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Cash Back Clauses
BCFSA recently published an Advisory regarding the use of ‘cash back’ clauses in real estate transactions. When cash back arrangements are not recorded in the Contract of Purchase and Sale or are otherwise concealed, it can pose serious risks to both consumers and professionals in the industry.
What are cash back clauses?
A cash back clause typically involves a buyer agreeing to pay more than the listed price for a property. However, the inflated price is subject to a side agreement in which the seller agrees to return a portion of that inflated price to the buyer in cash once the sale is finalized. This side agreement to return a portion of funds is often kept separate from the official Contract of Purchase and Sale, making it invisible to lenders.
In contrast, there may be cash back arrangements that are included in a Contract of Purchase of Sale or a Pre-Sale Contract and are disclosed to the lender. One popular example is a cash back clause for decorating expenses used by real estate developers. These arrangements are not the subject of this article or the Advisory, which specifically concern agreements that are intentionally concealed to avoid disclosure of the true nature of the transaction.
Why are they problematic?
Undisclosed cash back clauses can amount to mortgage fraud. Lenders rely on accurate property values to determine loan amounts. If the lender is not aware of the cash back arrangement, they may approve a larger loan than they otherwise would, based on an inflated sale price.
The arrangements may also be used for money laundering purposes. More broadly, undisclosed cash back clauses can distort market prices, potentially driving up costs for future buyers. In turn, this causes serious damage to the reputation and credibility of the real estate industry.
Real estate licensee considerations
As a real estate licensee, you have several responsibilities to your clients as set out in Part 3 of the Real Estate Services Rules. In addition, you are expected to uphold the standards of conduct set out in Section 35 of the Real Estate Services Act.
Participating in a fraudulent cash back scheme constitutes both professional misconduct and conduct unbecoming a licensee. Doing so will result in regulatory scrutiny, including likely disciplinary action.
As a result, it is recommended that you do not participate or facilitate any cash back clauses of this nature. If a buyer or seller asks you to participate in this type of cash back scheme, you should decline. If you suspect a suspicious transaction, you must report it to FINTRAC. If you suspect criminal activity, you should also contact the police.
FAQs
Q: What about the various promotions used by developers to market their properties? These could include decorating allowances, offering money to pay strata fees, or a moving in allowance. Do these constitute cash back arrangements as described in the Advisory?
A: Generally, no. Typically, developer promotions listed are included in the Pre-Sale Contract or Contract of Purchase and Sale and are disclosed to the lender.
The Advisory specifically concerns cash back arrangements that are intentionally concealed to avoid disclosure of the true nature of the transaction. This means they are not included in the Pre-Sale Contract or Contract Purchase of Sale and are not disclosed to all parties of the transaction, most notably the lender.
