Canada: Post-Closing Rescission Rights Under REDMA

On March 4, 2014, the B.C. Court of Appeal rendered its much awaited decision in Woo v. ONNI Ioco Road Five Development Limited Partnership.1 The lower court decision2 held that under section 21(3) of B.C.'s Real Estate Development Marketing Act ("REDMA"),3 purchasers may have the right to rescind their contract even after their sale has been completed and title transferred.

Five condominium purchasers had entered into contracts with the developer and received disclosure statements in accordance with REDMA disclosure requirements. The developer then filed an amendment to the disclosure statement prior to completion of the sales, which set out that certain project objectives had been completed on schedule as predicted in the original disclosure statement. However, the developer inadvertently failed to provide copies of the amendment to the purchasers, who discovered the amendment post-closing and successfully rescinded their purchase contracts by relying on section 21(3). A full discussion of this decision was the subject of a prior bulletin.4

On appeal, the Court overturned the lower court's decision in favour of the developer.

A purchaser's right to rescind pursuant to section 21(3) of REDMA is exercisable if such purchaser experienced non-disclosure amounting to a "misrepresentation" or failure to disclose a "material fact."5 However, the Court of Appeal found that while the purpose of REDMA is to protect consumers, it must also afford the developer a degree of certainty and efficiency in the real estate development market. Whether a fact was material or not depends on the circumstances; to be deemed material, the undisclosed fact must negatively affect the value, price or use of a development unit or property in some way. The Court went on to conclude that there was no evidence of a negative effect on the purchasers on which to base a finding of materiality.

Specifically, the Court of Appeal determined that the amendment was not "material" for the following reasons:

  1. there was no reason to think the project would not complete as predicted in the original disclosure statement; therefore, the amendments removed no risk that would have materially changed the value, price or use of the units;
  2. even if the amendments did affect the value, price or use of the units, a negative consequence has to exist before a claim of materiality can be made and here there was none (the Court chose not to define what the minimum threshold of negative consequence would be); and
  3. the effect on the purchasers of the amendments was not "adverse" to their interests, which is what the Legislature intended when affording the rescission right.

Based on these reasons, the Court concluded that the facts in the amendment were not "material" and purchasers were therefore not entitled to receive them pursuant to section 21(3) of REDMA.

This decision places greater emphasis on implementing REDMA in a manner which takes into account the interests of the developer as well as the consumer. It also removes the potential windfall scenario whereby purchasers can live rent-free and receive interest by rescinding contracts under which they received precisely what they contracted for.

However, the B.C. Court of Appeal failed to address some issues that arise in connection with the creation of this new materiality threshold for delivering an amendment to a purchaser. Prior to this decision, developers were obligated to disclose certain changes to the disclosure statement, whether material or not. Policy Statement 5 states that the Superintendent of Real Estate in B.C. will permit a developer to begin marketing its development provided the developer files an amendment to its original disclosure statement setting out particulars of the building permit once it's issued. Policy Statement 6 mandates that developers may only market development units that have not obtained a satisfactory financing commitment if they file an amendment to the original disclosure statement setting out the particulars of a satisfactory financing commitment once received.

Following this decision, the purchaser loses the right to have full disclosure of any changes to their development unit or property. If a developer deems an amendment not to be adverse to the purchaser, it may withhold disclosure. If the new information turns out to be material, the purchaser would likely only discover it post-closing or potentially not at all. This would not serve the second purpose of REDMA, articulated by the Court of Appeal as the efficient and profitable operation of the real estate development sector.6 Dealing with this scenario post-closing creates additional administrative and legal hurdles that are very complicated and expensive to resolve.

Further, leaving the decision on whether to disclose with the developers and their advisors contradicts the disclosure requirements set out in Policy Statements 5 and 6. The Honorable Mr. Justice Harris, writing for the Court, states at paragraph 60 of the decision that the Policy Statements provided by the Superintendent are "obviously" non-binding on the Court. This creates confusion, given that sections 10 and 13 of REDMA specifically state that developers are legally bound by such Policy Statements. After the Court of Appeal's decision, developers are now legally bound by a policy that can be ignored or overruled by adjudicators in any given dispute.

While the Court of Appeal's decision is beneficial for developers and provides clarity around what may be deemed "material" in the context of disclosure requirements under REDMA, underlying inconsistencies and gaps in the disclosure process remain. This confusion has the potential to undermine the interests of the consumer that REDMA was enacted to protect, and leave developers with legal complications down the road.

Footnotes

1. 2014 BCCA 76.

2. 2012 BCSC 764.

3. SBC 2004, C-41 [REDMA].

4. Damon Chisholm, "post closing rescission rights under REDMA – when closing does not necessarily mean closed", McMillan Bulletin, July 2012.

5. REDMA, supra note 3, s 16(1)(b)(i).

6. Woo, supra note 4 at ¶ 48.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014

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