On July 25, 2016 the Provincial Government announced legislative amendments to the Property Transfer Tax which, effective August 2, 2016, imposed an additional 15% tax on foreign entities acquiring residential real estate in the Greater Vancouver Regional District.
One of the issues that arises is the effect that the new tax will have on existing sale agreements involving foreign entities that were entered into prior to the tax being implemented, but that had not closed by August 2, 2016.
There is some thought that the option for the foreign buyer is to complete the transaction and pay the tax, or, walk away from the transaction and their deposit. Leaving the constitutionality of the tax aside, there may be another out for some prospective purchasers, as depending on the circumstances, the contracts may be frustrated. If the contracts are frustrated, both parties would be discharged of its obligations under the agreement, and the purchaser would be entitled to its deposit back.
A contract is frustrated when a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. The obligation becomes one that one did not promise to do (see: Davis Contractors Ltd. v. Fareham U.D.C., [1956] A.C. 696). The purpose of the doctrine is to relieve a party from its bargain because a supervening event has occurred without the fault of either party (see: Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58). The British Columbia Court of Appeal has applied the doctrine of frustration to contracts involving real property where there has been a change in zoning (see: KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295). It is not a literal requirement that the contract is incapable of being performed if it is rendered something fundamentally different from what had been contracted for (see: Veritas Geophysical (Nigeria) Limited v Energulf Resource Inc., 2010 BCSC 1253). As held by the Supreme Court of Canada in Vancouver Milling and Grain Co. v. G.G. Ranch Co., [1924] S.C.R. 671 “It is well established that where from the nature of the contract and the circumstances under which it was made it is apparent that the parties must have proceeded on the footing that certain conditions, without which performance would be impossible, should exist their existence may be regarded as an implied term of the obligation undertaken and non-performance due to their non-existence, without default of the obligor, will relieve him from performance.”
The issue will be whether or not the new tax will be viewed as something that makes performance a thing radically different from that which was undertaken by the contract, or whether the tax is simply something that has made performance more onerous than expected or an example of the future not unfolding as the party had hoped (see comments on frustrated contracts in: Le Soleil Hotel & Suites Ltd. v. Le Soleil Management Inc., 2009 BCSC 1303 ).
This may be a different answer depending on the purchasers individual circumstances, as the courts have commented that there is no mechanical rule of thumb when applying whether a contract is frustrated (see: Korol v. Saskatchewan Federation of Police Officers Inc., 2000 SKQB 367).
It is not hard to see an argument for a hypothetical purchaser who has put 5% down on the purchase of a $500,000 condo, to argue that a requirement that he comes up with an additional $75,000 to complete is something radically different from what he agreed to do, if not in many cases, impossible.
What we do suggest is, to the extent that you are a foreign entity that has found itself subject to this case, that you seek legal advice and speak to a lawyer before simply walking away from your deposit.
Tim Goepel
Partner in Dispute Resolution
Lindsay Kenney LLP, Vancouver Office