Sale of a Business

Guidelines
Published on
a close up of a brick building

Purpose

The Real Estate Services Act (“RESA”) defines a trade in real estate as including “a transaction for the purchase or sale of real estate, for the leasing of real estate, or for any other form of acquisition or disposition of real estate.” Often when businesses are sold, the transactions include a trade in real estate including the sale of real property or transfer of a lease, even where a standard contract of purchase and sale or rental assignment is not used.

Because the sale of a business includes more than just real property, and such sales may be completed by way of an asset sale or sale of the shares in a business, it is important you understand when a real estate licence is required, and when it is not. You must also ensure that when facilitating a transaction that includes the sale of a business where a real estate licence is required, that you do not act outside your area of expertise.

A “security” is defined in the Securities Act as including among other things, a share or an investment contract. As a licensee, it is prudent to consider the terms of any purchase contract and the interest being acquired in the property in order to assess whether the contract could be governed under the Securities Act or involve additional consideration outside of your expertise; you should seek legal and/or professional advice if you are unsure.

  1. Understand what activities are governed by RESA
  2. Act within your area of expertise
  3. Understand when the Real Estate Development Marketing Act (“REDMA”) applies

Understand What Activities Are Governed by RESA

(a) When you are governed by RESA

When a business is sold, whether by way of an asset sale or a share sale, the sale often includes everything that the company owns. This can be real estate, office furniture, electronics, signage and even the company name and client list.

Where a real estate professional provides real estate services to a party to a trade in real estate, all duties owed to the client under RESA and the Rules are in effect. These real estate services include rental property management services and trading services. Each of these services in turn are defined in relation to real estate and a trade in real estate, also defined in the RESA.

When a business is sold by way of an asset sale, real estate or rental real estate is included in a basket of business assets, and a licensee is facilitating the sale, RESA will apply.

When a business is sold by way of a share sale with a real estate component and/or a deposit is held outside a licensee’s related brokerage, the licensee involved may still be providing real estate services and must do so by or on behalf of the brokerage to which they are licensed, and in compliance with RESA. Where a licensee is acting under RESA, the Rules require a licensee to advise the client to seek independent professional advice on matters outside of the expertise of the licensee. If the purchase contract provides that the deposit will be held at your brokerage, it must be held in the brokerage’s statutory trust account under stakeholder provisions as set out in RESA.

(b) When you are not governed by RESA

Some real estate licensees may act as business brokers where they are dealing in transactions where no real property is involved. Under RESA, no licensing is required for an asset sale with no real estate component, therefore your brokerage is not permitted to hold deposit funds in their statutory trust account. RESA states that a brokerage must ensure that no money, other than money held in relation to real estate services, be paid into its brokerage trust account. If the brokerage receives the deposit in this circumstance, it must be held in a separate trust account other than the brokerage’s statutory trust account. If the deposit will be held by a third party, the purchase contract must outline who is holding the deposit and where.

It is also imperative that you do not use any standard form or other contract which references RESA and the provisions of the Act and Rules when a transaction does not constitute a trade in real estate. Using forms that lead consumers to believe they are offered protections under the legislation would be misleading and could result in discipline.

Act Within Your Area of Expertise

The Rules require that you advise your client to seek independent professional advice on matters outside your area of expertise. Commercial real estate encompasses transactions with various

business operations. These operations often include gas stations, hotels, office towers and entire strata complexes. There are many different kinds of assets that may be included in these types of sales. As well, matters such as inventory lists and valuations, tax assessments, the transfer of licenses and/or intellectual property, employment and labour law matters respecting staff, and allocation of purchase price may impact the transaction and the parties to the trade.

If you are unfamiliar with the business, the transaction has many assets that require special attention, you are unsure if the transaction itself constitutes a trade in real estate, or you are providing real estate services, it is recommended that you talk to your managing broker and then if appropriate have your client seek out an expert in that field to assist them. Depending on the scenario, this may mean having your client get legal or accounting advice or may mean working alongside a real estate professional with expertise in that area of real estate. In some cases, you may need to refer your client to another real estate professional to protect their interests.

Understand When REDMA Applies

REDMA may apply where the business being sold is itself a developer as defined in REDMA, or if the shares being sold are cooperative interests or some other type of development unit as defined in REDMA. Consider also BCI 45-512, a copy of which is available on the website of the British Columbia Securities Commission where an “eligible real estate security” is involved.

In this situation, a new or amended disclosure statement under the REDMA may be required. For example, if the legal identity of the developer changes or if the same corporate developer continues but under new ownership and with new directors or other material changes in the offering.

Your licensees and their clients should ensure that they obtain legal advice if they are unsure whether or how REDMA may apply.

Managing Broker Considerations

Commercial brokerages serve a diverse clientele. Some clients are looking to acquire or dispose of office buildings, gas stations, or restaurants. Whether your brokerage specializes in one area, or your real estate professionals work with a variety of businesses, ensuring that they understand when a transaction is governed under RESA and when it is not, is important.

Generally- speaking when a business is sold, and there is a trade in real estate included or real estate services provided, that transaction is governed by RESA unless an exemption from licensing is provided in the Regulation. The RESA will apply to every licensee who provides real estate services in such a transaction even if the licensee would otherwise be exempted under the RESA or regulations from the requirement to be licensed. If in the transaction there is no real property or real estate services provided, a license is not required. In that case, if a real estate licensee is involved, they must inform the consumer that they are not governed by RESA for the purposes of the transaction.

Deposits must also be considered when you are operating outside of RESA and representing a client that is entering a business sale/purchase transaction that is not a trade in real estate (as described above). The brokerage cannot hold those funds in its statutory trust account. Only funds related to a trade in real estate may be deposited there.

As a managing broker you must also ensure that your licensees do not operate outside their area of expertise. If a licensee only has experience in selling a restaurant, they may not have the requisite knowledge to competently represent a consumer in the sale of a gas station. Should an issue arise due to that lack of knowledge, the real estate professional may be subject to sanction under RESA.

A comprehensive policies and procedures manual will ensure your real estate professionals understand when they are operating under the requirements of RESA and when they are not.

Relevant Cases

Case #1

The licensee was instructed by the owner of a business to market a sale of business assets and assignment of a lease. The licensee stated that the owner did not want to list the sale on MLS and had instead placed an advertisement on Craigslist putting the licensee’s home number as the contact. The licensee met with two individuals who wished to jointly purchase the business assets and assignment of lease in the name of a company, which the licensee helped incorporate at their request. One of the potential buyers subsequently withdrew from the transaction. Documentation, including two versions of a contract of purchase and sale and a sublease, was prepared but not signed. Several payments were made in respect of the transaction, including a deposit, the purchase price, and rent. The licensee did not deliver any of the payments he received to his brokerage. The licensee stated that the seller instructed him to keep the some of the money as partial reimbursement towards restoration costs that the licensee had incurred on the seller’s behalf. Subsequently, the licensee and the buyer each claimed that the other had communicated that the transaction would not be completed.

The licensee was found to have:

  • provided real estate services other than on behalf of the brokerages in relation to which he was licensed,
  • accepted remuneration in relation to real estate services from persons other than the brokerages,
  • failed to promptly pay or deliver to the brokerages all money held or received from, for or on behalf of a principal in relation to real estate services,
  • failed to obtain a written agreement signed by the principals to the contract and separate from the contract of purchase and sale, pursuant to which the principles agreed that sections 27(1) and 27(2) [payment into trust account] of the RESA did not apply,
  • failed to keep his managing brokers informed of the real estate services being provided and other activities being performed on behalf of the brokerages,
  • provided rental property management services on behalf of the property owner by making payments to third parties and accepting rent and issuing a receipt for the same,
  • failed to act in the best interests of his client(s),
  • failed to act honestly and with reasonable care and skill, and
  • before providing trading services to or on behalf of the buyer, failed to disclose to the buyer, the nature of the representation that he would provide the party.

Contraventions: Sections 3(1)(a) [Requirement for licence to provide real estate services], 7(3)(a) and (b) [Relationships between brokerages and other licensees], 27(1)(a)[Payment into trust account], and 27(4) [Payment into trust account] of the RESA.

Sections 29 (formerly 3-2(2)(a)) [Associate broker and representative responsibilities], 30(a) (formerly 3-3(a)) [Duties to clients], 33 and 34 (formerly 3-4) [Duty to act honestly and with reasonable care and skill], and 54 (formerly 5-10) [Disclosure of representation of trading services] of the Rules.

Read the Full Case

Applicable Section of RESA/Real Estate Services Regulation/Real Estate Services Rules

Section 2, Act, Introductory Provisions

Section 3, Act, Licensing

Section 7, Act, License Levels, Categories and Relationships

Section 35(1), Act, Misconduct by licensee

Section 30, Rules, Duties to clients

Definitions

trade in real estate“ means

  1. a transaction for the purchase or sale of real estate, for the leasing of real estate or for any other form of acquisition or disposition of real estate,
  2. an assignment of a contract for purchase, sale or lease of real estate, or a transaction in relation to such an assignment, or
  3. prospective trade in real estate within the meaning of paragraph (a) or (b);

“real estate” means

  1. real property,
  2. regardless of whether it is or is not an interest in real property, a cooperative interest, shared interest in land or time share interest, as these are defined in the Real Estate Development Marketing Act, and
  3. a right in relation to real property that is defined by regulation to be real estate,

but does not include a right in relation to real property that is excluded by regulation;

real estate services” means

  1. rental property management services,
  2. strata management services, or
  3. trading services;

“trading services” means any of the following services provided to or on behalf of a party to a trade in real estate:

  1. advising on the appropriate price for the real estate;
  2. making representations about the real estate;
  3. finding the real estate for a party to acquire;
  4. finding a party to acquire the real estate;
  5. showing the real estate;
  6. negotiating the price of the real estate or the terms of the trade in real estate;
  7. presenting offers to dispose of or acquire the real estate;
  8. receiving deposit money paid in respect of the real estate
  9. but does not include an activity excluded by regulation;