New Wildfire Clause just in time for Fire Season

Fire Season is Here Again!

If you watch the news, you know that we hitting fire season again. Northern BC has had major issues and Fort Nelson is well involved. Harrison Lake fire has spread to over 3 hectares.
Last year CADREB Directors sent a request for BCREA and BCSFA to create a clause to help Buyers and Sellers deal with the issue of Fire Insurance refusals due to proximity to Wildfires. BCFSA did not feel that the public would benefit from going in this direction. They have now released a clause to deal with this important issue.

New Wildfire Clause for Real Estate Transactions
 
Date: May 15, 2024
 
Distribution: All Real Estate Trading Services Licensees
Advisory Number: 24-013

Purpose

BC Financial Services Authority is issuing this Advisory to notify trading services licensees of a new optional contract of purchase and sale (“CPS”) clause available on the Real Estate Knowledge Base.

Background Information

Real estate transactions set to complete in an active wildfire zone may be delayed or collapse due to the inability of buyers to obtain property insurance (including fire coverage), and by extension, mortgage financing. The impacts of wildfires serve as a reminder of the increasing financial risk consumers face due to natural catastrophes and climate-related risks (“NCCR”) events. NCCR poses risks to both consumers of real estate services and real estate licensees. Publishing a wildfire-related CPS clause is one of the steps BCFSA is taking to address NCCR in real estate transactions and across the financial services sector.

Where a real estate transaction is affected by a wildfire, consumers face significant uncertainty, risk, and distress. Using the wildfire clause in a CPS for a transaction may help manage consumer uncertainty from the outset, particularly for transactions scheduled to complete during wildfire season for a property in a typical wildfire zone.

Awareness of the clause and the impact of wildfires on real estate transactions is important for trading services licensees across the province. Licensees may have seller clients who are impacted as they are selling or buying in an area impacted by wildfires or have buyer clients who are buying or moving from and selling property in a wildfire area.

With the increasing frequency and severity of NCCR events, including wildfires, licensees are increasingly relied on by their clients as a source of information, advice, and services to help them make informed choices to better protect themselves and their assets.

Information about the Wildfire Clause

It is important for licensees to have discussions with both buyer and seller clients about the potential impact of a wildfire on a transaction, and ways that these impacts could potentially be mitigated through the CPS.

• The clause allows for one extension of the completion, adjustment, and possession dates in a CPS, up to a maximum of 30 days, if a wildfire prevents the buyer from obtaining fire insurance for the property. The length of the extension is 30 days after the original CPS dates. However, where a buyer obtains insurance before the end of the 30-day extension, the clause requires the buyer to immediately notify the seller and provides the seller with the option to accelerate the completion date to a date that is five business days after the buyer provides notice. The clause may be modified to provide for an extension of more or less than 30 days if the parties mutually agree. If the clause is being modified to provide for an extension of more than 30 days, legal advice should be obtained on the timeframe to avoid creating a clause that is void for uncertainty. The clause covers wildfire threats that prevent a buyer from obtaining fire insurance. It does not include floods or other NCCR events.
• The clause does not automatically release the buyer from their obligations under the CPS. A buyer must be able to show they made best efforts to obtain fire insurance and did not wait until the last minute to try to get fire insurance. This is a high standard. A prudent licensee will advise their client to (a) include a Fire/Property Insurance condition in the CPS, (b) get binding fire insurance coverage as soon as possible, and (c) if fire insurance cannot be obtained, keep a log of all phone calls and emails to insurance brokers in attempting to obtain fire insurance.
• The clause references fire insurance “on terms and rates that are commercially reasonable”. Some insurers may be willing to offer fire insurance for a short duration (e.g., 30 – 60 days) to aid in the completion of a sale in a high-risk area for a significant premium (i.e., cost). Whether any such available terms and rates are “commercially reasonable” will depend on the facts of each case, including property location and other underwriting considerations.
• If used, the parties should be advised to seek legal advice regarding how it may affect any related transactions that are closing on or near the original completion date or offers that they may make on the purchase of another property.
• The clause does not address damage to the property from wildfires. Damage to the property is addressed through other CPS terms as well as the common law.

The optional wildfire clause can be found on BCFSA’s Real Estate Knowledge Base, along with other optional clauses. A prudent trading services licensee will ensure that they discuss with their buyer and seller clients the option of including both a Fire/Property insurance condition precedent and BCFSA’s new wildfire clause.

Key Risks and Independent Professional Advice

The optional wildfire clause addresses the real estate transaction and provides a framework to reduce potential uncertainty. There are several other issues which may arise depending on the specific circumstances and the parties’ needs. These issues will require a licensee to use their professional judgement and expertise to identify in discussion with their client.
There are several matters connected to wildfires and real estate transactions that are outside of a trading services licensee’s expertise.[1] These matters can arise whether a licensee is acting for a seller or a buyer. Fundamental to buyer and seller clients’ understanding the risks related to a transaction impacted by a wildfire will be speaking to insurance brokers, financing providers, and lawyers.  

It is important for real estate licensees to talk to their seller or buyer clients about the risks associated with using or omitting CPS clauses, including the wildfire clause and a Fire/Property insurance condition. Both buyers and sellers will need to consider the impacts to insurance, financing, any upcoming costs to be adjusted such as property taxes or strata levies, and any related real estate transactions, to name a few.  

Additional Information

BCFSA’s Real Estate Knowledge Base has a dedicated clauses resource for licensees looking for a particular clause to use in a CPS. In addition to the new wildfire clause, the Real Estate Knowledge Base includes an optional Fire/Property insurance condition. For ease of use, BCFSA has sent the new wildfire clause to WEBforms for future publication on their site.

BC Wildfire Service tracks wildfire season as being from April 1 to October 31. B.C.’s 2023 wildfire season was the most destructive on record and resulted in ~208 evacuation orders which affected ~24,000 properties, and ~386 evacuation alerts which affected 62,000 properties.

BCFSA is aware of this issue not only from its regulation of real estate licensees, but also from its regulation of insurers and its work on managing uncertainty and building resilience in the B.C. financial services sector in light of NCCR.

See BCFSA’s Legal Update 2024 module on Climate Change and Natural Catastrophes for additional information.

For questions or more information about the new optional CPS clause, please contact a Practice Standards Advisor.

[1]Section 30(d) of the Real Estate Services Rules [duty to advise a client to seek independent professional advice on matters outside of the expertise of the licensee].
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