Canada: The Effect Of Recent Litigation On The BC Real Estate Development Marketing Act

What is REDMA?

The British Columbia Real Estate Development Marketing Act ("REDMA") was brought in to force in 2005 primarily to protect consumers of pre-sale condominium projects against changes made by developers prior to project completion. REDMA applies to developments marketed in British Columbia, regardless of whether the property for sale is actually located in British Columbia.  It imposes obligations on developers to disclose prescribed information about their projects to purchasers and to keep purchasers aware of changes that occur after they have entered in to a purchase agreement but before construction is complete. REDMA creates special rights for purchasers that help to displace the traditional attitude of "buyer beware" in real estate transactions. This is especially important in the case of condominium pre-sales because the buyer is unable to physically inspect the property or conduct other important due diligence at the time of purchase.

Under REDMA, a developer is required to file a disclosure statement setting out all material facts relating to the development before commencing marketing activities. A developer must provide purchasers with a copy of the disclosure statement and reasonable time to review it before entering in to a purchase contract. REDMA gives purchasers 7 days to get out of a purchase contract, beginning when the disclosure is provided or the contract is entered, whichever happens last.

After filing an initial disclosure statement, developers are subject to an ongoing requirement to amend the disclosure whenever they become aware of a change to the material facts regarding the project. A disclosure amendment generally does not give the purchaser a right to terminate the purchase contract (known as the remedy of rescission), but serves to keep the purchaser informed about pre-construction changes to the property they have purchased. However, if a developer fails to amend its disclosure in the event of a change, the purchaser is likely entitled to rescission.

In some cases, the developer is required to make 'new' disclosure. The circumstances that attract this obligation are serious ones, so they come with a right for the purchaser to rescind the deal. For example, if the identity of the developer changes (such as through a corporate amalgamation) or the developer goes bankrupt and a receiver, liquidator, or trustee in bankruptcy is appointed, then a pre-sale purchaser is automatically entitled to terminate a purchase agreement without penalty within 7 days of receiving notice of the new information. This provides a great deal of protection to purchasers in the event that the developer falls on hard times.

Background: the Condominium Pre-sale Market and Increasing Litigation

Pre-sales of condominiums are particularly vulnerable to changing market and labour conditions because of the delay between the time of purchase and the time when construction is actually completed. In the early years of REDMA, the booming condominium market made purchasers more forgiving of unexpected pre-construction changes to their units for the simple reason that rising property values created an incentive for purchasers to honour their agreements. In the event of a dispute, the purchaser or the developer could simply flip the property for more than the original sale price. 

The situation became less easy-going when property values began to fall sometime around 2008. Consumers became disappointed at the prospect of overpaying for something worth less at the time of completion and, as a result, started looking for ways to get out of their pre-sale purchase contracts. REDMA provided just that opportunity in certain cases. As a result, REDMA-centred litigation has increased over the past several years and the judgements have begun to shed light on the standard of disclosure required of developers and the degree of change necessary to allow a purchaser to walk away from a pre-sale purchase agreement. In some cases, the courts have moved toward protecting developers, but overall, the case law is heavily biased toward consumers. It is clear that the law in this area is still in flux, as many issues have yet to be litigated and others, including some discussed below, are working their way up through the court appeal process. Nevertheless, developers and consumers alike can learn some important lessons from the litigation of the past few years.

Lessons from Recent Litigation

1.            More clarity on the standard of materiality

When trying to determine whether a fact or change is "material" enough to require disclosure, the BC Court of Appeal in 299 Burrard Residential Limited Partnership v Essalat, (2012 BCCA 271) determined that the traditional, common law standard of materiality does not apply under REDMA. This had been a source of confusion because the common law standard applied under the old Real Estate Act. Under REDMA, unlike the Real Estate Act, the term "material fact" is defined and means, among other things, "a fact, or proposal to do something, that affects, or could reasonably be expected to affect, the value, price, or use of the development unit or development property."1 Further, a "misrepresentation" is defined as a false or misleading statement of a material fact, or an omission to state a material fact."2

The BC Supreme Court has provided further guidance in Bosa Properties (Esprit 2) Inc v Kim, 2012 BCSC 1013 [Bosa] as to the test to be met and the onus of proof for materiality.  The onus is on the purchaser to prove that a change has affected the value, price, or use of the property. The purchaser's subjective opinion is not taken in to account; rather, what is material is determined objectively. As a result, expert, or at least objective, evidence will likely be required to prove the effect of a change on the use, price, or value of the property.

The court also noted that language in the purchase contract reserving the right to make certain minor changes may be considered when making the materiality determination. In Bosa, the developer initially planned for hot water delivery via a central gas-fired unit, but later changed the design to individual electric-powered tanks in each unit. The original disclosure statements were not amended to disclose this fact; however, the information sheet and purchase contract reserved the right of the developer to make minor modifications or substitution to the plan with respect to the electrical, mechanical, and plumbing systems. The buyer was only able to provide subjective (opinion) evidence that this change had a material effect on the use, price, or value of the unit. The court was not convinced that a slight increase in operating costs for the unit constituted a material change.

2.            Construction delays are material facts

In Chameleon Talent Inc v Sandcastle Holdings Ltd., 2009 BCSC 1670 [Chameleon], the court held that changes to construction and occupancy dates are material facts and must be disclosed by amending the original disclosure statement. In this case, the failure of the developer to amend the disclosure led the court to find in favour of the purchasers, who were able to walk away from the deal. The decision was upheld on appeal.

How long a delay is required before it becomes material? This question has yet to be definitively answered. Without establishing a threshold, the Court of Appeal in 299 Burrard Residential Limited Partnership v Essalat, 2012 BCCA 271, found that a four month delay was significant enough to require an amended disclosure statement. In doing so, they reversed the lower court's decision and granted rescission to the purchaser on account of the developer's failure to disclose. The court also emphasized that amendments must be filed immediately once the developer becomes aware of the delay (or material change, in general).

3.            "Outside completion dates" do not negate amendment requirements

Developers will often provide purchasers with an estimated completion date for construction, as well as an outside completion date several months to a year after the estimated completion date. The purpose of doing so is to provide a degree of flexibility to developers, since construction is notoriously difficult to complete on schedule. If construction is delayed to a time beyond the estimated completion date but still before the outside completion date, the developer does not need to amend all the individual purchase agreements it has entered in to with property buyers. The question, however, is whether the developer is obligated to provide disclosure amendments under REDMA if the estimated date changes, but is still before the outside completion date.

The BC Supreme Court in Chameleon created doubt about the enforceability of outside completion dates and whether a purchaser could be reasonably seen to have agreed to a term of this nature. The Court of Appeal did not provide any clarity on the enforceability of outside completion dates in a contractual context; however, the court did confirm that an outside completion date in a purchase contract does not negate the developers requirement to file amendments under REDMA in the event that the estimates completion date changes.

4.            Early project completion may not be a material fact

Bosa Properties (Edgemonth) Inc v Ban, 2012 BCSC 94 [Bosa 2] is one of the few cases in which the court shows some willingness to limit the protections offered to consumers under REDMA. In Bosa 2, the court found that early project completion may not be a material fact requiring a disclosure statement amendment. In this case, it was not material because the earlier completion date did not affect the value, price, or use of the property.

At this point it is important to note the difference between the completion of construction and the closing of the purchase agreement. Completion refers to the time when construction is finished, whereas closing refers to the time when the buyer pays the balance owing to the developer and takes title to the property. While early completion may not be material, developers may risk litigation if they force buyers to close prior to the agreed date. Early closing can create issues related to tax liability, mortgages and securing funding, and additional strata fees, for example, which could significantly change the deal and at the very least give the purchaser an action in contract, if not under REDMA.

5.            "Marketing" is broadly defined and covers relatively informal activities

In Mazarei v Icon Omega Developments Ltd, 2012 BCSC 673 [Mazarei], the court held that the definition of "marketing" is very broad under the REDMA, and captures even relatively informal marketing activities. The court also found that it is within the power of the BC legislature to apply REDMA to the marketing in British Columbia of property located outside British Columbia. In this case, a director of an Alberta development company offered his friend, a Vancouver realtor, $5,000 for any sales that she facilitated. The realtor then went on to tell friends and family about the development, some of whom decided to purchase units. This activity was sufficient to constitute marketing under REDMA, thus the purchasers were able to obtain rescission because the developer had only complied with the Alberta disclosure standard, not the REDMA standard.

6.            Buyers can walk away after occupying the property... rent free

In Woo v. ONNI Ioco Road Five Limited Partnership, 2012 BCSC 764 [Woo], the court held that rescission can be granted even after the purchaser takes title to the property. In fact, there is no apparent time limit up until a purchaser re-sells the property. In the event that rescission is granted after the purchaser has taken possession and occupied the unit, the court held that the developer has no claim for occupational rent. Woo is currently being appealed to the BC Court of Appeal.

7.            Strict compliance with disclosure obligations is required

The case law shows that developers must comply strictly with the procedural aspects of REDMA or risk giving buyers a right to terminate their purchase agreements.  By way of example, in Riegel v Paraskevopolous, 2013 BCSC 335, the seller filed a disclosure amendment and forwarded a copy to the purchaser. FICOM (the Financial Institutions Commission) found the amendment deficient and required the seller to correct it and re-file.  A copy of the corrected amendment was filed, but not delivered to the buyer. As a result, the buyer was granted rescission on the grounds that the disclosure obligation was not met, without any regard to the materiality of the information disclosed.

8.            Motive does not matter

As a final point, it is clear throughout the case law that the buyer's motive for wanting out of a purchase agreement is not a relevant factor to the court when considering a claim under REDMA. The courts often note their belief that a particular action is motivated by a drop in property value, and in many cases the buyer's testimony confirms as much. Regardless, this has no real impact on the outcome of the case, which is to be decided purely on the basis of whether changes to the purchase agreement are material and whether the developer has complied with their disclosure obligations. 

The Implications of Recent Litigation for Purchasers and Developers

Purchasers

The courts have respected the purpose of REDMA as consumer protection legislation and, as a result, purchasers are still in a strong position. The law has been applied strictly, ensuring that consumers are kept up to date on changes regarding their units. Regardless of their motivation, buyers can turn to REDMA to terminate purchase agreements where developers have failed in their disclosure obligations. Undisclosed construction delays are a valid ground for a claim, even where there is an outside completion date. Early completion is unlikely to ground a successful claim, but forced closing on an earlier date might, depending on the repercussions to the purchaser. 

Buyers should be aware that contract language in the purchase agreement may allow the developer to make certain changes without disclosure. As a result, purchase agreements should be read carefully, especially where they concern details of particular importance to a purchaser. If in doubt, purchasers should engage legal counsel to interpret the purchase agreement before signing.

While it is clear that a purchaser's rights under REDMA remain in effect even after a purchaser takes title to and occupies the property, purchasers nevertheless should not delay when making claims. The longer a purchaser waits, the more likely the development company will cease to exist or become judgement proof, meaning it has no cash or assets from which to pay damages or give effect to an order for rescission. At this time, there is no case law allowing purchasers to trace the money paid for their property through the development company to the ultimate recipient.

British Columbia residents purchasing property in other jurisdictions should be aware that REDMA will likely apply to their transaction if the property was marketed in British Columbia.

Finally, while REDMA provides robust statutory protections to purchasers of pre-sale units, it does not provide absolute protection against changes to construction plans. As long as developers disclose material changes, they have great flexibility when it modifying units under construction. Buyers should remember that traditional legal remedies are still applicable in pre-sale situations. While they may not allow a buyer to walk away from an agreement, compensation in the form of damages may be available where the purchaser does not get exactly what was bargained for.

Developers

Recent legislation emphasizes that developers must be vigilant about complying with their disclosure requirements under REDMA. Failure to do so can result in claims even after sales are complete and purchasers have taken possession of their units. On the positive side, as long as a developer complies with its disclosure requirements, changes affecting the value, price, and use of the property can often be made without consequence under REDMA. Since amendments to disclosure statements do not generally allow purchasers to terminate their purchase contracts, developers should err on the side of disclosing whenever they have any doubt about the potential materiality of a change. Developers should also assume that anything more than the most insignificant construction delays should be properly disclosed. While early project completion dates likely will not cause problems under REDMA, developers should be wary of forcing purchasers to close early. 

Developers must be diligent to follow procedural technicalities under REDMA or risk creating an opportunity for buyers to terminate their purchase agreements, regardless of any material change or actual impact on the buyer. Corrections to inadequate disclosure must both be filed with FICOM and delivered to the purchaser. In addition, changes should be disclosed immediately as they become known. Developers should keep evidence that purchasers have received all necessary disclosure documents.

Developers of properties outside of British Columbia need to be aware that REDMA applies to any project marketed in British Columbia and that it may impose more onerous obligations than their home legislation. Even very informal activities aimed at selling properties will be considered marketing and attract the consequences of REDMA.

While there is no reason to cease the practice of providing outside completion dates, developers should be aware that they cannot rely on these to relieve them of their disclosure obligations under REDMA. Changes to estimated completion dates should be disclosed regardless. Developers should also be aware that outside completion dates may not provide a defence in a claim for misrepresentation under contract law, although this has yet to be definitively determined in the courts.

Finally, developers should be aware that beyond the rights created by REDMA, standard contract remedies are available to purchasers who do not get what they bargained for.

Footnotes

1.Real Estate Development and Marketing Act, s 1 "material fact"

2.Real Estate Development and Marketing Act, s 1 "misrepresentation"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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