As the BCFSA’s Practice Resources on Foreclosures makes clear, foreclosure transactions are “a complex area of real estate where unforeseen hurdles can cause serious problems for the licensees and the public.”
Foreclosure transactions are quite different from regular real estate transactions, and it’s important to appreciate the differences to avoid common mistakes. This article highlights just one of the pitfalls that can be encountered when dealing in foreclosure transactions, and provides some context about how the court system handles foreclosure transactions.
The starting point is that foreclosure transactions are ultimately subject to court approval. The first offer accepted by a seller/lender doesn’t automatically mean that this buyer will get the property. The approval process encompasses an overarching supervisory role of the courts in relation to the transaction, which in general is handled by a master of the court.
As recently noted by our Court of Appeal, masters approving foreclosure transactions “do so in busy courtrooms in which they must handle a high volume of work.”[i] Licensees who have attended at busy court registries will no doubt be familiar with the ‘bustle’ of masters granting conduct of sale and approval of sale. The lists that masters deal with can be long.
As noted, foreclosure transactions can be very different from regular real estate transactions. For example, the BCFSA’s Practice Resources on Foreclosures states, “In many cases, the party that has conduct of sale in the foreclosure requires that many of the standard clauses in a Contract of Purchase and Sale be amended. The amended clauses are generally contained in a Schedule to the contract.”
Parties foreclosing are not always banks or financial institutions, but can include private lenders. The foreclosure procedure is commenced by way of the lender obtaining an Order Nisi in court, and once a redemption period has expired, obtaining an Order for Conduct of Sale. Potential purchasers will make offers, and the lender may choose to accept an offer. Ultimately, however, no foreclosure transaction will be finalized until the court has given approval to the sale.
A recent case demonstrates the discretion conferred on masters in court, and highlights an important practice point[ii]. The plaintiff was a buyer who retained a licensee for the purpose of putting in an offer for a foreclosure property. The offer was accepted by the party with conduct of sale, and subjects were duly removed; however, the offer remained subject to court approval. When the parties appeared in court to obtain approval of the sale, a competing offer to purchase the property was presented by a third-party bidder. The plaintiff was therefore given the opportunity to increase his bid, which was done.
Key to this case was the manner in which the new offer was conveyed. The licensee prepared a revised offer by striking out the previous purchase price on the contract and replacing it with a higher figure. When the new offer was handed back to the court, a copy of the previous subject removal form was not provided. The master expressed concern that the offer presented on behalf of the buyer was not subject-free.
Despite assertions from both the licensee and the lawyer representing the lender that the transaction was subject-free (indeed the subject removal addendum was offered to the court), the master considered the offer to have been made with subjects and therefore not valid. The matter proceeded to several new rounds of bidding, and the plaintiff, although ultimately successful in obtaining the property, proceeded to sue the licensee for failing to ensure that the offer handed to the master was subject-free.
The plaintiff succeeded in his lawsuit against the licensee, with the court noting, “In short, while practices may vary and the Master (or Justice) may exercise considerable discretion in connection with the court approval of the sale of real property in foreclosure proceedings, it may reasonably be expected that the Master (or Justice) may engage in and supervise a bidding process. As such, a person seeking to become the successful bidder should be prepared to present a subject-free bid.” Thus, even though the lender had accepted the offer weeks before, and subjects had been removed, the failure to ensure that the subject removal addendum was included in the revised offer was ultimately fatal to the case.
Although the licensee was willing to provide the master with a copy of the addendum, the court noted that, “It should not be surprising that a busy Master (or Justice) will wish to make a direct side-by-side comparison of bids without regard to extraneous materials (including the contract in the court file upon which the application is based).” The court further rejected the argument made “that there is no protocol governing foreclosure proceedings and that a Master (or Justice) is not precluded in exercising discretion from considering matters outside the ‘four corners of the bids presented.’”
The court stated that, “While undoubtedly correct, a person seeking to make a bid at a court foreclosure hearing should be prepared with an unconditional bid. It is folly to assume that the Master (or Justice) may be willing to consider extraneous matters or materials to those presented when it is well-recognized that the Master (or Justice) may exercise the court’s discretion to engage in and supervise a more traditional bidding procedure.”
This may seem to licensees to be against the grain of common sense. Surely, one may ask, there was no prejudice here, given that the subject removal addendum was readily available? Although this is likely an unusual case, it highlights that in a busy courtroom, where many approvals of sale are being dealt with, the court may insist on strict compliance with its procedures. The practice note to take away from this case is that if a new offer is to be presented in court during the approval for sale process, the new offer should ‘stand on its own,’ and include all relevant terms, documents, and subject removal addendum.
Licensees are reminded that foreclosure transactions are very different from regular real estate transactions, and it is incumbent on licensees without experience in this area to seek assistance in order to avoid potential pitfalls.
Additional resources for licensees can be found on the BCFSA website including an article in the June 2014 Report from Council, “Acting for Buyers in Foreclosure Sales” or the PDP course “Foreclosures and Court Ordered Sales” offered by BCREA. As always, a first step for information is to seek guidance from your managing broker.
[i] Reliable Mortgages Investment Corp. v. Gautam, 2017 BCCA 233, paragraph 20
[ii] Zedah v. Moadebi, 2017 BCSC 2164