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Western Law Societies Conveyancing Protocol (Alberta)
1. Part A of the Protocol states that it applies to single-family residential transactions and not to multi-family dwellings or commercial transactions. What about:
(a) undeveloped residential lots;
(b) undeveloped commercial property;
(c) unimproved agricultural lands;
(d) leasehold interests where a leasehold title exists.
The Protocol will apply to the sale and purchase of an undeveloped residential lot. Although not specifically dealt with in Part A of the Protocol, the Protocol does not apply to the purchase and sale of more than four residential lots (by extrapolation from the prohibition against more than four multi-family units being purchased concurrently). If more than four lots are being sold to the same purchaser at the same time, then it is not appropriate to use the Protocol, even if separate transfers are used. However, the sale of a number of residential lots to different parties, or to the same party at different times, should be acceptable. The maximum 4 units in a multi-family project threshold was drawn from an actuarial perspective. The potential of an intervening encumbrance would not be of major significance on a single transaction basis, whereas the potential of an intervening encumbrance on a more substantial number of units, could be significant.
The Protocol at present does not apply to any commercial property, whether developed or undeveloped. A number of practitioners have suggested that the risk of a problem in respect of an undeveloped commercial property is low and that the Protocol should be available, but the appropriate underwriting analysis has not yet been completed in this regard. When analyzing whether or not property is commercial or residential, it is important to remember that this is an analysis of the use made of the property itself, and generally, not of the nature of the character of the parties. A client who buys and sells numerous residential houses, may well be in the business of conveying property such that the property is inventory, but that does not impact the fact that the properties are residential.
If lands are truly agricultural lands such that commercial activities are being carried on thereon, then the Protocol is not available. One of the gray areas is when does an acreage become “agricultural lands”. The lawyer should make reasonable inquiry and make a reasonable determination based on those inquiries. So long as those enquiries and determinations are reasonably made, then the protections afforded to the lawyer by the Protocol will be available. It is recognized that making such a determination is not a science.
Examples of inquiries that might be made are:
(a) is the Buyer paying GST on the transaction where the Seller is an individual? If so, then the Protocol likely shouldn’t be available;
(b) has the Seller reported taxable revenue arising from the property? If so, again the Protocol likely shouldn’t be available; and
(c) if the Buyer is getting a mortgage, are the instructions coming from the residential mortgage centre or the agricultural mortgage centre?
This may be indicative of what the Lender thinks is the nature of the property. The matter, of course, is further complicated when there is a house on the property as there is clearly a residential component to the transaction. Again, the lawyer should make a reasonable determination as to whether the transaction does contain a commercial component, and if there is, then the Protocol should not be available. There has been some suggestion that there should be an acreage threshold to determine whether the subject property should be considered to be commercial/agricultural. The mere size of the property should not be determinative of the issue and land area would not be an appropriate single test. Intense farming can be done on small land areas, and some large acreages are purely residential. Size can be one factor in the assessment, but clearly should not be determinative.
With respect to leasehold interests, the Protocol is specifically available for transaction within National Parks where leasehold titles are being conveyed or financed. However, other leasehold transactions are not available (these would be very rare in the non-commercial world).
2. Is the Protocol available in respect of the conveyance or financing of a residential condominium unit?
If the Seller of the Unit is not a “developer” within the meaning of the Condominium Property Act, then the Protocol will be available (subject to the prohibition against using the Protocol for more than four concurrent transactions involving multi-family units within the same project). However, where the Seller is a “developer” within the meaning of the Condominium Property Act, then the Protocol is not available in respect of such transaction. The reason for this is the provisions of Section 14(3) of the Condominium Property Act which contains a prohibition against the release of funds prior to the registration of the transfer of land in respect of such a transaction.
When Land Titles was significantly behind, pressure was placed on the Provincial Government to amend the Condominium Property Act to allow for a release of funds prior to registration of the transfer in circumstances where there was title insurance or the Protocol was used to “cover the gap”. However, while the government initially appeared to be interested, their interest waned as Land Titles caught up. They have now indicated that they will not consider this issue until such time as the entirety of the Condominium Property Act is more widely up for review.
It should also be noted that as a result of the definition of “developer”, Section 14(3) would catch the first time a condominium unit in a conversion project has been sold to a member of the public.
3. Why does the Protocol provide coverage for losses suffered by the Lender arising from a survey defect but not those losses suffered by a Buyer?
The change in practice standards under the Protocol allows the Lender’s lawyer to provide the Lender with the opinion that a Real Property Report with a Certificate of Compliance is not necessary. The insurer has agreed to accept liability for losses suffered by the Lender pursuant to the Solicitor’s Opinion that the Lender does not need a Real Property Report with the Certificate of Compliance. The insurers consider Lender claims pursuant to the Solicitor’s Opinion to be very low risk. Further, and perhaps even more important than the assessment of risk, is the fundamental question of whether a loss suffered by a Buyer from a survey defect can ever really be “insured over” or compensated by pure monetary damages. In the case of a mortgage, the Lender simply wants to be repaid; and thus, in all circumstances, the Lender can be satisfied by a monetary payment. However, when a Buyer acquires a residential property, there may be aspects of the property that the Buyer considers to be fundamental to his or her purchase decision and the agreement to pay the specified purchase price. If that fundamental aspect of the property were ever to be removed, the Buyer might be in a position where no monetary damages could cover his or her true loss. The damages that might be considered to be appropriate to cover the loss may not effectively cover the loss in the mind of that particular Buyer.
For example, if a residential property has a deck which overlooks the river valley or the mountains, and that deck is not in compliance with Municipal by-laws and had to be removed, could that Buyer in fact be adequately compensated by manageable levels of damages? The philosophy behind the Protocol is that the Buyer should be entitled to determine if there are any survey defects and what effect that may have on the Buyer’s decision to proceed with the purchase before the transaction closes. The Buyer’s lawyer must continue to protect the Buyer under the contract and look to the Buyer’s contractual remedies in the event of a loss. If a lawyer is negligent in fulfilling that duty, a liability claim by the Buyer against the lawyer would be handled in the normal course.
4. What is the consequence of being in possession of a real property report which discloses a defect?
Part A paragraph (b)(ii) of the Protocol indicates that a Lender is covered under the Protocol for survey defects unknown as at the date of advance which would have been shown on “…an up-to-date real property report with a compliance stamp…”. If the real property report arrives after the transaction has closed under the Protocol and the survey defect is identified, then that defect would be considered as unknown for the purposes of a claim under the Protocol.
In the result, if the transaction involves a refinancing only, then there is no issue of advancing without any survey evidence as the advance of loan proceeds can be completed without any survey evidence.
Where the transaction involves an acquisition, then, in accordance with the Canadian Bar Association Real Property Subsection Report on Survey Issues, the Buyer’s lawyer should be justified in refusing to go to registration until such time as some survey evidence is provided so that the Buyer can make a reasoned decision as to whether or not the Buyer is prepared to proceed to complete the transaction in the face of a survey defect. If at that point in time, the Buyer still wishes to proceed, then the Lender’s instructions would have to be obtained on the basis of the foregoing analysis (since this would now be a known defect) and the Buyer would have to make appropriate arrangements with the Seller as to how they will complete the transaction in the face of a clear or apparent defect.
Options sometimes adopted are:
- to require the Seller’s lawyer to submit the real property report for compliance,
- and to use reasonable commercial efforts to obtain an encroachment agreement or relaxation in the event of an issue, a holdback pending a determination of whether an encroachment or relaxation is required, or a price reduction where the defect is readily apparent.
5. Can I use Protocol on any financing transaction?
As a result of the fact that all five major Canadian chartered banks have now endorsed the Protocol, there has been a tendency on the part of the practising bar to conclude that the Protocol is always available on any mortgage financing transaction. Of course, that is not the case as there are a number of smaller lenders who have not yet accepted the Protocol as an acceptable procedure by which to complete a residential mortgage loan transaction. Conversely, even in an isolated loan transaction where the Lender is not ordinarily in the business of lending money, that Lender can choose to complete the transaction on a Protocol basis and be afforded the full protection thereunder. Further, notwithstanding that the Protocol has a very expedient method of confirming that funds can be advanced (by the provision of the short form opinion), practitioners are reminded that they must review the Lender’s instructions to determine whether the provision of the short form is the sole prerequisite to release of the mortgage advance. There is nothing to stop a Lender from requiring additional documentation prior to the release of the mortgage advance. Instructions should be read very carefully to make sure if any such other conditions apply. Many lenders will also require additional documentation with a final reporting.
6. What if one of the parties or the other lawyer will not agree to adopt the Protocol even though the transaction is one that otherwise qualifies for the Protocol?
As a result of amendments to the Alberta Real Estate Association’s standard residential form, Offer to Purchase, the Buyer and the Seller agree to the use of the Protocol, unless they delete the clause in the standard form. Section 4.12 of the current standard form indicates that: “Notwithstanding the closing provisions of this Contract, the parties instruct their lawyers to follow, if appropriate, the Law Society of Alberta Conveyancing Protocol in the closing of this transaction.”
Accordingly, unless that section in the Offer to Purchase has been amended or deleted, then both the Buyer and the Seller are obliged to close the transaction using the Protocol unless the Protocol is otherwise not appropriate. Similarly, because the parties are instructing their solicitors to use the Protocol where appropriate, it is suggested that a lawyer to a transaction does not have the ability to simply refuse to close on a Protocol basis unless there are justifiable reasons whereby the particular transaction should not be appropriate for a Protocol closing.
7. What if I think I have enough time to complete the transaction in the conventional manner but it subsequently turns out that I will not have completed registration in time to release funds on the closing date. Can I switch to a Protocol closing in midstream?
Although the Protocol was designed to replace the conventional method of completing a residential transaction, there is nothing wrong with converting to a Protocol transaction after the transfer has already been submitted to the Land Titles Office for registration. However, in order to do so, the Buyer’s lawyer would need the assistance of the Seller’s lawyer to amend the conventional trust conditions to allow for the completion of the transaction on the Protocol basis. It would need to be specifically acknowledged that the funds are already in the Buyer’s lawyer’s trust account and that the transfer and related documents have already been submitted to the Land Titles Office for registration. The Seller’s lawyer must provide the necessary Protocol undertaking in case the transfer does not register after release of the purchase funds. The Buyer’s lawyer should also run a title search before proceeding with the change in handling to be sure that title is as it should be.
8. Is there ever a need for a Buyer’s Caveat where the transaction is being completed on a Protocol basis?
There should be no need for an unpaid vendor’s lien caveat where the transaction is being completed from the outset on a Protocol basis. All funds are being released prior to submission of documentation for registration. There is therefore no danger that title transfers or possession passes prior to the Seller receiving sale proceeds. However, there appears to have been a misconception that the Protocol also eliminates the requirement of any caveat protecting the Buyer’s interest. There should be no change in the practice of a prudent solicitor when considering whether or not a Buyer’s caveat should be filed to protect the Buyer’s ability to acquire the property or recover a deposit. While there may be no need to file such a caveat in a “typical” transaction, consideration might be given to filing such a caveat when the purchase price and/or deposit are significant, where the closing date is a number of months away or when circumstances become known such that the Buyer’s interest in the property may be at risk. It may also be prudent to file such a caveat (and potentially one by the Buyer and one by the Lender, where applicable), after funds have been released in circumstances where registration is rejected and it may take some time to rectify the documentation.
9. What should be done if the documents are rejected after the transaction has closed and rectification is not available?
If the lawyer has followed the Protocol correctly, the chance of improper execution or completion of the documents submitted to the Land Titles office is small. Any rejection will likely be the result of errors of a clerical nature. In those cases, the lawyer is the agent of his or her client for the purpose of completing the transaction that the client entered into and is therefore justified in making corrections to the documents on the client’s behalf. If the problem cannot be quickly resolved, consideration should be given to filing caveats as suggested in Question #8 and a call should be placed to the Alberta Lawyers Insurance Association to see if a claim file should be opened at that time.
Lawyers for Sellers are also reminded that it is a specific requirement under the Protocol that they take reasonable steps to rectify any problem with the Seller’s documentation. It would be inappropriate for the Seller’s lawyer to simply do nothing just because the funds are released and the file essentially closed.
10. If a claim is required to be made under the Protocol, it is to be made to the Alberta Lawyers Insurance Association. It makes me nervous dealing with ALIA given that the rest of their obligations are to deal with claims of lawyer negligence. Can I really be comfortable with making a Protocol claim?
For a number of years after the implementation of the Protocol, there were very few claims, and accordingly, ALIA staff did not have much experience in dealing with them. When Land Titles was significantly behind, the incidences of claims under the Protocol increased (as there was more probability of unexpected registrations intervening while the subject documentation was in the queue).
Notwithstanding that the claim is a claim to ALIA and is ultimately back-stopped by the Canadian Lawyers Insurance Association, there is no requirement to pay a deductible pursuant to a Protocol claim. As well, there is no premium surcharge regardless of the number of appropriate Protocol claims that are made by a lawyer. The lawyer’s claims history will be unaffected for all purposes of Law Society record keeping.
Further, ALIA staff are well aware that the Protocol is not going to be effective unless the claims are dealt with expeditiously. Their instructions are to repair the damages as quickly as possible, and only if such repair is not possible in the short term, to appoint counsel to attempt to resolve the matter.
Unfortunately, and likely because of the small number of claims in the first few years of the Protocol, it is recognized that the Law Society and ALIA have not done a perfect job in differentiating between a Protocol claim and a normal ALIA claim in terms of the documentation involved and sometimes in the manner in which the claims are handled.
The Law Society is now trying to ensure that it is clear on the claims form that there is no issue of fault on a Protocol claim, and those questions on the claim form that deal with aspects of negligence are to be specifically shown as being not applicable to a Protocol claim. Further, claims examiners are being reminded that in dealing with Protocol issues, the most important factor in the claims resolution process is to expedite resolution.