Assignments

Assignments are a continuing part of the Vancouver real estate market, mostly in pre-sale situations where a contract of purchase and sale for a condominium was entered into with a Developer prior to the start or completion of construction.

An Assignment is a situation in which an existing contract of purchase and sale is “assigned” by the buyer to a third party. The third party takes over the buyer’s rights and obligations under the original contract. Note that the assigning party remains liable under the contract.

The assigning party is referred to as the Assignor and the person to whom the contract is assigned is referred to as the Assignee.

New Construction (“Pre-Sales”) Questions to consider when looking to sell or buy under an assignment:

Q. Does an assignment require the consent of the Developer?

A. The answer is almost always “yes”. And it is important to understand that most contracts provide that the consent can be arbitrarily withheld – and the Developer’s decision may relate to whether or not there are unsold units at the time of receiving a request to consent to an assignment. The Developer will normally charge a fee to consent to an assignment.

A. “Assignment Amount” includes the reimbursement of the deposit paid by the Assignor under the original contract of purchase and sale as well as the amount of the “gain” being paid to the Assignor – referred to in the standard assignment contract as the “Balance of the Assignment Amount”. The Balance of the Assignment Amount is the amount of money being paid to the Assignor that is usually profit or a capital gain over and above the amount payable to the Developer under the contract of purchase and sale.

Q. How is Property Transfer Tax (“PTT”) calculated under an assignment?

A. PTT is calculated based on fair market value at the time of the transfer of title of the property from the Developer to the Assignor. For example, if the purchase price under the contract of purchase and sale is $500,000 and the “Balance of the Assignment Amount” or “gain” to the Assignor is $50,000 the PTT is calculated on $550,000. It is the Assignee who pays the PTT.

Q. How is the Goods & Services Tax (“GST”) calculated under an assignment?

A. The Assignee on closing under the contract of purchase and sale will pay GST on top of the purchase price in the contract of purchase and sale. The standard form assignment agreement provides that if there is GST payable on the Balance of the Assignment Amount it is included in the Balance of the Assignment Amount so it is the responsibility of the Assignor to pay.

A. This is a most hotly debated issue. If an Assignor entered into the contract of purchase and sale with the intention of assigning the contract to make a profit the gain will likely be treated as income and GST would be payable. If an Assignor intended to close on the purchase and occupy as a principal residence but changes his or her mind and assigns the contract there may not be GST payable.

Q. What happens with the interest that has accrued on the deposits paid under the contract of purchase and sale?

A. The standard form assignment agreement provides that the interest will be paid to the Assignee. In certain circumstances the amount of interest that has accrued at the time of entering into the assignment agreement may be significant and depending on the length of the time the deposit has been held the Assignor may have paid taxes on the interest income. Therefore the Assignor may want to amend the standard form of assignment agreement and be reimbursed not only the deposit amount but also the interest that has accrued.

Q. What are the options for payment of the Assignment Amount?

A. The standard form of assignment agreement contains four options:

1. 1. The Assignment Amount is paid in full but is held in trust until completion of the purchase by the Assignee. This is the best option for the Assignee.

2. 2. The Assignment Amount is paid in full and is paid out to the Assignor once subjects under the assignment agreement are satisfied or waived. This is the best option for the Assignor.

3. 3. The Assignment Amount is paid in full and the amount of deposits paid by the Assignor under the contract of purchase and sale is paid out the Assignor once subjects under the assignment agreement are satisfied or waived. The Balance of the Assignment Amount is held in trust until completion of the purchase of the property by the Assignee. The balances the interests of the Assignor and the Assignee.

4. 4. Any other arrangement agreed to between the Assignor and Assignee.

Q. What happens if the Developer does not complete under the contract of purchase and sale?

A. There have been a few development projects where the developer has been unable to deliver title free and clear due to cost overruns. In this situation the option selected for payment of the Assignment Amount is extremely important. If Option 2 in the standard assignment agreement has been selected the Assignee will receive a return of the deposit held under the original contract of purchase and sale but will likely not be able to recover the Balance of the Assignment Amount. If Option 1 or 2 has been selected then the Assignee will likely receive a return of the deposit and the Balance of the Assignment Amount. The additional problem for Assignees is that if they entered into the assignment agreement early in the construction process increasing real estate values may make it impossible to find a replacement property at a comparable price.

For existing residential properties the standard real estate contracts do not have any restrictions against assignments. Therefore, a buyer has the right to assign without obtaining the consent of the seller.