Pre-sale litigation – where are we at?

Articles

The past few years have seen a number of purchasers trying to avoid their obligations under pre-sale contracts as they discover that the market value at closing might be significantly less than the pre-sale contract price. Many of these cases settle before ever going to court, but enough have made it before judges that there is a body of case law considering REDMA – the Real Estate Development Marketing Act.

The Pre-Sale Regime

We will start by reviewing a few particulars of the pre-sale regime.

That regime has two functions. First, it is consumer protection legislation. Second, it allows developers and lenders to get the certainty they need to be able to finance and build a project, to serve the public’s need for housing in an efficient way.

From one perspective, developers are able to:

  • sell a home that does not exist;
  • on a property it may not yet own;
  • using purchaser deposits to partially finance construction;
  • while retaining the ability to cancel the deal, within nine months, if it cannot obtain the necessary permits or construction financing.

The protection for a purchaser that REDMA establishes to enable the system to function are that the developer must:

  • make full disclosure, without misrepresentation, in writing before the purchaser signs up;
  • give the purchaser seven days to change his or her mind;
  • insure the purchaser’s deposits if they are to be used for financing;
  • advise the purchaser of all material changes; and
  • not sell the project or go bankrupt before it is completed.

Under the regime, the seven-day rescission period applies only to the initial disclosure statement, or to situations where a new disclosure statement is required. The regime requires a new disclosure statement in two main situations, being where:

  • the identity of the developer changes, or
  • a receiver or trustee in bankruptcy is appointed.

REDMA requires an amendment to the disclosure statement, but not a new disclosure statement, where a “material fact” changes. A “material fact” is described as a fact that affects, or could reasonably be expected to affect, the value, price or use of the development unit or development property (see the full definition in Section 1 of REDMA). While a new disclosure statement creates a new seven-day rescission period, an amendment does not. The purpose of the requirement for an amendment is not to allow for rescission, but rather to ensure timely notification so that people can check their rights. If the developer has notified the purchaser of all changes in material facts, it will have complied with that obligation.

Accordingly, if an amendment to the disclosure statement discloses something that is:

  • a material change, but
  • is not a fundamental change in what the purchaser is buying, such as would allow the contract to be nullified in common law,

disclosure will not allow purchasers out of their contract. Thus, unless the developer does something drastic like change two-bedroom units to one bedroom units, amending the disclosure statement will not let the purchaser out of their contract, but failing to amend will.

This is a very important point, often misunderstood by developers and project marketers. Failing to appreciate it can lead to catastrophic results.

Cases

Let us turn to the cases.

Three of the most noteworthy cases are Dwayne, Pinto and Sandcastle. All of them deal with the failure to provide necessary disclosure statement amendments:

  • In Dwayne v. Bastion the developer delivered the original and one amendment to the purchasers before they signed the purchase agreement, in a situation where there had been three amendments in existence at the time. There was therefore non-compliance with the obligation to provide all amendments before purchase, and the court found in favour of the purchaser.
  • In Pinto v. Revelstoke Mountain Resort Limited Partnership, the developer amended the disclosure statement a few times after the purchaser signed his contract, but instead of delivering the individual amendments to the purchaser, it delivered a consolidateddisclosure statement to the purchaser. There was nothing that drew attention to the specific changes. Again there was non-compliance with the obligation to provide amendments, and the purchaser won.
  • In Chameleon Talent Inc. v. Sandcastle Holdings Ltd., the developer failed to amend its disclosure statement until a very late stage, to advise purchasers of significant changes in construction dates. Again, there was non-compliance with the obligation to provide necessary amendments, and the court released the purchasers from their contracts.

So what do those cases indicate?

Respect the obligations in the statute

In all of them the developers failed to provide necessary amendments, and hence the purchasers were able to get out of their contracts. Developers need to be careful and respect their disclosure obligations under the Act.

Motive

Second, because REDMA falls into a category of laws known as consumer protection legislation:

  • purchasers’ motives don’t matter; and
  • purchasers’ actual knowledge doesn’t matter.

So, for example, in the Sandcastle case, it didn’t matter that:

  • the purchasers were informed of the delays in construction by way of newsletters from the developer, or
  • that their contract – which was included in the disclosure statement – expressly allowed for delays.

All that mattered was that the developer failed to amend its disclosure statement to formally advise purchasers of significant delays in construction.

When to amend

The cases are also relevant to the issue of when an amendment must be made to a disclosure statement. REDMA provides that an amendment must be made whenever there is a change to a material fact.

As noted, material fact is defined as including any fact which could reasonably be expected to affect the value, price or use of a strata lot; that is a broad definition, especially when viewed through the lens of consumer protection. The Sandcastle case indicated that estimated construction dates are material facts.

Implications for developers

The cases provide some very clear directions for developers:

Err on the side of more disclosure, not less.

The disclosure statement is not a promotional piece. If purchasers might not like the way a particular fact sounds, then almost by definition it is material and should be included in the disclosure statement.

The reality seems to be that few purchasers actually read the disclosure statement until something goes wrong; then they look at it with a magnifying glass. At that point you will want them to see that there was disclosure – for example, that some parking spaces may have low clearance due to overhead HVAC equipment.

When in doubt, amend the disclosure statement.

Second, when in doubt, amend the disclosure statement. There are practical limitations on providing a constant stream of amendments, so be careful with how things are worded. Also be sure to obtain a written acknowledgment of receipt from each purchaser, or at least deliver them in a way that provides evidence of delivery.

Make sure the judge understands the context.

If despite best efforts, you find yourself in court trying to enforce a pre-sale contract, it is important to balance the courts’ categorization of REDMA as consumer protection legislation (conjuring up images of door to door salesmen pushing vacuum cleaners to intimidated seniors) with the purpose of enabling housing to be built. Tens of thousands of new residents arrive in British Columbia each year and the demand for accommodation is met overwhelmingly by new condominiums. A transparent and dependable – and therefore financeable – regime is required to ensure a continuing supply.

Establishing that balance is important because the cases tend to turn largely on whether particular information is material or not, which is essentially a judgment call. Developing projects is a complicated business, with almost daily changes of one kind or another. Interpreting materiality to an illogical extent, dozens of amendments might be required during the course of a project, rendering the pre-sale system unviable.

Lastly, some strategic advice: Add a “closing deposit” to pre-sale agreements.

This advice does not arise from the cases, but puts the developer in a position to keep deposit monies and avoid going to court altogether.

Section 18(4) of REDMA requires the lawyer or realtor who is holding pre-sale deposit monies in trust to pay those funds out to the developer if the developer certifies that a purchaser has failed to pay a subsequent deposit. On the other hand, if a purchaser pays all deposits but then refuses to close, the deposit holder has no choice but to hold onto the deposit until either the parties settle or there is a court order.

So, it can be useful to provide for an additional deposit due very shortly before closing. If the purchaser is going to refuse to close, then they will often not pay this deposit. Once the developer certifies that the purchaser has failed to pay that final deposit the lawyer or realtor holding the deposits must release the previous deposits to the developer, which may provide a practical resolution.