New Foreign Buyers Tax Not Grounds for Avoiding Real Estate Contract: BC Supreme Court Rules

On July 25, 2016, the government imposed the a new tax on foreign nationals acquiring real estate in Vancouver which required buyers to pay a 15% tax on the fair market value of the property. The tax took effect on August 2, 2016 and applied not only to purchase completing on or after that date, even if the contract was entered into prior to that date.

In Wilke v. Jeong, 2017 BCSC, an unfortunate buyer entered in into a contract with the seller in June of 2016  to purchase a home in North Vancouver for $2,668,000. The buyer paid a deposit of $180,000 and the contract was set to complete October of 2016. As a result of the new foreign buyers tax, the property transfer tax payable on the property went from $58,040 to $458,240. The buyer refused to complete the transaction on the grounds that the new tax had “frustrated” the contract.

The defendant sought to keep the $180,000 deposit for the buyer’s failure to complete and started a lawsuit against the buyer. The buyer claimed relief from the forfeiture of her deposit and that any assessment of the seller’s losses should happen in the future when she has sold her house and will be able to quantify the loss.

The case raised two issues before Madam Justice Warren were whether the contract frustrated by the new foreign buyers test and if it was not frustrated, should the buyer be relieved from the forfeiture?

Firstly, Madam Justice Warren reviewed the law with respect to the doctrine of frustration. Frustration of a contract applies “when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract'”:  Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para. 53, quoting Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., [1960] S.C.R. 361, per Judson J., at 368, in turn quoting Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 H.L. (Eng.), at 729.”

The two elements in establishing the test for frustration require:

1. a qualifying supervening event (one for which the contract makes no provision, which is not the fault of either party, which was not self-induced, and which was not foreseeable), which
2. caused a radical change in the nature of a fundamental contractual obligation.

The buyer argued that the new Foreign Buyer’s Tax was a supervening event and that it so fundamentally altered the amount of money she had to come up with to close to make it impossible to do so.

Madam Justice Warren reviewed the contract itself to determine the foundation or purpose of the Contact. She states at para 32,

[32]         The Contract is the standard form Contract of Purchase and Sale used routinely in this province for the sale of residential properties.  It identifies the seller, the buyer, and the property.  The purchase price is set at $2,668,000, the completion date on October 17, 2016, and the adjustment date on October 18, 2016.  The Contract requires the buyer to pay a deposit of $180,000 “which will form part of the Purchase Price”.  It expressly provides that the buyer “will assume and pay all taxes, rates, local improvement assessments, fuel utilities and other charges from, and including, the [adjustment date]”.  It is not subject to the buyer obtaining financing.  It expressly provides that “[t]ime will be of the essence, and unless the balance of the cash payment is paid and such formal agreement to pay the balance as may be necessary is entered into on or before the Completion Date, the Seller may, at the Seller’s option, terminate this Contract and, in such event, the amount paid by the Buyer will be non-refundable and absolutely forfeited to the Seller in accordance with the Real Estate Services Act, on account of damages, without prejudice to the Seller’s other remedies”.

[33]         From the terms of the Contract itself, it is apparent that its fundamental purpose was simply the transfer of the land; in other words, the provision of clear title in exchange for the purchase price.  The seller was obliged to provide the transfer document and the buyer was obliged to pay the purchase price.  There is nothing in the record concerning the circumstances existing at the time the Contract was entered into suggesting any different purpose.  The question then is whether the effect of the Foreign Buyer Tax is of such a nature that performance of the Contract would result in something radically different from that contracted for.

Although Justice Warren held that the imposition of the Foreign Buyer’s Tax is a qualifying supervening event to meet the first leg of the test, she found that the  Foreign Buyer’s Tax did not change the nature of the contractual obligation and that performance of the contract would not result in something different that the parties had contracted for. The purpose of the contract was to transfer the title to the property in exchange for a purchase price and although it became more expensive to effect the deal, this part of the contract was unaffected and therefore not frustrated.

Madam Justice Warren next determined whether the court should grant the buyer relief from the forfeiture of the deposit, pursuant to the court jurisdiction to relieve against forfeiture as codified in s. 24 of the Law and Equity Act. The buyer argued that relief from forfeiture is only available if the deposit is excessive and out of proportion to the the seller’s actual loss and that it would be unconscionable to allow the seller to retain the deposit.

Justice Warren firstly reviewed the nature and purposes of deposits in law:

[42]         The purpose of a deposit paid on a real estate transaction is to secure the buyer’s intention to complete the purchase.  In other words, a deposit is designed to motivate contracting parties to carry through with their bargain.  It is an “earnest to bind the bargain so entered into, and creates by the fear of its forfeiture and motive in the payer to perform the rest of the contract”:  Howe v. Smith (1884), 27 Ch. D. 89 at 101 (C.A.), quoted with approval in Tang v. Zhang, 2013 BCCA 52 at para. 22.

[43]         Consistent with this purpose, a deposit is generally forfeited by a repudiating buyer without proof of damages even if it bears no relation to the seller’s anticipated loss.  As explained by Justice Newbury for the Court in Tang at paras. 24 and 25, this is an exception to the general rule that a contractual provision which requires one party in the event of breach to forfeit a sum of money to the other party is an unlawful penalty, unless it can be justified as a genuine pre-estimate of the loss the innocent party will incur by reason of the breach.

[44]         However, as also explained by Justice Newbury in Tang at para. 26, “the mere use of the word ‘deposit’ does not preclude a court from considering whether the payment is in fact a penalty against which relief from forfeiture may be granted.”  The court may prevent abuse of the term “deposit”, in recognition of the fact that “the special treatment afforded to deposits is plainly capable of being abused if the parties to a contract, by attaching the label ‘deposit’ to any penalty, could escape the general rule which renders penalties unenforceable”: Workers Trust & Merchant Bank Ltd. v. Dojap Investments Ltd., [1993] 2 All E.R. 370 at 373, quoted with approval in Tang at para. 26.”

Applying these principles, she held that the deposit was not penal in nature as it was only 6.7% of the purchase price. After reviewing recent authorities in British Columbia, she concluded that it is not possible to assess the true amount of the seller’s damages because she hadn’t relisted and sold the property yet. It is unknown if the seller’s eventual sale price would offset or exceed her losses. Based on this, the court could not find a basis to conclude that relief from forfeiture should be granted.

“[66]        In this case there is nothing to suggest that Ms. Wilkie’s conduct was anything but entirely proper.  There is nothing to suggest that Ms. Jeong suffered under any disability or disadvantage.  There was no inequality of bargaining power between the parties that resulted in an unfair bargain.  The amount of the deposit was reasonable and well within the normal range for residential real estate sales.  While Ms. Jeong’s decision to repudiate the Contract was the result of the imposition by a third party of the Foreign Buyer Tax, it did not flow from any action taken by Ms. Wilkie.  As discussed, although this supervening event was not the fault of either party, was not self-induced, and was not reasonably foreseeable, it did not frustrate the Contract because it did not change the nature of the parties’ contractual obligations or undermine the foundation of the Contract.  It would not be unconscionable, in the traditional sense, to permit Ms. Wilkie to retain the benefit of the Contract she negotiated, which expressly provided that the Deposit would be forfeited in the event of Ms. Jeong’s failure to complete.”

Madam Justice Warren held that the buyer had breached the contract and directed the real estate agent to provide the deposit to the seller.