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Pre-sale real estate contracts unwound

In a recent decision with broad implications for the real estate industry, the Supreme Court of British Columbia ordered the "disclaimer" of 40 pre-sale agreements in a troubled Langley strata project.

In Forjay Management, a receiver had been appointed to complete and sell all 92 units in the development known as "Murrayville House". Almost all of these units were covered by pre-sale contracts between buyers and the developer, and the receiver identified problems with many of these contracts: several of the units had more than one contract, i.e. the developer had tried to sell the same unit to more than one buyer; and other contracts appeared to be "insider" deals for less than fair market value.

Of the 151 pre-sale contracts, the receiver viewed 40 as straightforward, and applied to Court for directions to complete these 40 sales. Since these contracts had been entered into, however, real estate prices had risen dramatically, and the developer's lenders objected to these sales, arguing that the units should instead be put back on the market for sale at current prices.

The Court agreed with the lenders. Since a court-appointed receiver is not bound by contracts entered into by the company, the Court directed the receiver to disclaim these pre-sale contracts and re-market the units, ruling that such a disclaimer would clearly increase the value of the assets, to the benefit of the developer's creditors, and was not unduly unfair to the buyers.

Not surprisingly, many of the buyers disagree with that assessment. An appeal to the British Columbia Court of Appeal has recently been filed by several buyers, and so the status of pre-sale contracts will now receive scrutiny from the province's highest court.

Stay tuned!

Buyers and others dealing with troubled real estate developments are advised to consult experienced insolvency lawyers to ensure that their interests are protected.

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