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Professional Standards Manual

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6. Real Estate Development Marketing Act

(e) Forms of Development Property under the Real Estate Development Marketing Act

(See also information regarding strata properties.)

Cooperative Interests

A cooperative interest is the interest that includes both a right of ownership in the shares of a cooperative association or to be a partner or member in the cooperative association and the right to use or occupy a part of the land in which the cooperative association has an interest.

The Real Estate Development Marketing Act defines a cooperative association as

(a) a corporation, as defined in the Business Corporations Act;

(b) a limited liability company as defined in the Business Corporations Act;

(c) a partnership; and

(d) an entity incorporated or other wise created outside British Columbia that is similar to one described in paragraphs (a) to (c).

Thus, an owner of a cooperative interest acquires shares, or some other form of ownership in a corporate entity or partnership, which carry with them the right to occupy only a portion of the land that the cooperative association owns. The particular portion may be an apartment or a recreational vehicle site.

Sellers are unable to carry primary or secondary financing on cooperative interests by way of a mortgage registered against the title or by an Agreement for Sale, as there is no title in a cooperative interest to encumber. It is, therefore, strongly recommended, in a situation where the seller is asked to carry any financing, that the seller’s lawyer and the buyer’s lawyer be consulted before the acceptance of any offer.

Licensees are also advised to consult their financial advisers, including experienced mortgage brokers, for guidance in such financing, as well as ascertaining from the cooperative’s rules and regulations whether or not there is a prohibition on financing in any way.

A Disclosure Statement must be filed with the Superintendent of Real Estate before a developer or a developer’s agent can market one cooperative interest if the cooperative interest is part of a development consisting of two or more cooperative interests. Accordingly, licensees involved in the sale or purchase of a cooperative interest by or from a developer should familiarize themselves with the content of and the requirements associated with the Disclosure Statement. It is possible for a cooperative association to own a strata lot. Hence, the Strata Property Act may also be applicable.

Regardless of whether the transaction involves a developer or a single unit resale, licensees should be knowledge- able with respect to the proportion of the share capital acquired by the purchaser, the allocation of ongoing maintenance and operating costs, the presence of any other assets or liabilities that the cooperative association may have, the terms of the agreement which restricts an owner to using only a portion of the land that the cooperative association owns, the applicability of the homeowner’s grant and property transfer tax, and the particulars of the cooperative association’s share capital, such as provisions related to voting rights or restrictions on transfer.

Rental Leases and Head Leases

Another type of ownership, which fits between cooperative and strata on leased land, is the rental lease, where the cooperative building sits on leased land. It is financed like a cooperative, although sometimes private leaseholders will allow for less down payment and provide financing directly themselves. The holder of the head lease, the corporation which owns the building, determines how units in the building are purchased. As with cooperatives, these are purchases of shares in exchange for the exclusive right to occupy a designated unit in the building. Owners do not have title to the unit itself. Owners must not make alterations to the unit (unlike strata ownership) without permission from the cooperative association. These are long-term leases (often 99 years). Licensees are advised to consult experienced financial advisers, lawyers and mortgage brokers for guidance.

The following clause should be used in the purchase of cooperative interests. This clause may also be used for the purchase of rental-lease properties but it is strongly recommended that the buyer seek legal advice and ensure understanding of the head lease’s restrictions and duration.

Co-operatives-Suite/Townhouse Clause

This contract is for the purchase of (number of shares) shares in (name of co-operative association) together with a lease of (unit number) to the Buyer, and other considerations as may accompany said lease.

Buyer to assume payments of the monthly maintenance charge of $(amount) (which includes a proportionate share of annual taxes).

Buyer has approved the Rules and Regulations, the Memorandum and Articles of Association, any lease documentation and any financial obligations of (name of co-operative association) including the following specific restriction(s):

 

Subject to the approval of the Buyer by the Board of Directors of (name of co-operative association) on or before (date) .

This condition is for the benefit of both the Buyer and the Seller.

 

Ώ Warning re Approval of buyer by Directors: The Board of Directors of a Cooperative is allowed to make a decision as to the suitability of any buyer. The reasons for such a decision are to be kept confidential to the Board of Directors.

Optional Assumption of Portion of Mortgage Clause

NOTE: The Buyer should obtain legal advice before assuming a mortgage in these circumstances.

Buyer will assume obligations on an assigned portion under the existing first mortgage held by (name of mortgage lender) registered against the property at (address) with an outstanding balance on the assigned portion of approximately $(amount) at an interest rate of ___% per annum, calculated (frequency)not in advance, with an original (number of years)-year amortization and a ‘‘balance due” term date of (date), with blended payments of $ (amount) per month including principal and interest.

(i) Shared Interests in Land

A shared interest in land is a person’s interest in one or more parcels of land, if the parcel or parcels are owned or leased by the person and at least one other person and as part of any arrangement relating to the acquisition of the person’s interests, that person’s right of use or occupation of the land is limited to a part of the land.

Thus, an owner of a shared interest in land acquires a direct ownership interest in land, typically an undivided fractional fee simple interest, which carries with it, by agreement amongst the co-owners, a right to occupy only a portion of the land.

A Disclosure Statement must be filed with the Superintendent of Real Estate before a developer or the developer’s agent can market one shared interest in a development containing at least two shared interests. Accordingly, licensees involved in the sale or purchase of a shared interest in land by or from a developer should familiarize themselves with the content of and the requirements associated with the Disclosure Statement.

Regardless of whether the transaction involves a developer or a single unit resale, licensees should be knowledge- able with respect to the proportionate fractional interest acquired, the allocation of ongoing maintenance and operating costs, the applicability of the Homeowner’s Grant and Property Transfer Tax, and the particulars of the agreement which restricts owners to using only a portion of the land that they own, such as voting rights or restrictions on transfers.

(ii) Time Share Interest

A time share interest is defined in the Real Estate Development Marketing Act as a person’s interest in a time share plan. A time share plan is a plan in which the persons participating each have a right of recurring use, of all or part of the land. A time share plan does not require that the persons acquire an ownership interest in the land that is the subject of the plan.

A Disclosure Statement must be filed before a developer may market one time share interest in a development containing five or more time share interests. Accordingly, licensees involved in the sale or purchase of a time share interest by or from a developer should familiarize themselves with the content of and the requirements associated with the Disclosure Statement.

(iii) Real Estate Securities

In some cases, the offering of a real estate development unit may constitute the offering of an investment contract, which is a security within the meaning of the Securities Act. Where a real estate development includes an interest in land and an ancillary agreement, usually with the developer, for management of the property, combined with financial commitments such as rental guarantees or revenue and expense pooling, the arrangement may meet the requirements of a security. A typical example of such an offering is the marketing of strata lots in a hotel or resort in which there is an agreement that the strata lots will be rented out by a manager. The agreement may include a rental guarantee or revenue or expense pooling, or it may simply be a mandatory requirement that the strata lot be provided to the manager for rental as part of the overall development. In such cases, both the Real Estate Development Marketing Act and the Securities Act apply. Policy Statement 13 issued by the Superintendent’s office sets out an explanation of real estate securities and includes reference to the related documents issued by the Securities Commission. Licensees involved in the purchase and sale of real estate offerings, where the purchaser must rely on the promoter for an investment return, should familiarize themselves with these requirements.

(iv) Leasehold Units

A leasehold unit is a unit in a residential leasehold complex which is defined as containing one or more buildings capable of being used for leasehold residential purposes other than buildings comprised of strata lots, cooperative interests or shared interests in land.

Although not specifically identified in the Real Estate Development Marketing Act, a common form of leasehold unit that has been marketed in British Columbia is a life lease. A life lease in its broadest sense is a leasehold interest in land, the term of which extends for the life of the lessee. In many ways, it resembles a life estate. In particular, life leases typically must prepay a large portion or all of the rent, and the possessionary interest of a life estate and a life lease both terminate with the life of the person holding the interest. However, a life estate is a freehold interest in land whereas a life lease is a leasehold interest in land that creates a landlord and tenant relationship.

The distinction between a life lease and a life estate should not be forgotten because a life lessee is subject to a lease. Accordingly, most, if not all, aspects of the law governing landlord and tenant relationships will apply and licensees should be aware of their duties and responsibilities, which apply to all lease transactions. The following characteristics of many life leases should also be considered.

Most, if not all, life lease offerings obligate the landlord to repay some or all of the prepaid rent to the lessee, or his or her heirs, on the death of the lessee or the termination of the lease. The obligation to repay the rent (capital payment) results from the contractual terms of the lease. The repayment term is basically peculiar to life leases. Licensees should familiarize themselves with the security arrangements, if any, associated with the obligation to repay and the financial ability of the landlord to make the repayment.

Additionally, landlords can generally terminate a life lease for non-payment of rent or a breach of any other covenant in the lease. The life lease may or may not be registrable. Section 4 of the Residential Tenancy Act provides that the Act does not apply to living accommodation rented under a tenancy agreement that has a term longer than 20 years. Life lessees generally may not assign or sublet their lease as the landlord typically controls the renting of the premises. Life leases generally obligate the lessees to pay monthly charges related to the maintenance and operation of the development. Often, these charges are payable as rent.

The Real Estate Development Marketing Act requires that a developer file a Disclosure Statement before marketing a leasehold unit of a term of three years or more in a development property containing five or more residential leasehold units. All long-term leases, including life leases contained within developments other than buildings comprised of strata lots, cooperatives or shared interests, are subject to the requirements of the Real Estate Development Marketing Act. Because the marketing of strata lots, cooperative interests and shared interests are specifically addressed in the Real Estate Development Marketing Act and because the definition of marketing includes selling or leasing, the offering of a long-term lease of a strata lot, cooperative interests or shared interests already requires compliance with the Real Estate Development Marketing Act.

Each offering of a leasehold interest, including a life lease, requires that a current Disclosure Statement, which has been filed with the Superintendent of Real Estate, be provided to the lessee. Developers may therefore be required to update the Disclosure Statement to ensure that it is current before each new leasehold interest is marketed. In other words, as lessees die or otherwise terminate their lease, the developer will offer a new leasehold interest which requires an up to date Disclosure Statement. Developers reselling life leases must therefore provide a current Disclosure Statement to new lessees.

(v) First Nations Lands

The Superintendent of Real Estate has advised that his opinion is that RESA applies to the sale of real estate on First Nations property. However, the Superintendent is of the view that the Real Estate Development Marketing Act is not applicable to the sale or lease of development units on First Nations property and a developer is not required to file a Disclosure Statement or comply with any other requirements contained in the Real Estate Development Marketing Act when a development is located on First Nations property.

Licensees should advise consumers that the Real Estate Development Marketing Act does not apply and that the disclosure requirement and rescission rights contained in the Real Estate Development Marketing Act also do not apply. Furthermore, the Strata Property Act does not apply to multi-family developments located on First Nations land.