The Tide May Be Turning on Pre-Sale Litigation

By Seva Batkin

The economic downturn wreaked havoc on the pre-sale condo market in B.C. Buyers who were previously lining up around the block to snap up units in the new pre-sale projects, began looking for ways to get out of their contracts. As projects completed, buyers found that their units were appraised at less than the purchase price and additional, sometimes quite substantial, downpayments were required to obtain financing. Some buyers refused to complete and, predictably, some disputes ended up in court: developers suing for damages resulting from having to re-sell units at a discount, and buyers suing for the return of their deposits.

REDMA – the Real Estate Development Marketing Act – played a starring role in these court cases. Buyers argued that developers breached one or more provisions of REDMA, rendering their purchase contracts unenforceable. For example, buyers alleged that a developer failed to deliver a Disclosure Statement at the time of purchase, failed to deliver an amendment to a Disclosure Statement when material facts changed, or otherwise omitted or misrepresented material facts in the Disclosure Statement or an amendment.

In a previous article – Pre-sale litigation – where are we at? – we explained the REDMA regime and summarized the state of the law to that point. At that time, the courts appeared to focus heavily on the notion that REDMA is "consumer protection legislation", and thus required perfect compliance from developers, failing which, the contract would be found unenforceable. In other words, courts displayed a willingness to err on the side of the buyers.

Over the past three months, several important decisions were issued by the Supreme Court of Canada, B.C. Court of Appeal, and B.C. Supreme Court, all of which indicate that the tide may be turning towards a more reasonable, common sense approach to REDMA. It appears that courts are starting to recognize that REDMA should not be used to allow buyers to escape from pre-sale contracts that they now find improvident because of a change in the market by seizing "on any trivial or unimportant fact that was not disclosed". Only omission or misrepresentation of a material fact – a fact that, objectively, would likely be considered important by a reasonable buyer in making a decision to buy – should render a contract unenforceable. More generally, the courts appear less willing to accept "excuses" and appear more likely to hold buyers to the contracts they made irrespective of the state of the economy.

We discuss these cases below.

Supreme Court of Canada: Not Every Fact is Material

On May 11, 2011, the SCC released its judgment in Sharbern Holdings Inc. v. Vancouver Airport Centre, where it considered the pre-sale regime under the Real Estate Act, a predecessor to REDMA in effect until May 13, 2004. The two regimes are substantially similar.

The case arose out of a project where Mariott and Hilton strata-titled hotels were developed on the same property by the same developer. Although the hotels were physically connected, the two developments were separate and units were sold under different disclosure statements at different times. For the Mariott, the developer offered buyers an guaranteed return and charged a management fee. For the Hilton, no guarantee was offered and the management fee charged by the developer was lower. The Hilton disclosure statement did not disclose that the Mariott arrangements were different.

Ultimately, the Hilton buyers suffered losses and sued the developer for failing to disclose material information about the difference in financial arrangements, which they alleged placed the developer in a conflict of interest because it provided an incentive to favour the Mariott owners over the Hilton owners. Although successful at trial, the owners were unsuccessful at the Court of Appeal, which found that the differences in financial arrangements between the two hotels were not material information that had to be disclosed.

The SCC found that although the rule of caveat emptor (buyer beware) did not apply to such regulated fields as pre-sales of real estate, this did not mean that the disclosure obligations of developers were unlimited such that unhappy buyers could "seize on any trivial or unimportant fact that was not disclosed". Rather, statutory obligations, placed a disclosure burden on developers, but also provided "a balance between too much and too little disclosure". Indeed, the Court noted that "it is not in the interests of investors to be buried "in an avalanche of trivial information" that will impair decision making".

The Court held that the onus is on the buyer to prove that, either as a matter of common sense or on the evidence, a fact omitted from or misrepresented in a disclosure statement is material in the following sense:

An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable [buyer] in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable [buyer] as having significantly altered the total mix of information made available.

Not "all facts which a reasonable [buyer] might consider important" are material!

Importantly, the standard of materiality is objective and, generally, it does not matter what the specific buyer or the developer considered to be material. However, to determine materiality, court will take into account "all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors". For example, a court may take into account a strong economic environment at the time of the purchase in determining whether a particular piece of information would have been important to a reasonable buyer at that the time. Thus, the court will compare what was omitted/misrepresented to what was disclosed and determine if the omission/misrepresentation was material.

Ultimately, the SCC found that the trial judge erred in three important respects:

  1. in assuming that the conflict of interest, which did exist, was material;
  2. in failing to consider all evidence to determine whether the conflict was material; and,
  3. in placing the burden on the developer to prove that the omitted fact was not material.

The SCC found that the mere existence of a conflict of interest was not inherently material and, in this particular case, the disclosure of the conflict of interest would not have made a difference to a reasonable buyer in light of the strong economic environment at that time, the projected occupancy for the Hilton hotel, and other financial incentives offered to the Hilton buyers.

B.C. Court of Appeal: Actual Evidence is Required

In Mariner Towers Limited Partnership v. Imani-Raoshanagh, the buyer purchased two units in Mariner Towers, ultimately negotiated two extensions of completion dates, and then still refused to complete. A further "Accommodation Agreement" was reached whereby the buyer would be released from previous breaches in exchange for his parents agreeing to buy one of the units. The parents also did not complete that contract. The developer sued for damages.

At trial and appeal, the buyer unsuccessfully made the following claims:

  1. that, contrary to section 15 of REDMA, he was not provided with a disclosure statement. He did not produce any evidence to explain why he signed an acknowledgment that the disclosure statement was provided and that he had reasonable opportunity to review it;
  2. that, contrary to sections 11 & 12 of REDMA, the developer did not make adequate arrangements to assure that he would have title to the properties or to ensure payment of utilities and other services. However, he did not produce any evidence on this point; and
  3. that the developer had failed to obtain an exemption from obtaining satisfactory financing commitment as required under Superintendent's Policy Statement #6. However, no such exemption was necessary as satisfactory financing commitment was in fact obtained.

On appeal, the buyer also attempted to raise a new argument that the developer breached section 16 of REDMA by failing to issue an amendment to the disclosure statement to advise of the extension of construction completion dates and that, if such an amendment was issued, he would have been "entitled to withdraw from the contracts in what appears to have been a falling real estate market."

Although the buyer relied on the decision in Chameleon, the court found that his argument was doomed to fail because the parties entered into an Accommodation Agreement which expressly affirmed the buyer's obligations under the original contracts in exchange for concessions by the developer. The buyer could not now argue that that his obligations, which he confirmed in the Accommodation Agreement, were invalid at that time and he was not bound by the agreements.

BC Supreme Court: No Excuses

In Mode Properties Ltd. v. Esposito, decided on June 6, 2011, a buyer purchased a unit for her son in a pre-sale project. She refused to complete and the developer sued for damages. The buyer argued that the contract was invalid because (i) it was not accepted in the time provided for acceptance; (ii) her son, for whose benefit the contract was entered into, was a minor at that time and then repudiated the contract when he became an adult; and (iii) the developer failed to comply with REDMA. On all grounds, the court found for the developer.

On the first ground, the court found that the buyer either consented to the extension of the acceptance date or the agreement signed by the developer after the acceptance date was a counter-offer which the buyer accepted. The conduct of the buyer, treating the contract as a valid binding contract, was an important factor.

On the second ground, the court dismissed the claim against the son but found that the buyer was liable under the contract because she expressly agreed to "go on title" "for mortgage purposes" and because the contract included a clause that provided that "If the Purchaser is more than one person, all obligations of the Purchaser will be joint and several." Although the court found that the buyer and her son "may have felt pressured" to purchase the unit, it refused to accept that as an excuse because the "pressure she felt resulted from her own desire to complete a purchase while units remained available".

With respect to REDMA, the buyer unsuccessfully made three arguments:

  1. Because the contract was based on a "counteroffer" provided by the developer, her acknowledgement of receiving the disclosure statement did not count under section 15(1)(c) of REDMA.

    The court found that REDMA does not "tie" a disclosure statement to "any specific contract", nor requires that a disclosure statement is provided any every time an offer or counteroffer is made. All that matters is that the buyer receives a disclosure statement before entering into a contract.
  2. On October 30, 2007, the buyer was provided a disclosure statement issued October 18, 2007. In the fall of 2007, the Superintendent Issued Policy Statements 14 and 15, which came into effect on November 1, 2007. On April 28, 2008, the developer filed an amended disclosure statement, where it complied with the new policy statements. The buyer argued that the developer breached REDMA by failing to provide, immediately after November 1, an amended disclosure statement that complied with the new policy statements.

    The court found that this claim was precluded by the fact that both new policy statements specifically provided that any disclosure statements filed before November 1 continued to comply with REDMA. Amendments to comply with the new policy statements were only necessary if an amendment was otherwise being made after November 1. Accordingly, the buyer received a valid disclosure statement.
  3. The buyer alleged that the amended Disclosure Statement did not comply with REDMA or the policy statements in effect at that time.

    First, she argued that it was invalid because she did not initial a statement on the front page of the amended disclosure statement which indicated that the property was not yet completed. The court rejected this argument finding that the buyer was well aware that the property was not yet completed as she received and reviewed the original disclosure statement. Furthermore, the court noted that REDMA did not require that buyers acknowledge receipt of amendments to disclosure statements.

    Second, she argued that the amended disclosure statement failed to disclose the material fact of developer obtaining financing for the project via a construction mortgage. The court found that this was not a material fact that had to be disclosed.

    Finally, she argued that, as a result of the new policy statements, the developer was required to and failed to adequately describe in the disclosure statements provisions in the purchase agreement relating to extensions of time. The court rejected this argument, finding that the language of the policy statements was "advisory" in the sense that such information should have been provided, but was not mandatory.

All in all, although the buyer (or her lawyer) came up with various breaches of REDMA and other arguments, the court clearly indicated that it would not accept such creative, but frivolous excuses and would hold the buyer to the contract she made.

BC Supreme Court: Applying Sharbern, Delays Must be Material

In 299 Burrard Residential Limited Partnership v. Essalat, which was released on July 26, 2011, the buyer purchased a $6 million unit in the Fairmont Pacific Rim Residences in August, 2007, and refused to complete in April, 2010. The developer sued to keep the $1.1 million deposit.

The buyer raised a REDMA defence, arguing that the developer should have filed an amendment when it found out that completion would likely be delayed from the estimated date of September 2009 (as shown in the disclosure statement provided at the time of sale) to December 2009. The buyer relied on the decisions in Chameleon Talent and Maguire, in both of which courts found contracts unenforceable because substantial delays in completion dates were not brought to buyers' attention via amendments to disclosure statements.

This is the first B.C. case considering the SCC decision in Sharbern (discussed above) and the court found that although Sharbern was decided with respect to the Real Estate Act, rather than REDMA, it was applicable to the extent that the Court "addressed the elements necessary to establish that there had been a false or misleading statement of a material fact in a disclosure statement" and "gave some guidance as to the general approach courts should take in considering issues arising under regulatory legislation such as REDMA". The court held that, although REDMA expressly defined "material fact", Sharbern was relevant to determining "whether a statement contained in a disclosure statement concerning a material fact is false or misleading".

Relying on Sharbern, the court held that to succeed, the buyer had to establish either "as a matter of common sense" or on evidence that "there was a substantial likelihood that the undisclosed delay in completion would have had actual significance to a reasonable purchaser in making a decision whether to purchase a unit."

The court expressly rejected the buyer's argument that "anything more than a trivial change in the completion date meant that the statement contained in the Disclosure Statement had become false and that the plaintiff was therefore required to file an amendment to the Disclosure Statement". On the contrary, the court agreed that the word "estimated" used in the disclosure statement indicated that there was some possibility that actual completion date could vary.

Although the court did find that at the time that the buyer signed the purchase agreement the developer was already aware of the likely delay, it nevertheless distinguished Chameleon and Maquire and found that there was no material misrepresentation. The key was that "in this case there is no evidence that the delay that was experienced was in any way unusual or arose from anything other than the normal construction delays that a person would reasonably expect to be encountered in a construction project of this scale." There was no evidence that such a "delay would have assumed actual significance in a reasonable investor’s decision whether to purchase".

Furthermore, under Sharbern, the court also considered "surrounding circumstances" and took into account that the buyer's real estate agent was informed of December completion date prior to the execution of the purchase agreement, and that when the developer advised buyers of delay in September, 2009, it received no complaints. Although neither of these facts were conclusive because the court had to consider materiality from the perspective of a theoretical, reasonable buyer, they informed the court as to what may have been expected by buyers.

At the end, the court found that the developer was entitled to keep the deposit.