Selling Land for Local Governments – Part 2

Part 1 of this article, which appeared in the Fall 2009 issue of LoGo Notebook, dealt with several general issues of concern to local governments that sell land. Part 2 focuses on the actual agreement of purchase and sale, including some issues specific to situations where the local government is the seller.

It has been a principle of the law for centuries that an agreement to transfer an interest in land must be in writing, and the value of having a well-drafted agreement of purchase and sale cannot be overestimated. It serves the interests of all parties to a transaction to have the terms of the sale and the mechanics of how the transfer will be completed set out clearly from the beginning. Every piece of land is in some respect unique, and however routine some aspects of the process may be, every transaction is also unique. “Cookie-cutter” agreements may seem desirable as a means of reducing costs, but they must be approached with great caution. Even if a standard form is to be used, legal advice should be obtained to avoid any unpleasant surprises.

Conditions Precedent

When a local government is selling land, there are a number of issues that the agreement of purchase and sale should address. For instance, the agreement should set out any conditions on which the sale depends. These are referred to as “conditions precedent” or “subject clauses”.  Some conditions precedent can be waived by the party they benefit, and some cannot. An example of a condition precedent that could be waived is a condition that the buyer have the property inspected. The buyer could elect to proceed with the transaction despite not having inspected the property.

Those conditions precedent that cannot be waived are referred to as “true” conditions precedent, since the transfer of the land simply cannot occur unless they are satisfied. One example of a true condition precedent is where the parcel being sold has not yet been created by a subdivision. If the subdivision cannot be completed, then the deal will collapse. Other conditions precedent that are essential from a local government perspective are those relating to statutory prerequisites for disposing of land, such as Board or Council approval, and notice of disposition.

Care must be taken to ensure that a condition precedent is not so subjective in nature that it renders the agreement a mere offer, rather than a binding agreement. Where a condition precedent is highly subjective, the agreement must be drafted so as to ensure that it is binding while the condition remains outstanding.

In Murray McDermid Holdings Ltd. v. Thater (1982), 42 B.C.L.R. 119, the British Columbia Supreme Court held that an agreement was a mere offer to sell, and not binding, because it was subject to the approval of the buyer’s president. In other words, approval could be granted or refused on a whim. Likewise, in Saveheli v. Philp, 2000 BCSC 815, the British Columbia Supreme Court held the agreement to be a mere offer to purchase where it was subject to the “buyer receiving and being satisfied with information relative to tax implications re: Canadian/U.S. ownership”. There were simply too many variables and subjective elements involved.

Representations and Warranties

Representations are statements made by one party to the other regarding certain facts about the condition of the property, the state of title, a party’s legal status, and other matters. Representations are legally significant because the party to whom they are made is often entitled to rely upon their truth when deciding to enter into an agreement.

Warranties usually go hand in hand with representations. A warranty, as the ordinary use of the term implies, is a promise that if something goes wrong with the item covered by the warranty, the party giving the warranty will make good the resulting damage. In the context of an agreement of purchase and sale, a warranty is a promise that a representation is true. For example, if the seller represents and warrants that there are no outstanding construction debts that could result in a builders’ lien against property, and after the transfer of the property a lien is claimed because of the construction debt of the seller, the buyer will have the ability to claim damages from the seller.

Buyers of land will typically seek to extract as many representations and warranties from the seller as possible, while the seller will try to minimize them. Local governments that are selling land should be extremely wary of making representations and warranties, and should only make them if it is absolutely certain that the state of affairs represented is true, and the language used to express the representation does not leave the local government vulnerable to a change in circumstances that is beyond its control.

If a local government is selling property on an “as-is” basis, this should be stated explicitly in the agreement, and language employed that leaves no room for the buyer to argue that it relied upon a representation by the local government. This might be the case where a local government is selling a portion of closed road, or a property obtained through tax sale.

Sellers of land, local governments included, should beware of a statement of adjustments provided by the buyer that includes representations and warranties that were not part of the original agreement of purchase and sale. In many cases these should be rejected.

Closing Matters

An agreement of purchase and sale should set out which party is responsible for preparing transfer documents, including land title documents, the statement of adjustments, tax documents, and others. Responsibility may be divided, depending on the circumstances, although the more usual arrangement is for the buyer to have its solicitors do the work.

Details of the closing date, the payment of deposits and purchase funds, and other matters relating to the mechanics of closing the transaction should be spelled out as clearly as possible. For example, if the buyer is, or may be relying on a new mortgage to finance the purchase, then the agreement should state that the transfer can take place on the buyer’s solicitor’s undertaking to pay the purchase price once the mortgage documents are registered. In the case of Norfolk v. Aikens (1989), 41 B.C.L.R. (2d) 145, the British Columbia Court of Appeal held that it is not permissible to close a transaction on the basis of solicitor’s undertakings unless the parties have expressly agreed to it in the contract.

The buyer will be required to pay the Property Transfer Tax when registering the transfer in the Land Title Office. If there is GST/HST applicable to the transaction, who will account for it? Normally the local government selling the property will collect it and account for it with the Canada Revenue Agency, but some corporate buyers may be registered for GST purposes and wish to self-assess the GST/HST. In that case, the agreement should require the buyer to provide a certificate to the local government in order to protect the local government from liability in the event the tax is not paid.

Standard Clauses

A good agreement should contain a few pages of what is sometimes referred to as legal “boilerplate”, also known as the “fine print”. These clauses often deal with matters such as notice, binding effect, assignment, amendment, waiver, interpretation, further assurances, time being of the essence, and others. Although it can be tempting to do away with these clauses in the interest of having a “simple” agreement, the consequences of signing an agreement without them can be anything but simple.

To give just one example, a local government may agree to sell a piece of property to a particular buyer, and for any number of reasons may not want the buyer to assign the agreement to another party. Under the Law and Equity Act, an agreement for the sale of land is deemed to be assignable unless the parties have agreed otherwise in writing. So, unless the agreement prohibits assignment, or requires the prior consent of the local government, the local government may have no control over who the ultimate buyer will be.

Legal boilerplate, while hardly thrilling to read, has been developed by lawyers over many years in response to a variety of potential complications, and the parties to an agreement dispense with it at their peril.

In conclusion, it is no exaggeration to say that selling land, even in what may appear to be the most straightforward of circumstances, is a process full of potential risks. Timely legal advice can assist in identifying and, where possible, minimizing those risks through the creation of a well-drafted agreement of purchase and sale. As Benjamin Franklin once said: “An ounce of prevention is worth a pound of cure”.