B.C. Introduces New Rules to End Real Estate “Shadow Flipping”

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The British Columbia government has announced new rules aimed at ending the recently decried practice of shadow flipping of real estate contracts.

Shadow flipping has recently become a focus of the hot real estate market in B.C. and involves a purchaser entering into a contract of purchase and sale (usually for residential property) and then assigning that contract to a third party for a fee, sometimes several times, driving property price up to the benefit of the middle men. The seller does not benefit from the higher price and is often shocked to learn of the final selling price. Real estate agents or “licencees” under the Real Estate Services Act, often obtain commissions for each of the shadow transactions as well, which has given rise to public discontent. This process is possible because the standard forms of purchase and sale agreements used in most residential transactions do not prohibit assignment of the agreements and do not require notice or consent of the seller for the purchaser to assign.

The provincial government introduced regulations under the Real Estate Services Act that will require real estate agents and licencees to include, in every contract, a prohibition on the assignment of the contract by the purchaser unless the seller consents to such assignment and a provision that requires that any profit obtained from an assignment to a third-party purchaser to be returned to the property’s original seller. The new regulations come into effect on May 16, 2016.

If the purchaser wishes to remove these two provisions from the purchase and sale agreement, the licensee presenting the offer must provide the seller with a notice form advising the seller these provisions are missing from the agreement and what the potential consequences are.

These new regulations apply to offers and agreements to purchase made on or after May 16, 2016, but do not apply to contracts made before that date. The regulations apply to the presentations of offers and agreements to purchase by licencees under the Real Estate Services Act and affect both residential and commercial transactions. However, in many commercial transactions the licensee is not presenting the offer to the seller because the parties will involve their legal counsel, who are not governed by the new regulations.

The Real Estate Council of British Columbia, which is the regulatory body responsible for administering the Real Estate Services Act and regulations through its rules governing licencees, will draft new rules to impose requirements on the licencees and provide a form of disclosure to be used to notify sellers regarding these requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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