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Backgrounder on British Columbia Real Estate for the Foreign Investor

By Warren Brazier         March 18, 2008 

British Columbia is no longer a local real estate market – the Province is attracting significant investment and development dollars from across Canada and around the world. With so much foreign investment in the Province, a brief backgrounder about the more notable differences and unique aspects of British Columbia real estate law may be useful to out-of-province investors.

Land Title System

British Columbia follows the Torrens system of indefeasible title and registration which provides certainty of title. Evidence of a right to the land exists in the Land Title Office, pursuant to the Land Title Act. In British Columbia, one may rely on the title kept in the Land Title Office so there is no need for an extensive search on the validity of title. In fact, titles and most Land Title Office records are available online. Recently, the Land Title Office introduced an electronic filing system for most land registry documents which speeds up the time it takes for closings on real estate transactions. With electronic registration, confirmation of title is efficient and certainty of title is assured in virtually all circumstances.

While popular in other jurisdictions in North America, with the prevalence of the Torrens system, title insurance is not typically used in British Columbia on commercial real estate transactions, although it is becoming more common.

Development

Most developers in British Columbia must at some point deal with either a municipality or a regional district when developing their lands. British Columbia legislation, specifically the Local Government Act and the Community Charter, gives municipalities and regional districts (a collection of municipalities) broad power over land use regulation, such as zoning and subdivision and long term planning. Most municipalities in British Columbia have established comprehensive land use regulation by-laws. Absent formal by-laws, land use regulation is governed by Provincial legislation, the common law and any restrictive encumbrances registered on title to the property.

In British Columbia, there is no Planning Act as there is in Ontario, and most subdivision matters are dealt with at the municipal or regional district level by the Approving Officer under the Land Title Act. Only when the property is situate in rural areas outside of recognized districts, or if a proposed development involves, road, watercourses or other Provincial land, are the Provincial authorities involved.

It is also common for British Columbia municipalities and regional districts to establish Official Community Plans and Regional Growth Strategies. These are often used by developers as a guide for possible future development opportunities.

Regional Growth Strategies

Under the Local Community Act, a regional district in British Columbia has the power in a Regional Growth Strategy to set priorities and growth management policies for a particular region, while establishing social, economic and environmental goals for the region, typically with input from residents and businesses. Regional growth strategies are not binding law however, but more of a general guide to development plans and often provide an excellent lead for regional planners and developers.

Official Community Plans

More specific than Regional Growth Strategies, a typical Official Community Plan is a comprehensive plan that serves as a guide to the overall future development of a city and provides a broad framework for managing future change. When considering a development in a particular community, the first order of due diligence should be a review of the applicable Official Community Plan. While overcoming a Official Community Plan is possible as communities change over time it is often difficult and very time-consuming.

Zoning

Zoning By-laws govern the right to use land in a detailed manner and a review of the local zoning by-laws is a critical due diligence step. Most municipalities have comprehensive zoning by-laws setting out size, density, building height, services, parking, landscaping, access and other development requirements for the property. Zoning by-laws may be varied, or amended through a re-zoning process which typically involves the submission of building plans, environmental studies and community consultation through a public hearing. The time it takes to complete a re-zoning varies significantly among the municipalities. Under the Local Government Act, re-zoning decisions of the municipal council are final. Only decisions of a board of variance may be appealed.

Occasionally, a property is found in an area that has been re-zoned after the date upon which the current land use commenced. Under the Local Government Act, if at the time a by-law is adopted, the land or a building on the land is lawfully used, but the current use does not conform to the by-law, then the use may continue as a non-conforming use until such use is discontinued for a period of six months or the building is significantly, damaged, or altered without permit or the land re-developed.

Subdivision

The Land Title Act governs the subdivision of land in British Columbia. Subdivision approval is required from the Approving Officer of the municipality or Minister of Transport for rural areas. Developers applying for a subdivision of land must ensure compliance with land use designations (such as Agricultural Land Reserve), flood plain regulations and consider the location of any watercourses among other things. If the property is adjacent to a waterway, either provincial or federal authorities must be notified of the subdivision. Furthermore, subdivisions must comply with municipal requirements such as siting and zoning by-laws and the subdivided lands must have access to public streets. The Approving Officer has discretion whether to approve a subdivision plan, whose decision may be challenged in court.

Strata Property

Investors often inquire about developing condominiums for sale. In British Columbia, the proper terminology is “strata property” and residential, commercial, office and industrial strata property is governed by the Strata Property Act.

Strata title property is a form of ownership in which a property owner owns an individual strata unit, plus a share of the common areas of the site, or “common property”. Residential, commercial, industrial and mixed use buildings, as well as bare land, may be subdivided by way of a strata plan.

Each strata development is managed by its own “strata corporation”, although some strata corporations may choose to hire a property manager. The owner of each strata lot has one vote in the strata corporation, and generally pays monthly maintenance fees to cover shared expenses related to common property and to provide for a contingency fund, used for repairs and maintenance of common property.

Fees and expenses are paid by the owners on a proportionate share basis, generally based on size of unit relative to the building. The strata corporation can pass strata by-laws (building regulations), and must hold a general meeting of all owners at least once a year, when the annual budget is approved, the “strata council” is elected, and special resolutions, if requested, are voted on. The Strata Property Act permits, among other things, conversions of existing buildings to strata developments, phased strata developments, bare land subdivision and subdivision of strata lots. See the further discussion below.

Air Space Subdivision

Mixed-use developments, typically where residential space is located above commercial space, are becoming more popular in British Columbia. For further discussion some of the options available for developers in this respect please see the recent article [October, 2007].

Development Cost Charges

Under the Local Government Act, municipalities are authorized to levy development cost charges for the development of land. These charges are used by local authorities to off-set servicing costs for new developments on previously undeveloped or under serviced lands. Depending on the location of the property, the cost of development cost charges can be considerable.

First Nations Lands

Increasingly, developers are exploring First Nations lands in British Columbia for new developments. In our experience, many Indian Bands have sophisticated development policies and guidelines for reserve lands, akin somewhat to municipal by-laws. While federal approval is required for most developments on reserve lands, the Minister of Indian and Northern Affairs Canada usually defers to the Band’s approval of a proposed development; although, the development still must meet federal policy requirements and comply with the Indian Act. In 1999, federal legislation was enacted to allow certain Indian Bands to form their own unique land management regimes; placing some of the land management control of the reserve exclusively in the hands of the Band. Self government legislation is also used in British Columbia to give the Indian Band the rights and responsibilities of an owner of its reserve land. More recently, modern day treaties have been negotiated in British Columbia, and when implemented, the result is that all lands subject to the treaty are governed by the treaty, including applicable reserve lands.

Most aspects of treaty land development will be in the complete control of the treaty nation. Needless to say there is growing range of land management regimes and title systems on First Nation lands that in many instances provides greater opportunity and certainty for developers and First Nations than the current land use regime under the Indian Act, but each new regime and system will have its own unique set of challenges.

Land Claims

The traditional view is that privately owned land in British Columbia is not subject to claims by First Nations. However, land developers should be cautious and make inquiries if they are aware that the land in which they are interested is the subject of active land claims, as the law in this area may be changing.

Heritage Conservation Act

The purpose of the Heritage Conservation Act is to encourage and facilitate the protection and conservation of heritage (archaeological) property in British Columbia. Certain types of archaeological sites are protected, including burial sites, aboriginal rock paintings or carvings, sites predating 1846, wrecked ships, wrecked planes, and sites specifically designated as being protected by the Provincial government. In accordance with the Act, these archaeological sites may not be destroyed, excavated or altered without a permit. If an article of cultural significance is found in the course of development, development will be interrupted until the appropriate course of action is identified and implemented. For a further discussion please see the article [November, 2006].

Rural Lands

Developers of rural lands must consider certain some distinctive development issues on rural lands, such as the agricultural land reserve, water permits, septic systems, forestry licenses or permit, grazing rights, mineral or other resource claims. A further discussion of these issues is beyond the scope of this paper.

Environmental

Environmental liability is a chief concern for developers. The Environmental Management Act imposes stringent liabilities on owners of contaminated sites and even strict joint and several liability with certain limitations on those people who own or acquire contaminated sites. Environmental due diligence is critical.

Property Transfer Tax

Property Transfer Tax

In British Columbia, Property Transfer Tax is payable by a purchaser of land at the time of registration of a transfer. Tax is payable at a rate of 1% on the first $200,000 and 2% of the balance of fair market value of each parcel of land. Fair market value includes land and buildings. Property Transfer Tax also applies, on a sliding scale basis, to the registration of leases for terms longer than 30 years, including all renewal terms. This is a registration tax only and does not apply to the transfer of shares of a company or the transfer of beneficial ownership which are not registered in the Land Title Office. Unlike in other jurisdictions, such as Ontario, transfers from legal to beneficial owner and vice-versa are taxed. However, an unregistered transfer between legal and beneficial owner is not taxed in British Columbia at present. See below for further discussion.

Ownership

Bare Trustees

The ownership of registered title to real estate by bare trustees is very common in British Columbia. This is due primarily to British Columbia’s property transfer tax legislation. In commercial transactions, a nominee company will hold title to a parcel of land as a bare trustee in trust for the beneficial, or “real” owner. The nominee has no balance sheet and no income or expenses as it does nothing for its own account. It acts solely as title holder for the beneficial owner as the beneficial owner directs. If the beneficial owner sells its beneficial title in real property and at the same time sells the shares of the nominee and directs the nominee to hold title for the purchaser as new beneficial owner, no property transfer tax is payable, because no transfer is registered in the Land Title Office. The purchaser effectively saves almost 2% of the value of the property, which saving the vendor will likely expect to share. It is important to remember that this structure must be put in place at the time of purchase of the property. Investors should be aware that there has been discussion for many years that this “loophole” should be legislatively closed.

Leasing

Leasing land in British Columbia is very similar to other jurisdictions except in particular where strata property is involved. Strata leases add a level of complexity to the standard lease by adding the “strata corporation” and other unfamiliar ownership matters to the lease. These issues can be overcome with legal drafting, but the standard real estate lease is not adequate in a strata property situation.

The rationale for registering a lease is the same in British Columbia as in other jurisdictions – to protect the tenant from subsequent transferees, mortgagees, tenants or other persons who may claim they acquired their interest in the property without knowledge of the tenant. What is different is that in British Columbia, it is not possible to register a notice or caveat in respect of a lease. A lease must be registered, and if the premises is less than the whole of a subdivided lot, including part of a building, a registerable reference plan which shows the leased premises must be prepared. Parties may not wish all of the terms of their agreement to be a matter of public record – this is sometimes avoided with a short form of lease that does not set out the financial terms of the lease. But this is an added expense. Couple this with the cost of preparing a reference plan and many tenants decide that the cost is not worth the benefit of not registering their interest on title.

Another area where leasing is different in British Columbia relates to leases which are not leases of a building or part of a building. If a lease has a term (including renewals) longer than three years and is not limited to a building or part of a building, it may violate the subdivision control provisions of the Land Title Act. It is possible to resolve this issue in most circumstances without the need for subdivision, but both landlords and tenants need legal advice to avoid the pitfalls in this area.

Withholding Tax

Under the Income Tax Act, capital gains, income, rents or interest earned on Canadian property and paid to a non-resident is subject to a withholding tax in Canada at a prescribed rate but which is typically modified by treaty. A discussion of withholding tax is beyond the scope of this paper.

Financing

Generally

Real estate finance in British Columbia is similar to real estate finance in other common law jurisdictions, with the primary security documents being mortgages and assignment of rents, supported by general security agreements and other charges on personal property, guarantees and the like. Mortgage remedies in British Columbia are somewhat different than in other common law jurisdictions, in that realization is achieved through judicial sale in the context of foreclosure proceedings, rather than pursuant to contractual power of sale, as is common elsewhere.

Opinions

Another area where practice may be different in British Columbia from that in other jurisdictions relates to financing opinions by borrower’s counsel to their client’s lenders. Borrower’s counsel ordinarily does not provide enforceability opinions on lender’s standard form security documents. The general exception occurs when borrower’s counsel has required material amendments to the security documents. The standard position of British Columbia counsel for the borrower must often be resolved in negotiation with lenders from outside the Province who may insist on such an opinion as a condition of lending.

Warren Brazier

 

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