New Regulations Aim to Restrict “Shadow Flipping”

New regulations came into force Monday, May 16th which the B.C. Government hopes will stem the rising practice of assigning contracts for the purchase and sale of real estate, referred to recently as “shadow flipping”.

Recent news coverage of B.C.’s hot real estate market has focused on assignments of real estate purchase and sale contracts prior to closing – a practice known as “shadow flipping.”  In some cases, contracts have been “flipped” multiple times between signing and closing.  This can create situations where real estate agents earn multiple commissions on the same property – potentially for each assignment and the original sale – and where the original seller receives sale proceeds that are substantially lower than the price paid by the final buyer.

New Regulations to Restrict Shadow Flipping

To address complaints surrounding these practices, the B.C. government has introduced an amendment to the Real Estate Services Regulation, which along with the Real Estate Services Act, governs licensed real estate agents in B.C.

The amendments have two main components. First, the amendments create mandatory contract provisions designed to prevent shadow flipping that must, absent contrary client instructions, be included in all real estate contracts prepared by real estate agents. Second, if any of the mandatory contract provisions are omitted, the amendments impose a disclosure obligation on real estate agents.

Mandatory Contract Terms

Unless otherwise instructed in writing by their clients, agents preparing real estate contracts must include the following provisions:

  1. the contract may not be assigned without the written consent of the seller, and
  2. the seller is entitled to any profit resulting from an assignment of the contract by the purchaser or any subsequent assignee

Disclosure Requirements

If the mandatory contract terms are not included in a contract, the buyer’s agent is required to give notice. Notice must be in a specific form approved by the Real Estate Council of B.C. and must:

  1. be provided at the same time the contract is presented to the seller’s agent, or the seller if he or she is not represented by an agent,
  2. advise the seller to obtain independent professional advice before signing the contract, and
  3. be separate from the contract itself

If the mandatory provisions are not in a contract when it is presented to the seller, in addition to providing the type of notice described above the seller’s agent must also inform the seller:

  1. whether the contract may be assigned, and
  2. if the contract can be assigned, about any conditions in the contract on the right of assignment, and the seller’s entitlement to any profit resulting from an assignment

The notice requirements also apply to agents involved in real estate transactions as principals.

Exemptions from the New Rules

The new rules do not apply to a contract for the purchase and sale of a “development unit” by a developer, which is currently addressed under the Real Estate Development Marketing Act. Presumably, this is because developers engage in the purchase and sale of real estate as their business and are familiar with issues around assignment clauses.

Additionally, as the new requirements are imposed on real estate agents, not buyers and sellers, the requirements will not apply to transactions made without licensed real estate agents.

Considerations and Impacts

The new regulations raise some issues for agents, buyers and sellers dealing in commercial and residential real estate to consider, including:

  1. the new regulations did not include a transition period and apply to all contracts made on or after May 16, and
  2. it is not clear how to calculate the “profit” to be paid to the seller in the event of an assignment, or how the seller would be able to enforce such payment, as the seller may not be party to a contract with subsequent assignors

It remains to be seen what effect these new regulations will have on real estate transactions in B.C. In a hot real estate market where an original buyer might have previously been inclined to “flip” a contract for the purchase of a property, he or she may now choose to complete the sale and immediately re-list the property.

If this is the case, the original seller will receive no benefit from the effect of the new regulations, but the B.C. Government will benefit from the additional payment of property transfer tax and the Canada Revenue Agency may benefit by being better able to track capital gains or income earned in property sales that might not have been noticed or reported in a shadow transfer.

EKB’s Commercial Real Estate team is experienced and knowledgeable in this area and can assist you further.

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