After a lengthy trial, the BCSC confirmed that developers of condominium projects do not owe a fiduciary duty to pre-sale purchasers, and that the commonly used lease structure to assign parking stalls and lockers to purchasers is valid and binding on the owners and the strata corporation.
Introduction
Mr. Justice Myers of the BCSC released his decision in One West Holdings Ltd. v. The Owners, Strata Plan LMS2995 2021 BCSC 473 following a lengthy trial. The defendant Strata challenged the legality of the established practice of a developer granting to itself or a related company an option to lease (registered) over the parking and locker areas of the development, and subsequently entering into a lease before the strata plan is filed. After stratification, the parking tenant partially assigned the lease to purchasers of individual stalls and lockers including the Strata. The Strata argued the structure was illegal and unenforceable on various grounds, including:
- It was contrary to the provisions of the Condominium Act;
- It was contrary to the provisions of the Land Title Act;
- The unregistered lease was not binding on the Strata;
- It was a breach of the developer's fiduciary duties owed to pre-sale purchasers;
- There was inadequate disclosure; and
- The lease could not be interpreted to provide an ongoing leasehold interest to the parking tenant.
The Court found against the Strata on all grounds, and determined:
- The option to lease was valid and enforceable;
- The Strata entered into a new lease on the same terms as the pre-incorporation lease;
- There was no fiduciary duty owed to pre-sale purchasers;
- There was adequate disclosure in the disclosure statements; and
- The lease terms were clear and enforceable.
Background
The development at issue is a mixed use residential and commercial development known as Marina Pointe. It was developed, marketed and constructed in the mid-1990's. The strata plan was filed on October 31, 1997 bringing into existence the strata corporation and creating the strata lots and the common property. The legislation at the time was the Condominium Act.
Various disclosure statements and amendments were prepared and filed with the Superintendent of Real Estate as the development proceeded. All BC purchasers received at least one version of the disclosure statement, which set out with reasonable particularity the arrangements that would be created with respect to parking and storage lockers.
The development was substantially sold out by way of pre-sale contracts prior to stratification.
On October 29, 1997 the legal owner granted to a related company (which became the plaintiff One West) an option to lease the parking and locker areas as outlined on explanatory plans (the "Option to Lease"). The Option to Lease was registered in the Land Title Office on October 30, 1997. Importantly, the Option to Lease was executed and registered prior the strata plan being filed.
On October 30, 1997, One West exercised the Option to Lease and entered into a lease agreement (the "Lease") which granted One West the leasehold rights to all of the parking and storage locker areas. The Lease was not registered.
Shortly after stratification, and before any closings took place, One West assigned all of the visitor stalls to the Strata by way of an assignment document that made it clear that the Strata was aware of the Lease and was agreeing to be bound by its terms. At the time the assignment was made, the Strata was controlled by the developer.
Individual closing transactions took place in the normal course. Those purchasers who had purchased one or more parking stalls, or storage lockers, received a partial assignment of the Lease with respect to the individual stall or locker.
What was unusual in this case is that not all of the parking stalls in the development were assigned to strata lot owners. Approximately 40 stalls designated for commercial parking were not assigned. One West retained the leasehold rights to those stalls which were managed by one of the commercial strata lot owners through a commercial parking operator.
The Strata, a number of years later, took control of the commercial stalls, leading to the litigation.
The Lease did not contravene the Condominium Act or the Land Title Act
The Strata argued that pursuant to the Condominium Act, common property cannot be subject to a lease without being subdivided. Although the Option to Lease was registered prior to stratification the Strata maintained "what cannot be done after stratification cannot be done before stratification". Furthermore, the Strata argued that the Lease violated the Land Title Act as an unauthorized subdivision.
The Court agreed with One West that the Condominium Act is not intended to apply to actions taken prior to stratification. As such, the Condominium Act had no application to the Option to Lease and Lease. Furthermore, the Court agreed that the Lease was for part of a building, which made it a permissible lease under s. 73(3) of the Land Title Act.
The Lease is binding as a post-incorporation contract
The Strata argued that the Lease was not binding because it had not been registered. The Court disagreed, finding that the Strata had entered into a new lease with One West on the exact same terms of the Lease. The Court applied the recent decision of the Supreme Court of Canada in Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp.2020 SCC 29. That decision affirmed that:
- A strata corporation may enter into a contract with positive covenants in relation to land that binds present and future strata lot owners;
- A strata corporation may enter into a post-incorporation contract on the same terms of a pre-incorporation contract through conduct evincing an intention to do so; and
- The test for determining whether a post-incorporation contract has been entered into is objective and is determined by the same legal principles that determined whether any other contract has been formed.
The Court held the execution of the assignment agreement for the visitor stalls was sufficient evidence of the intent of the Strata to enter into a post-incorporation contract on the same terms as the Lease (the Strata was controlled by the developer at that time). This conclusion was supported by the fact that the Strata continued to act as if the Lease was in place until 2005 when it took control of the commercial parking lot.
Moreover, there was nothing that could have reasonably given the Strata the belief that it had the right to assign parking stalls as part of its ownership of the common property. The original assignments were made by One West to the purchasers, and the Strata had no role in subsequent transactions of an owner assigning his or her parking rights when a strata unit was sold, other than keeping a log of who had which stall numbers.
A developer does not owe fiduciary duties to pre-sale purchasers
A substantial argument made by the Strata was that the developer owed a fiduciary duty to all purchasers before the filing of the strata plan, from the time of the first pre-sale, and that it was in breach of that duty by failing to disclose certain aspects of the parking arrangements. The Strata relied on the decision of the Ontario Court of Appeal in York Condominium Corp. No. 167 v. Newrey Holdings Ltd., [1981] O.J. No. 2965, which held that a developer "stands in a fiduciary relationship with purchasers and holds the property in trust for them".
Although York has been cited in a number of cases in Canada, the Court found that most, if not all of these, involved an alleged breach after the strata plan had been filed. The Court also found that York is irreconcilable with subsequent Supreme Court of Canada decisions, including Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24 and Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23. In Sharbern, a developer of a condominium project (specifically a hotel project marketed to investors) was found not to owe a fiduciary duty to the investors of the project. The relationship is an arm's length commercial one characterised by self-interest.
The Court concluded that there was no fiduciary duty owed to pre-sale purchasers. The relationship is governed by contract and statutory disclosure requirements. Adding a fiduciary duty was unjustified and unnecessary. On the facts of the case there was neither an express or implied undertaking of the developer to act in the best interests of purchasers, nor any vulnerability on the part of the purchasers. Yes, it is a complicated legal regime, but that does not make every condominium purchaser in British Columbia vulnerable so as to meet the criteria for establishment of a fiduciary duty.
There was adequate disclosure
The Strata argued that the developer, to meet its alleged fiduciary obligations to purchasers, should have clearly disclosed the Lease and the fact that the parking tenant was keeping the un-assigned stalls for its own benefit.
There are two aspects to disclosure: materiality and adequacy.
The Court held, following Sharbern, that even if a developer owed a duty of disclosure, it was only with respect to "material" conflicts. Materiality is to be determined from the perspective of an individual purchaser, and not the condominium owners collectively or the strata corporation, as it was the individual owners who signed the offers to purchase. The test is an objective one.
The Strata filed subjective evidence of several purchasers. The upshot of their evidence was that when they bought their units, they were not aware of the parking lease structure and were surprised to learn of it later. The Strata did not provide any objective evidence of materiality, leading to the conclusion that the alleged non-disclosure was not material. The Court found that the purchaser's only real concern with respect to parking would be to secure their own parking spots.
The Court went on to examine the actual disclosure for adequacy. The governing Real Estate Act at the time required the developer to provide prospective purchasers with a disclosure statement. The developer had filed the required disclosure statements and several amendments, meeting the statutory requirements. Each purchaser signed a standard offer to purchase that contained a clause initialed by the purchaser acknowledging receipt of and the opportunity to read the disclosure statement. The Court found that the disclosure statements were adequate.
The disclosure in this case met the correct balance, as discussed in Sharbern, between providing enough information on the one hand, and too much information on the other, so as to overwhelm and obfuscate the reader.
Disclosure statements can, in their narrative section, do no more than highlight and summarize the most important features of the condominium documents, and assist purchasers in comprehending those documents by directing them to the full text. In this case the form of the Option to Lease and the Lease were both attached to the disclosure statements.
The narrative section described that while the parking lot would be common property, the parking tenant would have a lease over it. If a buyer wanted to purchase a parking stall or locker it would have to do so from the developer, and there would be no right to use a stall without having purchased it. It was clear that unassigned parking stalls would be the property of the parking tenant, not the Strata.
In finding the disclosure adequate, the Court noted that purchasers of strata units who proceeded without legal advice did so at their own peril.
Key Take Aways
- The long established practice of leasing parking garages to a parking tenant prior to stratification so as to create an inventory of parking stalls that can be sold and assigned has been affirmed.
- The Court carefully considered whether a fiduciary duty belongs in the relationship between a developer and a pre-sale purchaser; and has concluded that it does not. The relationship is governed by contract law and statute.
- Adequacy of disclosure is a balance between providing enough information on the one hand, and too much information and obfuscation on the other.
- Buyers of condominiums who do not take legal advice do so at their own peril.
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