It is common for developers to undertake real estate developments using limited partnerships formed specifically for that purpose. They generally do so in order to provide limited partners with limited liability, to allow for the pass through of profits and losses directly to limited partners and to facilitate raising capital from investors and financing from lenders. In British Columbia, limited partnerships are formed upon the filing of a certificate of limited partnership with the Registrar of Companies. The certificate must contain certain information prescribed by the Partnership Act (British Columbia) (Act) and third parties are entitled to rely on the information set out in the certificate.

The general partner of a limited partnership has unlimited liability for the debts and obligations of the limited partnership, whereas a limited partner’s liability is, subject to certain exceptions, limited to the amount of property (including cash) the limited partner contributes or agrees to contribute to the capital of the limited partnership. For this reason, the general partner is commonly a company with no assets (other than its interest in the limited partnership) and the limited partners contribute substantially all of the limited partnership’s capital.

The limited liability protection otherwise available to limited partners may be diminished if there is a change in the amount or character of the limited partners’ capital contributions, but the certificate is not amended to reflect the change. Unfortunately, the requirement to amend the certificate is often overlooked.

The Act provides that a limited partner is liable for:

• the difference, if any, between the actual amount of the limited partner’s contribution and the amount stated in the certificate as having been made; and
• any unpaid contribution that the limited partner agreed in the certificate to make in the future at the time and on the conditions, if any, stated in the certificate.

The Act also provides that a limited partner is not entitled to the return of any part of the limited partner’s contribution until the certificate is cancelled or amended to reflect the withdrawal or reduction. The potential liability arising from a failure to comply with this requirement can be significant. For example, it is common for a limited partnership to sell all the strata lots in a real estate development and use the proceeds to pay out all its known liabilities and return the limited partnership’s capital to its partners. However, if the certificate is not cancelled or amended to reflect the return of the capital contributions, and the limited partnership subsequently incurs an unanticipated liability (such as a claim for a construction defect), the limited partners could be compelled to return their capital contributions to the limited partnership to satisfy such liability.

In light of this, if there is to be any change to a limited partner’s capital contribution (including any return of capital to the limited partners), it is important to ensure that the necessary amendment to the certificate is prepared and filed or, if the limited partnership is being wound up, that the certificate is cancelled.