Mortgage Broker

38 | summer 2018 cmba-achc.ca CMB MAGAZINE i n a recent decision of the Supreme Court of British Columbia, presale contracts in respect of a condominium development in receivership were disclaimed (cancelled) so that the units could be resold for a higher price to pay down more of the developer's debts. is article discusses the case and its implications for lenders and presale purchasers. BACKgROund e case concerned Murrayville House, a 92-unit strata condo development in Langley. e presale contracts were entered into in 2015, and the project was supposed to be ready for occupancy in 2016. e project was fraught with delays, cost overruns, and allegations of fraud. In August 2017, a mortgage lender commenced foreclosure proceedings against the developer. A receiver was ultimately appointed to take control of the lands and development assets. RECEIvERShIP And dISCLAIMER A receiver is sometimes appointed in insolvencies in order to take control of the assets and maximize their value for the benefit of stakeholders, namely the creditors. Receivers also have the power to disclaim (i.e. cancel) the debtor's preexisting contracts if doing so would help maximize the value of the debtor's assets. e receiver's power to disclaim contracts is consistent with its primary role, which is to maximize the value of the assets for the benefits of the stakeholders. Accordingly, where a property that is the subject of a presale contract rises in value, it may be prudent to disclaim that contract in order to maximize the value of the assets and minimize the shortfall to lenders. In this case, it became clear during the receivership that the mortgage lenders faced a very significant shortfall. In particular, if the presale contracts were completed, the mortgage lenders would face a shortfall of $34 million. By this time the value of the condo units had increased considerably. Appraisal evidence obtained by the receiver established a 46 per cent li above the presale prices, meaning that cancelling the presale contracts would generate millions more, which would help decrease the shortfall. dECISIOn e Court was tasked with deciding whether or not the presale contracts should be disclaimed. e Court thoroughly reviewed the applicable law and set out an analysis for considering the issue. In essence, the analysis first required consideration of which group – the purchasers or the mortgagees – had the stronger legal right to protect. In this case, the Court determined that the mortgagees had legal interests in the land as a result of their security registered on title. e Court contrasted this to the position of the presale purchasers, who had only contractual rights rather than interests in the land. e position of the presale purchasers hinged to some extent on contractual language in their presale contracts which expressly provided that the contracts created "contractual rights only and not any interest in land" and that the purchasers would only "acquire an interest in land upon completion of the purchase and sale contemplated herein." As a result, the mortgagees' legal interests in the land trumped the purchasers' contractual interests. e Court then turned to the next step in the analysis, which required consideration of whether there were any "equitable considerations" which justified favouring the interests of the purchasers and declining to disclaim the presale contracts. e Court considered a very broad array of circumstances in determining whether the "equities" favoured the purchases. For example, the purchasers argued that the developer had acted in bad faith and misconducted itself – but the Court concluded that this was not relevant to a balancing of equities as between the mortgagees and the purchasers, both of which were innocent groups. e Court also noted that the disclosure statement expressly put the purchasers on The Perils of Presale Contracts When the mortgage lender's actual investment takes precedence over the buyer's future interest By mAtthew Nied If the presale contracts were completed, the mortgage lenders would face a shortfall of $34 million.

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