Buying and Selling Property in a Hot Market: Flipping a Contract of Purchase and Sale

It is most likely common knowledge that, for quite some time, the housing market in the lower mainland has been a highly competitive environment with seemingly outrageous and rapid increases in property values. These market trends were front and centre in the recent decision of Zhang v. Tsai, 2017 BCSC 583 (CanLII).

While purchasers flipping real properties in a hot market for a quick dollar is hardly unique, Zhang v. Tsai featured a contract for purchase and sale being flipped twice for a substantial profit without the purchaser realizing value on those assignments.

In May, 2015, Mr. Tsai listed his property for sale and, on that same day, negotiated and entered into a contract of purchase and sale to sell his West Vancouver home for $5.1 million to Mr. Li. Completion was to occur on October 30, 2015.

Mr. Li realized he would be unable to sell his home and, eventually, was able to assign the purchase contract to a numbered company for $5.7 million in July, 2015. Mr. Tsai received no value for this assignment.

The numbered company negotiated with Mr. Tsai to obtain an extension of the closing date to November, 2015 and paid Mr. Tsai $5,000 for the extension. The numbered company gave evidence and the Court agreed that Mr. Tsai understood the purpose of the $5,000, although Mr. Tsai denied understanding the reason he received the $5,000.

In August, 2015, the purchase contract was assigned for a second time from the numbered company to Mr. Zhang for $6.3 million. Again, Mr. Tsai received no value for this assignment.

In September, 2015, Mr. Tsai went to his lawyer where he says he first learned of the assignments and decided not to complete as a result. He commenced litigation against his realtor in October, 2015 alleging that his realtor misled him about the value of his property.

Mr. Tsai refused to complete the sale of his property to Mr. Zhang in November, 2015 and Mr. Zhang sued to force Mr. Tsai to complete the contract to sell the property. Mr. Zhang’s defence, although not clearly stated, essentially was that if he successfully sued his realtor, the contract of purchase and sale would be found to be invalid.

The Court recited the requirements of s. 36(1) of the Law and Equity Act that an assignment expressly made in writing and otherwise valid transfers legal rights to the assignee. The Court also noted that assignment had to occur prior to closing (which it did).

The Court found that Mr. Tsai had received notice of the two assignments in writing at least once prior to closing and possibly on multiple occasions. The Court also found that the assignments were absolute, in writing and signed by the assignor. In the result, the Court found that the assignments were valid.

Having found the assignments valid, the Court was left to determine if it would order specific performance (force the contract to be completed) or would award damages in place of performance. The Court went through the law about whether to award specific performance or damages -in particular, Youyi Group Holdings (Canada) Ltd. v. Brentwood Lanes Canada Ltd., 2014 BCCA 388 (CanLII) – and concluded that the subject property was subjectively unique enough to Mr. Zhang that he was entitled to the remedy of specific performance. It was significant to the Court that otherwise assessing damages would be complex.

The Court did not find that the innocent, third-party assignee who paid value for the purchase contract, Mr. Zhang, could be faulted to any claim that might exist by Mr. Tsai against his realtor.

Zhang v. Tsai is notable in that it is an example of some of the issues that can occur in particularly active real estate markets. In particular, it is illustrative of how vendors may get seller’s remorse between entering a contract and closing when they see their property continue to increase in value without their having any opportunity to realize on that increase.

There are ways to construct a contract to make adjustments to the purchase price at the time of closing to reflect market trends (although this would almost always require the additional expense of a valuation at closing).

Additionally, between the time issues arose in Zhang v. Tsai and the time the case was determined, s. 8.2 of the Real Estate Services Regulation came into force. S. 8.2 essentially provides that, unless instructed otherwise, realtors are required to put into all contracts of purchase and sale that the contract cannot be assigned without written consent of the vendor and that the vendor will be entitled to any profit resulting from an assignment of a contract and, if the contract does not contain such clauses, that the realtor must specifically inform the vendor of the consequences of not including such clauses. To be clear, such clauses are not mandatory and can be altered or removed by the vendor prior to listing or by agreement of parties to a contract, but s. 8.2 at least ensures that all vendors will have at least have been informed of their rights and obligations concerning assignments.

Vendors and purchasers are well-advised to understand their rights and obligations under a contract of purchase and sale, especially in an active real estate market where there can be temptation to consider assignment of a contract. Timely legal advice can save both vendor and purchaser time and money down the road.

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