Shane Coblin
Wednesday, July 27th, 2011    Posted by Shane Coblin (posts)

Editor’s note: on June 21, 2012 the decision of 299 Burrard v Essalat referred to in this blog post was overturned by theBritish Columbia Court of Appeal: see 299 Burrard Residential Limited Partnership v. Essalat, 2012 BCCA 271.

In the wake of the Supreme Court of Canada’s recent decision in Sharbern Holdings Ltd. v. Vancouver Airport Centre Ltd. [Sharbern], 2011 SCC 23, courts in BC are taking a sober second look at the onus placed on developers when purchasers claim that a disclosure statement contains a material misrepresentation.

In 299 Burrard Residential Limited Partnership v. Essalat, 2011 BCSC 996 [Essalat], Ms. Essalat was a purchaser of a luxurious pre-sale condominium unit in the Residences at the Fairmont Pacific Rim.  On the closing date, she refused to complete the transaction and, through counsel, demanded return of her deposit.

The developer commenced an action seeking forfeiture of her deposit.  Ms. Essalat raised a number of defences, primarily arguing that the contract should be unenforceable pursuant to section 23 of the Real Estate Development Marketing Act, S.B.C. c. 41 (“REDMA”) and that the action was, in any event, barred by section 6 of the Property Law Act.  On this basis she sought an order that her deposit be returned.

Her REDMA defence, focused on the estimated construction completion date set out in the disclosure statement.  Her unit was not tendered to her until 4 months after the estimated completion of construction date and the entire development was not completed until 7 months after the estimated completion date.  She alleged that this constituted a material misrepresentation and therefore the contract was unenforceable pursuant to section 23 of the REDMA.

In recent years, pre-sale purchasers have been successfully able rely on incorrect estimated completion dates in a developer’s disclosure statement to avoid liability under a contract and forfeiture of their deposits.

Up until now, the leading case on the topic was Chameleon Talent Inc. v. Sandcastle Holdings Ltd. [Chameleon], 2009 BCSC 1670, aff. 2010 BCCA 300.  In that case Mr. Justice Rice found that delays in the estimated commencement and completion of construction dates were material facts that required amendments to the disclosure statement.  However, the delay at issue in Chameleon was significant, extending to over a year.

The difficulty this decision caused is that it did not define in anyway how long of a delay was necessary before an amendment was required.  It appeared to suggest that any delay would be material regardless of the length.

This decision was upheld by the Court of Appeal without any further clarification on the length of delay issue.

Ms. Essalat presented no evidence to support why either a 4 or 7 month delay was in fact material.  Instead, she took the position that any delay past the estimated completion date, even if only a few days, constituted a material misrepresentation that required an amendment to the disclosure statement.  She characterized it as a “bright line pass/fail test” and she relied upon Chameleon to support that approach.

Several weeks before this trial, the Supreme Court of Canada released its decision in Sharbern. Though that case was decided under the old Real Estate Act, which is the predecessor to the REDMA, Mr. Justice Rothstein framed his decision as being applicable generally to all disclosure legislation.  He set out the following 5 part test to apply when determining just how significant a fact must be before it should be considered material:

i.  Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor;

ii.  An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available;

iii. The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor’s deliberations;

iv. Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors; and

v.  The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer.

In Essalat, the developer argued that this is the test that should be applied in British Columbia when considering a purchaser’s claim that a disclosure statement contains a material misrepresentation.  Mr. Justice Sewell accepted this position and rejected Ms. Essalat’s suggestion that the test is a simple question of pass/fail.

Having presented no evidence of materiality, His Lordship found that Ms. Essalat had not met her burden.

The alternative argument advanced by Ms. Essalat was that because the developer did not hold legal title to the property before the unit was tendered to her, it was in violation of section 6 of the Property Law Act, and therefore could not maintain an action to enforce the sale contract.

Section 6 states:

(1) A person who transfers land, or who makes an agreement, or assignment of an agreement, for the sale of land by which the purchase price is payable by installments or at a future time, must register his or her own title in order that a person to whom all or part of the land is transferred and a person claiming under the agreement or assignment can register their instrument under the Land Title Act.

(2) An action must not be brought on the agreement or assignment referred to in subsection (1) by a person who fails to comply with this section.

In British Columbia, Limited Partnerships (or any partnership at all) cannot be the registered owner of real property.  As is typical in the pre-sale development industry, the developer was a limited partnership and a nominee and bare trustee was set up to hold legal title to the development lands in trust and for the exclusive benefit of the developer and was required to transfer title to the land to whomever the developer directed it to.

This ownership arrangement was disclosed in the disclosure statement and the contract of purchase and sale included the following express term:

The Buyer acknowledges that the Unit is or will be registered in the name of 299 Burrard Management Ltd. (“299 Burrard”), as discussed in the Disclosure Statement, who will hold such title as agent and nominee for the Seller.  The Buyer agrees to accept the Transfer executed by 299 Burrard as transferor, but acknowledges and agrees that 299 Burrard shall have no liability or obligation to the Buyer hereunder, other than to convey legal title to the Unit to the Buyer.

Ms. Essalat argued that the Property Law Act was consumer protection legislation, and thus the protections afforded by it could not be waived even by express agreement.

The developer relied upon the decision of Mr. Justice Edwards in 410263 B.C. v. Poke (1995), 11 B.C.L.R. (3d) 368, which stood for the proposition that a purchaser cannot rely on the protections of section 6, if it has knowledge that the vendor does not hold title to the land in question and has agreed to accept title through an alternative method.  Mr. Justice Sewell agreed with this position and found that the express terms of the contract precluded Ms. Essalat from demanding compliance with section 6 of the Property Law Act.

The developer was successful in the action and Ms. Essalat was ordered to forfeit her deposit as required by the contract.

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Posted by Shane Coblin (posts) | Filed under Real Estate Law |

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