Buyer acknowledges and accepts that on Completion the Buyer will receive title containing, in addition to any encumbrance referred to in Clause 9 (TITLE) of this contract, any non-financial charge set out in the copy of the title search results that is attached to and forms part of this contract.
If a buyer's offer fails to address the Section 9 trap, the listing agent should warn the seller. Acceptance may obligate the seller to remove one or more non-financial charges from the seller's title by completion, which may be impossible. If the seller cannot deliver title in accordance with the contract, the buyer may walk and sue the seller for damages. To avoid this trap, the seller must counter-offer to expand the list of Section 9 exceptions to include the relevant non-financial charge, thereby excusing the seller from removing it.
What if the seller wishes to accept the offer as presented, despite its Section 9 trap and contrary to the listing agent's advice? The licensee should urge the seller to first seek legal advice, warning the seller what might happen if they ignore the agent's guidance, while confirming all of these communications in writing.Mike Mangan
|1.||JBP Developments Ltd. v. Li, 2018 B.C.S.C. 209.|
|2.||JBP Developments Ltd. v. Li, 2018 B.C.S.C. 209 at para. 54.|
|3.||Real Estate Council of British Columbia, Professional Standards Manual.|
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