Overview for the Real Estate Development Marketing Act, S.B.C. 2004, c. 41 (“REDMA”)
In the late 1990s there was an unprecedented boom in the real estate development industry in British Columbia. Hundreds of strata-titled apartment condominium and townhouse developments were constructed over the next several years. The vast majority of those strata-titled projects were marketed prior to construction.
The so-called “pre-sales” became the norm for real estate developers and the number of pre-sale purchasers who had paid deposits became one of the most important criteria upon which construction lenders were prepared to advance funds for the completion of the development.
The predecessor to REDMA is the Real Estate Act, which required developers to file an initial prospectus with the Superintendent of Real Estate prior to marketing a real estate development in BC. However, the Real Estate Act does not require a developer to update the prospectus over time to report on material events or circumstances. Moreover, there was no statutory definition as to what information constitutes a “material fact” which ought to be disclosed to potential purchasers. This gap in the legislation caused substantial uncertainty for purchasers and developers and led to a large body of case law as to the definition of materiality (see Sharbern Holding Inc. v Vancouver Airport Centre Ltd., 2011 SCC 23).
It was against this backdrop that REDMA was introduced in 2004. The primary purpose of REDMA is consumer protection and as such, it is to be interpreted generously in favour of the consumer (Pinto v Revelstoke Mountain Resort Limited Partnership, 2011 BCCA 210).
Section 14 of REDMA requires a developer to provide a prospective purchaser with a disclosure statement and states:
“14 (1) A developer must not market a development unit unless the developer has
(a) prepared a disclosure statement respecting the development property in which the development unit is located, and
(b) filed with the superintendent
(i) the disclosure statement described under paragraph (a), and
(ii) any records required by the superintendent under subsection (3).
(2) A disclosure statement must
(a) be in the form and include the content required by the superintendent,
(b) without misrepresentation, plainly disclose all material facts,
(c) set out the substance of a purchaser’s rights to rescission as provided under section 21 [rights of rescission], and
(d) be signed as required by the regulations.”
The definition of “disclosure statement” includes “any amendment made to a disclosure statement”. A developer who becomes aware that a disclosure statement contains a misrepresentation or does not comply with REDMA is required to immediately file an amendment. In some circumstances, an amendment is insufficient and the developer must file a new disclosure statement. Those circumstances are set out in ss. 16(2) and (3):
“(2) A developer must file a new disclosure statement under subsection (1) (a) (i) if the failure to comply or misrepresentation referred to in that subsection
(a) is respecting a matter set out in paragraph (b) or (c) of the definition of “material fact” in section 1,
(b) is respecting a matter set out in paragraph (d) of the definition of “material fact” in section 1, and the regulation prescribing the matter specifies that a new disclosure statement must be filed if subsection (1) of this section applies, or
(c) is of such a substantial nature that the superintendent gives notice to the developer that a new disclosure statement must be filed.
(3) A developer must file an amendment to the disclosure statement under subsection (1) (a) (ii) in any case to which subsection (2) does not apply.”
“Misrepresentation” is defined as “a false or misleading statement of a material fact” or “an omission to state a material fact”. The definition of “material fact” referred to in s. 16(21) reads:
“”material fact” means, in relation to a development unit or development property, any of the following:
(a) a fact, or a 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;
(b) the identity of the developer;
(c) the appointment, in respect of the developer, of a receiver, liquidator or trustee in bankruptcy, or other similar person acting under the authority of a court;
(d) any other prescribed matter.”
Rescission rights are the most important component of REDMA from the perspective of the purchaser. In a falling real estate market, scores of pre-sale purchasers have sought to rescind their purchase contracts. The pertinent portions of REDMA relating to rescission rights are set out below:
Rights of rescission
21 (1) A purchaser does not have a right of rescission under this section
(a) if the purchaser is not entitled to receive a disclosure statement under this Act, or
(b) as a result of receiving an amendment to a disclosure statement in respect of a development property, including an amendment described in section 16 (1) (a) (ii) [non-compliant disclosure statements], unless the purchaser has not previously received any disclosure statement in respect of that development property.
(2) Regardless of whether title, or the other interest for which a purchaser has contracted, to a development unit has been transferred, a purchaser of the development unit may rescind the purchase agreement by serving written notice of the rescission on the developer within 7 days after the later of
(a) the date that the purchase agreement was made, and
(b) the date that the developer obtained, under section 15 (1)(c) a written statement from the purchaser acknowledging that the purchaser had an opportunity to read
(i) the disclosure statement provided under that section, or
(ii) a new disclosure statement, if any, described in section 16(1)(a)(i)
- (3) Regardless of whether title, or the other interest for which a purchaser has contracted, to a development unit has been transferred, if a purchaser is entitled to a disclosure statement in respect of a development property under this Act and does not receive the disclosure statement, the purchaser may rescind, at any time, a purchase agreement of a development unit in that development property by serving a written notice of rescission on the developer.
. . .
Liability for misrepresentation
22 (1) In this section:
“developer” means a developer that is required by the Act or regulations to
(a) file a disclosure statement with the superintendent, or
(b) provide a disclosure statement to a purchaser
in respect of a development property;
“director” means a director of a developer at the time that the developer
(a) filed a disclosure statement with the superintendent, or
(b) provided a disclosure statement to any purchaser
in respect of a development property.
(2)This section does not apply to a purchaser who is not entitled to receive a disclosure statement under this Act.
(3)If a developer files a disclosure statement respecting a development property and the disclosure statement contains a misrepresentation, a purchaser of a development unit in the development property, whether the purchaser received the disclosure statement or not,
(a) is deemed to have relied on the misrepresentation, and
(b) has a right of action for damages against
(i) the developer,
(ii) a director,
(iii) a person who consented to be named, and was named, in the disclosure statement as a developer or director,
(iv) a person who authorized the filing of the disclosure statement, and
(v) a person who signed the disclosure statement.
(a) a disclosure statement contains a misrepresentation at the time at which a purchaser and a developer enter into a purchase agreement, and
(b) the misrepresentation is removed or otherwise corrected after the purchaser and developer have entered into the purchase agreement,
subsection (3) continues to apply as if the misrepresentation had not been removed or corrected.
(5)A person is not liable to a purchaser under subsection (3) if the person proves that the purchaser had knowledge of the misrepresentation at the time at which the purchaser received the disclosure statement.
. . .
Agreements void for non-compliance
23 A promise or an agreement to purchase or lease a development unit is not enforceable against a purchaser by a developer who has breached any provision of Part 2.
Amendment or new disclosure statement?
The primary distinction between an amendment to an existing disclosure statement and a new disclosure statement is that it is only the filing of a new disclosure statement that affords the purchaser, whether title has passed or not, the opportunity to rescind the purchase agreement by serving written notice within seven days of receipt of the new disclosure statement.
In other words, a developer can amend the disclosure statement as many times as is necessary without triggering rescission rights as long as all of the amendments are delivered to all purchasers or owners. In 299 Burrard Residential Limited Partnership v Essalat, 2012 BCCA 271, the court noted at paragraph 25 that “REDMA balances the rigour of the disclosure regime as a consumer protection measure against the flexibility in giving the developer an open opportunity to amend the Statement as often as it is necessary to adjust to unforeseen circumstances.”
On a similar theme, the Court of Appeal in Drake v North Ellis Developments Ltd., 2012 BCCA 256 stated that REDMA has twin goals, which are to afford consumers protection whilst also enabling efficient and profitable operation of the real estate development sector, a “key economic driver in British Columbia”.
“estimate” of construction commencement and completion dates
REDMA requires the developer to include in its Disclosure Statement, estimates of the commencement of construction and the anticipated completion of the development. The courts have recognized that the term “estimate” implies a certain degree of uncertainty at the time that the original disclosure statement is filed with the Superintendent of Real Estate. However, if the developer’s original estimates are inaccurate, an amendment to the disclosure statement must be filed and delivered.
In Chameleon Talent Inc. v. Sandcastle Holdings Ltd., 2010 BCCA 300, the original disclosure statement filed by the developer stated that the construction commencement and completion dates were estimated to be November of 2006 and November of 2008 respectively. In May of 2007, the developer amended the disclosure statement to advise that the building permit had been issued in April of 2007.
While in hindsight, it might have been self-evident from the amendment that construction had not commenced in November of 2006, no reference was made in the amendment to any changes to the construction commencement and completion dates. When the purchaser sought to rescind the contract, the trial court held and the Court of Appeal agreed that it was clear that the November 2006 date in the disclosure statement was wrong and the November 2008 completion date was unlikely. As those dates no longer complied with the requirements of REDMA, an amendment had to be filed “immediately” and, within a reasonable time, delivered to all purchasers. Since that did not happen, the agreement was not enforceable.
In Maguire v. Revelstoke Mountain Resort Limited Partnership, 2010 BCSC 1618, the purchaser had refused to pay a second deposit and the developer terminated the contract. The purchaser sued for a return of his initial deposit. The developer had estimated a completion date of December 2009 for the development.
The court held that by March of 2009, the developer was aware that the completion of the development was going to be delayed by about 3 months but it did not amend the disclosure statement. Shortly thereafter in April of 2009, the developer became aware that a substantial delay of at least 10 – 16 months would occur beyond the estimated date for completion of the project. In the circumstances, it was incumbent upon the developer to file an amendment to the disclosure statement and deliver it to the purchasers. In the view of the court, the developer had more than a reasonable period of time to amend the disclosure statement prior to seeking to rescind the contracts. The deposits were returned to the purchasers.
The latest word from the Court of Appeal on estimated completion dates is found in the decision of 299 Burrard Residential Limited Partnership v. Essalat, 2012 BCCA 271. The facts, as found by the court, were simple – “when the (purchaser) entered into an agreement to buy the unit in August 2007, the (developer) had known since March of that year that completion would be later than September 2009, the date given in the Disclosure Statement. The (developer) did not subsequently amend the Statement to revise the date”.
The completion date was delayed approximately 4 months. The Court of Appeal held that there was no room for an argument that an incorrect completion date is not material because of the relatively short time span between the estimated and actual dates. Rather, if the estimated completion date is wrong, it must be revised by way of a filed amendment. Informal notices and newsletters, which had been provided to purchasers from time to time to update them on the status of the project, did not meet the requirements of REDMA.
Review of selected judicial decisions
One of the issues that arose recently is the extent to which REDMA applies to the marketing, in British Columbia, of real estate development projects in other jurisdictions. In Mazarei v Icon Omega Developments, 2012 BCSC 673, the court held that if a real estate developer from another jurisdiction wished to market its development in British Columbia, then REDMA would apply. As a result, the constitutional challenge to the application of REDMA to a project in Alberta was dismissed.
One of the most common financing vehicles for large-scale real estate developments in British Columbia is the use of the limited partnership. Typically, the general partner of the limited partnership acts as the agent for the Limited Partnership in managing the development. Recently, unhappy pre-sale purchasers sought to bring an action, not only against the limited partnership, but also the principal of the general partner under the provision of REDMA. In Woo v Onni Ioco Road Five Development Limited Partnership, 2012 BCSC 764, the court held that the principal of the general partner is neither a developer nor a partner of the limited partnership developer and as such could have no personal liability to any pre-sale purchaser.
As set out in paragraph 16 of REDMA, the appointment of a receiver or trustee in bankruptcy requires a developer to file a new disclosure statement with the superintendent of real estate. As the filing of a new disclosure statement triggers rescission rights for all purchasers, whether title has passed or not, lenders have been reluctant to appoint receivers or petition the developer, regardless of its solvency, into bankruptcy.
In (Re) Jameson House Properties Ltd., 2009 BCCA 339, the court held that the institution of proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) and the appointment of a monitor did not require a developer to file a new disclosure statement and in the result, no rescission rights arose for purchasers. Further, the court held that any pre-sale agreements were valid, binding and enforceable and that the completion date for those pre-sale agreements should be extended by almost three months.
The court went on to hold that the identity of the developer would not change on the implementation of the corporate restructuring nor was the failure to obtain financing in October 2008 a “material fact” that required the developer to file and provide an amendment to the disclosure statement. As a result, the pre-sale purchasers had no rights of rescission or to claim their agreements were unenforceable and as such were not creditors for the purposes of the CCAA proceedings.
This interpretation of the law has led to a practice amongst commercial lenders where a defaulting developer is left in place to try and complete the development pursuant to some fairly strict terms in a series of “rolling” forbearance agreements including an agreement that the developer will not seek protection under the Bankruptcy and Insolvency Act. Rather, if a stay of proceedings is required, the lender and the developer will cooperate in seeking protection for the developer pursuant to the CCAA.
Similarly, a change of identity of the developer triggers the requirement for the filing of a new disclosure statement which, in turn, affords pre-sale and completed purchasers with rescission rights. In Maguire v Revelstoke Mountain Resort Limited Partnership, 2010 BCSC 1618, the court followed the Jameson House decision which was to the effect that a change of ownership or control of a developer, or a change of directors and officers, does not constitute a change in the identity of the developer. The purchasers persisted in an argument that a change to the board of directors of the developer was a “material fact” which ought to have been disclosed by way of an amendment to the disclosure statement. The court held that:
“Consistent with my comments above regarding the change in identity issue, if a change in the directors was of such importance so as to trigger renewed disclosure, REDMA could have easily been amended to so provide. Further, I do not consider that the changes to the board of directors in December 2008 constituted a “material fact” in these circumstances.”
Accordingly, the composition of the board of directors of a developer at any given time is not a “material fact” which requires renewed disclosure.
In Pinto v Revelstoke Mountain Resort Limited Partnership 2011 BCCA 210, the court held that of the seven filed amendments to the disclosure statement made by the developer, several of them had not been provided to the purchasers. In an attempt to counteract those failures, the developer prepared and delivered a “Consolidated Disclosure Statement” which incorporated all of the amendments to the purchasers.
The court held that the delivery of the “Consolidated Disclosure Statement” was insufficient to remedy the breaches of REDMA because it had not been filed with the superintendent of real estate, it was not provided within a reasonable time as required by s.16 of REDMA and, perhaps most importantly, REDMA’s clear language and general purpose supported a conclusion that the “Consolidated Disclosure Statement”, which required purchasers to make a line-by-line comparison of two lengthy documents in order to locate any amendments, was not sufficient.
In another decision, the issue as to the manner in which amendments to the disclosure statement may be delivered to purchasers was considered. In Travelers Guarantee Company of Canada v Ryan, 2011 BCSC 1825, the court held that REDMA contains no requirement as to how the disclosure statements are to be delivered to a purchaser. The court went on to find that e-mail is now widely used for delivery of documents and information and that there would need to be a specific provision under REDMA or the contract of purchase and sale for the court to conclude that delivery by e-mail was somehow inadequate.
Since rescission rights are afforded to purchasers who have already taken title to their properties, they may have been in possession for some time before the court rules on whether they are entitled to rescind the purchase contract. If the owner is entitled to rescind the contract then the parties are to be put back to the position they enjoyed prior to entering into the contract.
In these circumstances, the owner has had the use and enjoyment of a strata lot for some time. In the Woo v Onni Ioco Road case, the developer pursued a claim for occupational rent, compensation for wear and tear, and for any diminution in value of the units caused or contributed to by the owner.
The court held that REDMA makes no provision for an accounting between the developer and the rescinding purchaser. The focus of the statute is on consumer protection and not equitable restitution between parties. The developer’s claims were dismissed.
One of the most efficient ways to deal with the claims of multiple parties against a single defendant is through a class action under the British Columbia Class Proceedings Act. However, in Lee v Georgia Properties Partnership, 2012 BCSC 1484, which dealt with the potential claims of purchasers related to delays at the development of the Hotel Georgia, the court found that there would be no judicial efficiency if the only relief sought is a declaration that legislation, in this case REDMA, had been breached.
More recently, the Court of Appeal in Bosworth v Jurock, 2013 BCCA 4, had an opportunity to consider whether class proceedings under REDMA were appropriate. It is well known that most cases deal with claims by pre-sale purchasers or owners of strata-titled properties. The Class Proceedings Act states that a class action cannot be brought if a representative action could be brought under another statute. The Strata Property Actstates that the strata corporation can sue as a representative of all owners for matters affecting the problem property and the use and enjoyment of a strata lot. Accordingly, the developer took the position that a class action was not available to an individual pre-sale purchaser.
The court held that the provisions of the Strata Property Act were not sufficient to preclude a class action as the Plaintiff in the class action could not start a representative proceeding under the Strata Property Act, that was only available to the strata corporation. Accordingly, the Court of Appeal approved the certification of the class action by a trial judge and dismissed the developer’s appeal.
While there is now a significant body of judicial decisions dealing with REDMA, it is clear that issues between real estate developers and purchasers, especially in a soft or declining market will continue and that the protection provided by the rescission rights afforded by REDMA will continue to be sought.