Are Pre-Sale Deposits Protected in BC? Trust Rules and Deposit Insurance

Pre-sale buyers often hand over tens of thousands of dollars years before they get a key. With projects being delayed or cancelled, many are asking a simple question: what happens to my deposit if things go wrong?

The answer depends on where your deposit sits today. BC's Real Estate Development Marketing Act (REDMA) and the Insurance Act set out two different ways a deposit can be protected, and your disclosure statement and contract tell you which one applies.

The starting point: your deposit goes into trust

Under section 18 of REDMA, a developer who receives a deposit on a pre-sale unit must promptly place it with a real estate brokerage, lawyer, notary public or other prescribed person. That person holds it as trustee, in a trust account at a savings institution in BC.

The trustee holds the deposit for both the developer and you, and does not act as agent for either side. The money can leave the trust account only in the ways the Act allows, including:

• returning money paid into the account in error;
• paying it to you with the written consent of both you and the developer;
• paying it out on completion, or to the developer after you default, as described below;
• paying it to the developer under a deposit protection contract;
• returning it to you if you rescind under section 21 of REDMA (for example within the 7-day period after you sign);
• paying it out under a court order or the regulations.

Our article on the 7-day rescission period and your disclosure statement explains the cancellation right that applies in the first days after you sign.

When the developer is entitled to the money

Without a deposit protection contract, the developer normally receives the deposit at completion. The trustee must release it once the developer certifies in writing that you have no right of rescission and that the project has reached the completion milestones in the Act. In practice that means any required strata or subdivision plan has been deposited at the land title office, the approvals needed for lawful occupation have been obtained, and your interest in the unit has been registered with proof delivered to you.

The other route is default. If you fail to pay a later deposit or the balance when the contract requires, and the contract lets the developer cancel and keep the deposit, the developer can certify that it has cancelled and the trustee must release the deposit to it. Missing a deposit deadline is therefore a serious risk.

Deposit protection contracts: when the developer can use your money

Section 19 of REDMA allows a developer to use deposits for its own purposes related to the development, such as construction and marketing, but only if it first enters into a deposit protection contract (a form of insurance) for that deposit and gives you notice as the regulations require. The trustee releases the money once it receives the contract from the insurer and the developer certifies that you no longer have a right of rescission.

The Insurance Act sets minimum terms for these contracts:

• What is covered. The contract must cover the loss of your deposit, and any interest the developer agreed to pay, if the developer fails both to reach the completion milestones by the time set in your purchase agreement and to return the deposit as the agreement requires.
• You can enforce it. The contract is enforceable by you even though you are not a party to it, and even if the premium has not been paid.
• The developer pays. The developer is responsible for the premium and cannot charge it to you as a separate item.
• Paperwork. The insurer must give the trustee a copy, and once you notify it of a loss, it must give you claim forms.

If the project stalls, is cancelled or the developer fails

Where your deposit stands decides where you look first. If it is still in trust, the trustee can release it only in the ways listed above, for example on a valid rescission, with both parties' written consent, or under a court order. If it has been released to the developer under a deposit protection contract, your main protection is a claim under that insurance.

When a developer becomes insolvent, there may be court proceedings that affect the timing of any refund. Recent BC Supreme Court decisions show that whether a developer can still enforce pre-sale contracts can also depend on its disclosure obligations under REDMA, so the facts of your project matter. If you are still waiting for a completed unit, our article on completing a pre-sale condo covers the final stage.

What to check before you pay the next deposit

The disclosure statement and the purchase agreement should tell you how deposits are handled. Before you pay more, confirm:

• who the trustee is, and that your earlier deposits were paid into that trust account;
• whether the developer has a deposit protection contract, the insurer's name, and whether you received notice of it;
• the deposit schedule and the exact consequences in the contract if a payment is late;
• whether the developer agreed to pay interest on deposits;
• whether any amendments to the disclosure statement have been filed since you signed;
• the completion window and outside date, since those dates also drive the insurance coverage.

If any answer is unclear, get it in writing before you send more money.

Want to know how your deposit is protected before you pay more?

Our real estate lawyers can review your disclosure statement, purchase agreement and any amendments, explain how and where your deposits are held, and advise you on your options if the project runs into trouble.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.