A person must have “capacity” in order to enter into a legally binding contract with respect to land. Two of the most common contracts with respect to real estate include a Contract of Purchase and Sale which is used to purchase or sell real estate or a Residential Tenancy Agreement which is used to lease real estate.
Mental capacity is the ability to make decisions and understand the consequences of those decisions. The determination of whether a person has capacity is a legal test (although medical evidence is sometimes helpful) with respect to whether or not a person has the ability to understand and manage their own affairs. The assessment is highly individualized and is fact specific. Certain acts or decisions require more capacity then others. For this reason, the degree of capacity required varies depending on what the individual is doing (Ex. entering into a contract, making a will, making a power of attorney, dealing with financial affairs, dealing with personal or medical affairs, etc.). Capacity is also not black and white – a person who is starting to have a decline in mental capacity may have good days and bad days. Capacity may come and go and then come back again.
If an owner of land does not have capacity at the relevant time, his or her interest in the land cannot be dealt with (sold, leased, etc.) unless another person has been validly appointed to deal with the incapacitated owner’s assets. This can be done in two ways:
- Power of Attorney: An attorney may be appointed by the owner under the Power of Attorney Act while he or she still has capacity to make a power of attorney. In determining whether the owner has the capacity, the common law (court/judge-made law) as well as Sections 11 and 12 of the Power of Attorney Act must be considered. The process to make a power of attorney is generally relatively fast and inexpensive as compared to the committeeship process discussed below. Please note that the Land Title Act and Land Title Office have extremely strict rules for the form, content and execution of power of attorneys for use with respect to real estate. Accordingly, it is prudent to retain a lawyer with experience in estate planning and real estate transactions to prepare your power of attorney.
- Committeeship: A committee of estate may be appointed by the Supreme Court of British Columbia under the Patients Property Act after the owner has lost capacity. The committeeship application process is standardized and requires statutory declarations (sworn statements of facts) from at least two medical professionals confirming that the owner has lost capacity. This process can be quite time consuming and expensive, particularly if the application is contested (for example, if related parties do not agree on who should be appointed as committee).
Having an incapacity plan in place is extremely important. For example, consider the scenario in which a person (we will call him John) suddenly develops Alzheimer’s, loses capacity and needs to move from his private residence to a more supported living/care facility. If John created a power of attorney effective for dealing with his or her real estate prior to losing capacity, John’s attorney could promptly take the steps necessary to refinance and/or sell John’s home and use the proceeds to fund John’s ongoing care. If John did not create a power of attorney prior to losing capacity, the Supreme Court of British Columbia may appoint a committee of estate to handle the refinance and/or sale of John’s home. Until a committee is appointed, no one would be authorized to deal with John’s home (or bank accounts). Accordingly, John’s family and/or friends would have to pay for John’s care out of pocket during the interim period. Delays in appointing a committee may also affect John’s eligibility for the principal residence exemption from capital gains tax and the applicability of the speculation and vacancy tax, specifically whether John would be eligible for an exemption under the residential care exemption (for a period of up to 2 years) or the medical reason exemption. For more information regarding the requirements for these exemptions from the speculation and vacancy tax, please visit: https://www2.gov.bc.ca/gov/content/taxes/property-taxes/speculation-and-vacancy-tax/exemptions-speculation-and-vacancy-tax/individuals
If you have questions regarding the implications of the loss of capacity or incapacity planning, please feel free to reach out to one of our lawyers practicing in the area of estate planning, which can take months or years depending on the circumstances.
Author: Danielle (Dani) Brito
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of estate planning and estate administration at the following:Jennette Vopicka: firstname.lastname@example.org Danielle (Dani) Brito: email@example.com Jane Otterstrom: firstname.lastname@example.org Sasha Platz: email@example.com