Archive for the ‘Real Estate Law’ Category

Christopher Ellett
Thursday, July 26th, 2012    Posted by Christopher Ellett (posts)

On June 21, 2012, the Court of Appeal released its reasons in 299 Burrard Residential Limited Partnership v. Essalat, 2012 BCCA 271. In July 2011, we wrote that the trial decision provided much needed clarification for the pre-sale development industry [link]. The Court of Appeal has now overturned the trial decision leaving an uncertain future for the development industry.


In the midst of the economic downturn, the purchaser did not complete on a pre-sale purchase of a $5,000,000 unit at the Residences, Fairmont Pacific Rim. Among other things, she argued that the contract was not enforceable pursuant to the Real Estate Development Act (‘REDMA”).

The contract of purchase and sale was agreed in August 2007. The estimated completion date in the disclosure statement was September 2009, which was never amended. At the time of entering into the contract the purchaser was advised that the expected completion would be around the end of 2009 and at least before the Olympics.

Construction delays led to a three-month delay in the closing date. Difficulty in getting the City to issue occupancy permits and the Olympic security zone led to a further one-month delay resulting in the occupancy permit being issued in late January 2010.

The purchaser’s primary argument was that under s. 23 of the REDMA and following the decision in Chameleon Talent Inc. v. Sandcastle Holdings Ltd., 2009 BCSC 1670 aff’d 2010 BCCA 300 (“Chameleon Talent”), any delay beyond the disclosed estimated completion date would lead to an unenforceable contract.

The trial judge found that the only delay the developer was aware of was three months and that delays of that nature in a 38 month development project were to be expected. Further, following a recent decision of the Supreme Court of Canada in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23 (“Sharbern”), the trial judge considered the total mix of facts available to the purchaser at the time of purchase to determine if a misrepresentation had been made.

Sharbern dealt with the provisions of the REDMA’s predecessor, the Real Estate Act, which had been repealed by the time leave to appeal to the Supreme Court of Canada was granted.  Ultimately, the trial judge found that the purchaser had not met her onus in proving there had been a misrepresentation as defined in the REDMA.


In allowing the appeal, the Court found that Sharbern was not binding authority in relation to whether there had been a misrepresentation under the REDMA, because the REDMA contained a statutory definition of misrepresentation and the Real Estate Act did not.

Misrepresentation in the REDMA is defined as (a) a false or misleading statement of a material fact, or (b) an omission to state a material fact.

The Court of Appeal found that there was no room for argument that an incorrect completion date is not material because of a short time span between the estimated and actual completion dates. The Court concluded that any delay beyond a “true de minimis non curat lex situation (the law does not concern itself about trifles),” will be deemed a misrepresentation, relying on the following comment from the BCCA in Chameleon Talent:

… Some delays in the construction of condominium projects may be expected, but it seems to me substantial delays of many months, here extending to a year, will generally be material to purchasers and prospective purchasers in respect of the price to be paid for, the value there may be in, and the use of a condominium unit that is being purchased.

From the Court’s comments, a de minimus delay appears to be a matter of days or weeks but not months. The finding that the undisclosed delay was a misrepresentation was based on a common sense inference rather than any evidence led by the Defendant to show that it was significant. Therefore, future purchasers will have a very slight burden of proof and need only show that 1. the developer was aware of a delay of weeks and 2. that the delay was not formally disclosed.


The implication for developers is that if at any time during construction, they become aware that they may miss the completion date by more than a few weeks, they will have to issue an amendment to the disclosure statement revising the completion date. If the developer does not issue an immediate amendment, the purchase contracts will be unenforceable.

In this development, the occupancy permits were issued by the City over a four month span. Therefore, besides more closely monitoring and disclosing potential delays, developers will likely have to be more precise about when a particular floor or common area will be complete.

From a policy point of view, the court appears to have preferred protecting consumer rights as opposed to commercial certainty or practicality. A successful challenge by one purchaser may allow all purchasers to escape their contracts even after closing. The impact on development financing is yet unknown, but this decision leaves developers and financiers in a vulnerable position as they will not know if the purchase contacts will be binding until well after the completion dates.

It may be that developers use more conservative completion estimates and then give the option to purchasers to complete early. However, even then, the carrying costs of development in addition to compliance will be increased. These costs will eventually be passed along to purchasers.

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Posted by Christopher Ellett (posts) | Filed under Real Estate Law | ....
Shane Coblin
Monday, June 4th, 2012    Posted by Shane Coblin (posts)

Developers’ rights, if you can call them that, were eroded even further in the latest decision by the BC Supreme Court under the Real Estate Development and Marketing Act (REDMA).   In Woo v. ONNI Ioco Road Five Development, 2012 BCSC 764, the Court found that a group of ten Plaintiff purchasers were entitled to rescind their contracts of purchase and sale.

What made this situation unique is that it is one of the first times that the purchasers were relying upon section 21(3), which allows rescission after the transaction has closed and title to the unit has been transferred to the purchaser. In Woo, the purchasers had taken title to the units and lived in them for almost 3 years prior to rescinding.

The fact that these purchasers were entitled to rescind is not surprising.  The statute is relatively clear on this point.  The surprising part of this decision is that the purchasers were granted an order entitling them to a 100% refund of all the monies paid to the developer, plus interest, for the entire 3 year period, and the developer got nothing in return.  These purchasers lived in these units, free of charge and essentially on the developer’s dime, for nearly 3 years, without any consequence.  The developer made the argument that, at a minimum, it should be entitled to occupation rent for the period of time that the purchasers lived in the units, but that request was denied.  The Court said :

In my view, where the plaintiffs have invoked the statutory remedy of rescission under s. 21(3) of REDMA, rather than equitable rescission, the defendants are not entitled to relief by counterclaim based on the equitable principle of restitutio in integrum when the statute makes no provision for an accounting or the payment of occupational rent.

I would suggest that most objective non-lawyers would consider this result unfair, perhaps even oppressive, to the developer.   From a legal perspective, while it is true that there is no provision in the statute  allowing occupation rent,  the statute also doesn’t expressly provide for purchasers relying on section 21(3) to live rent free until they rescind their contracts.  What about renovations, wear and tear, outright damage that the purchasers have caused?  The statute also doesn’t address how to deal with these; likely because no one actually contemplated a situation like this arising.  The fact is, there are always voids in statutes.  That is when the courts are called upon to step in and fill the voids on terms that are just for all the parties.

For a statute that the Legislature expressly touted as creating a balance between the flexibility that developers need, and an appropriate level of consumer protection, I have previously argued that it  has been interpreted by courts disproportionately in favour of purchasers; and Woo was no exception.  At paragraph 98, the court expressly states “As consumer protection legislation, the {REDMA} must be generously interpreted in favour of the consumer.”  It doesn’t seem possible to create a reasonable “balance” between the needs of the parties, which is what the Legislature said it wanted to do with this act, when it is being interpreted generously in favour of one side or the other.

In the end, the ultimate losers will be pre-sale purchasers.  Yes, these ten got a free ride, but the price will be paid by future purchasers in future developments.  Decisions like this one, and the continued uncertainty surrounding how courts will interpret and apply the REDMA, will increase development costs across the industry, which will simply be passed along to purchasers by way of higher prices.

Posted by Shane Coblin (posts) | Filed under Real Estate Law | ....
Robert Ward (guest author)
Friday, March 9th, 2012    Posted by Robert Ward (guest author) (posts)
Robert Ward (guest author)


 If you have not yet received this call, you will. “My wife/husband and I were in Scottsdale/Palm Springs/Maui last week and signed a contract for a town house/single family home/condominium.  How should we own it?” This article will tell you what to say.

Welcome to the US Tax System. When someone buys a property – any kind of property – in the United States, that person is buying an admission ticket to the US tax system.

•    If that property is rented, the rental income will be subject to US income tax.  Owners of US real estate who are not US citizens or residents (“non-US persons”) will be subject to withholding on the gross rental income at a rate of 30% (Section 1441(a) of the United States Internal Revenue Code (“Code”)).

•    On sale of the property, a Canadian resident who is a non-US person will be subject to US capital gain taxation (Code Section 897(a)(1)) (currently at rates of 15%) and subject to withholding on the gross sales proceeds at a rate of 10% (Code Section 1445(a)).  (Depreciation will generally be recaptured at a rate of 25%.)

•   Regardless of whether the property is rented, if not sold prior to death, the fair market value of the property on the date of the Canadian resident’s death will be fully subject to US estate taxation.  As a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the maximum estate tax rate for decedents dying in 2011 and 2012 has been reduced to 35%.  Absent further Congressional action, estates of decedents dying after 2012 will be subject to a maximum rate of 55%.

Planning for Rental Real Estate.  Withholding on the gross amount of rental income paid to a non-US person can be avoided by electing under Code Section 871(d) to treat the rental income as effectively connected with a US trade or business.  As a result of the election, rental income net of expenses will be taxed at graduated rates of 15% to 35% (Code Section 871(b)).  The Canadian resident who owns the US property will be required to file a US income tax return to report the income and expenses associated with the rental property.  In order to protect the personal assets of the owner from liability claims, the property will typically be owned by either a limited partnership, limited liability partnership, or limited liability limited partnership.  In such a case, the election under Code Section 871(d) is not available to the partnership, but must instead be made by the individual partners (US Treasury Regulations Section 1.871-10(d)(3)).

Avoiding US Estate Taxation. Numerous strategies have been advanced to avoid US estate taxation.  A discussion of all of them is beyond the scope of this article.  However, the balance of this article discusses four practical approaches available to Canadian residents and concludes with a brief explanation as to why some of the more common alternatives (corporations, partnerships, and joint ownership) are undesirable.

Sell Before Death.  The simplest way to avoid US estate taxes is not to own any assets deemed present in the United States (“US situs assets”).  Many Canadian residents view their ownership of a US vacation property as an asset to be held for only a limited period of time.  On sale of the property, the proceeds of sale may be repatriated (after payment of US income taxes).  As long as the sales proceeds are not invested in other US situs assets (for example, shares of US corporations or real or personal property located in the United States), a Canadian resident who is not a citizen of the United States has no US estate tax exposure.  Because life is uncertain and the US estate tax rate severe, individuals owning US real estate for a limited period of time may consider purchase of life insurance in order to fund the payment of the US estate tax (which is due within nine months of the owner’s death).

Relying on the Treaty Exemption. For many US citizens and residents, US estate taxes are not an issue.  This is because of a generous exemption which Code Section 2010 provides to each citizen and resident.  Unfortunately, Code Section 2107(c) limits the US estate tax exemption which is available to non-US persons to $60,000.  However, the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital (the “Tax Treaty”) allows Canadian residents to claim a portion of the US estate tax exemption (the “Treaty Exemption”).  The amount which is available is determined by a fraction found in Paragraph 2(a) of Article XXIXB of the Tax Treaty.  The numerator of the fraction is the total fair market value of US situs assets owned by the Canadian resident.  The denominator is the total fair market value of the Canadian resident’s worldwide assets.  A convenient rule of thumb is that if the Canadian resident’s worldwide assets do not exceed the amount of the US estate tax exemption available in the year of the Canadian resident’s death, there will be no US estate tax.

In many cases, the Treaty Exemption creates a false sense of security.  First, computation of the denominator is based upon US estate tax principles.  The denominator will include not only the Canadian resident’s bank accounts, brokerage accounts, all forms of real and personal tangible property; it will also include the death benefits payable under policies insuring the life of the Canadian resident, as well as the account balances in the retirement plans of the Canadian resident, such as RSPs and RRSPs.  Further, it is the fair market value of the Canadian resident’s US and worldwide assets which is used in computing the Treaty Exemption and US estate tax liability.  (This is quite unlike the Income Tax Act’s tax on deemed dispositions at death which is imposed only on the unrealized gain inherent in the Canadian resident’s assets.)

Example 1: Mr. Smythe owns four assets.

Canadian Residence $1 million
Canadian RRSP $1 million
US Property $1 million
Life Insurance $1 million

Mr. Smythe dies on February 1, 2011.  The Treaty Exemption will be $1,250,000 determined using the following fraction.

U.S. Situs Assets ($1 million) x   US Estate Tax Exemption ($5 million)
Worldwide Assets ($4 million)

Because Mr. Smythe’s US property has a value of less than $1,250,000, there will be no US estate tax liability if Mr. Smythe dies in 2011.

What if Mr. Smythe dies in 2013?  The second reason why the Treaty Exemption may not provide the relief anticipated is because the US estate tax exemption may be less than anticipated.  Absent further Congressional action, the US estate tax exemption reverts to $1 million for decedents dying after 2012.  Mr. Smythe’s US estate tax liability will be significant.

Example 2: Assume the same facts as the preceding example except that Mr. Smythe dies in 2013 when the US estate tax exemption is $1 million.  The Treaty Exemption is reduced to $250,000 computed as follows.

U.S.Situs Assets ($1 million) x   US Estate Tax Exemption ($1 million) Worldwide Assets ($4 million)

The value of the US property exceeds the treaty credit by $750,000.  As a result, Mr. Smythe’s US estate tax liability will be $259,350.

One way in which to make the Treaty Exemption more effective is to reduce the amount of the denominator in the fraction described in Paragraph 2(a) of Article XXIXB of the Tax Treaty.

Example 3: Assume that Mr. Smythe transfers his Canadian residence, his life insurance policy, and (after withdrawal of the account balance) his Canadian RRSP to Mrs. Smythe.  Despite dying in 2013 when the US estate tax exemption reverts to $1 million, Mr. Smythe still has no US estate tax problem because he has reduced the value of his worldwide assets.

U.S. itus Property ($1 million) x  US Estate Tax Exemption ($1 million)
Worldwide Assets ($1 million)

By dividing assets such that the US situs property is owned by one spouse and the non-US situs assets are owned by the other spouse, the Treaty Exemption can be used most effectively.  However, without further planning this solution may prove to be ineffective.  Consider that if either Mr. Smythe or Mrs. Smythe dies and the survivor receives the deceased spouse’s assets, the facts of Example 2 are replicated, and the US estate tax liability will be incurred at the death of the last of Mr. and Mrs. Smythe.  To avoid increasing the worldwide estate of the surviving spouse, Mr. or Mrs. Smythe may deliver the assets he or she owns to the survivor using a Trust.  If the Trust is drafted properly in accord with US estate tax principles (which will determine the worldwide estate of the survivor for purposes of computing the Treaty Exemption), the result in Example 2 can be avoided and the result in Example 3 replicated.

Leveraging the US Property with Non-Recourse Debt.  Not every person purchasing US real estate is married.  Further, not every couple acquiring US real estate may be totally comfortable with one spouse owning only the US property and the other spouse owning all of the non-US situs assets.  As an alternative, the US property may be encumbered.  Code Section 2053(a)(3)(4) allows a deduction for the debts of the decedent in computing the taxable estate on which the US estate tax is assessed.  For example, a mortgage encumbering the US property will reduce its value for US estate tax purposes.  However, in order for the mortgage debt to be deductible on a dollar-for-dollar basis, the debt must be non-recourse (US Treasury Regulations Section 20.2106-2).  That is, the lender’s only remedy is to take the US property which is secured by the mortgage in the event the borrower defaults.  This type of financing may prove difficult to find, particularly in the current economic environment.

Ownership of a US Property Through a Trust.  Because property values may increase, because the amount of the US estate tax exemption is uncertain, because non-recourse financing may not easily be available, the most appropriate way for many Canadian residents to purchase US real estate is through a Trust.  The Trust is effective because the property is not owned by the Canadian resident at the time of the resident’s death.  The Trust is also advantageous in that it avoids probate, provides liability protection, preserves the owner’s control over the property by selection of a trustee, addresses the possible incapacity of the owner, and protects the heirs from US estate taxation after the owner’s death if the heirs die prior to sale of the US property.

The Trust presents two significant limitations.  First, the settlor of the Trust cannot be a beneficiary.  The practical reality is that in many circumstances this will mean that the Trust will be settled by one spouse for the benefit of the other spouse.  As long as the beneficiary spouse survives, the settlor spouse need not pay rent in order to occupy the US property.  However, once the beneficiary spouse dies or if the beneficiaries of the Trust are the children of the settlor, the settlor can only occupy the property if the children are present in the property at the same time.  Otherwise, the settlor must pay a fair market rental to the Trust for the use of the property.

The second difficulty in ownership of US real estate through a Trust relates to the situs of the Trust.  If the Trust is sitused in Canada, the settlor of the Trust will be taxable on the income realized from rental or sale of the property if either the settlor is the trustee (Income Tax Act (“ITA”) Section 75(2) or the settlor’s spouse is the trustee (ITA Section 74(1)).  As a result US income tax paid on the rental income or proceeds from sale of the property will not be creditable in computing the Canadian income tax liability of the settlor.  Consequently, a person or institution unrelated to the settlor must act as trustee of a Trust resident in Canada.

Alternatively, the Trust could be designed as a US resident Trust.  ITA Section 94 attributes the income of a non-resident Trust to the Canadian resident settlor.  Again, US income tax paid on rental or sale of the property will not be creditable in computing the Canadian income tax liability of the Canadian resident settlor.

As a result of the foregoing issues, Canadian residents buying US real estate will in most cases be best advised to own the property through a Canadian resident Trust with respect to which an unrelated person acts as trustee.  The primary beneficiary will be the settlor’s spouse and the successor beneficiaries will most likely be the settlor’s children.  If the Trust is properly drafted, there will be no US estate tax liability at the death of the settlor, the settlor’s spouse, the settlor’s children, or any other person who is a beneficiary of the Trust.  (The trustee is also not subject to US estate taxation inasmuch as the trustee has pure legal title and no beneficial interest in the property the Trust owns.)


Despite whatever disadvantages or complexities may be associated with the use of a Trust to own US real estate, it provides certainty (when the Trust instrument is properly drafted) that it is effective to avoid US estate taxes without disadvantageous US income tax treatment on rental or sale of the property.  In contrast, the other forms of ownership commonly utilized to bring with them serious liabilities or uncertainties in the tax treatment.

Joint Ownership.  Ownership of US real estate by a husband and wife as joint tenants with rights of survivorship or tenants by the entirety results in US estate taxation of the property at the deaths of both spouses.  There is no relief from US estate tax for a transfer to a spouse who is not a US citizen unless the transfer takes the form of a Qualified Domestic Trust qualifying under Code Section 2056A (Code Section 2056(d)).  Even with the use of a Qualified Domestic Trust, the US estate tax arising at the death of the first spouse is merely deferred until the survivor’s death (Code Section 2056A(b)(1)(B)).  Further, the US estate tax paid at the death of the first spouse is not creditable for Canadian tax purposes because the transfer to a spouse is generally exempt from the Canadian capital gains tax on deemed dispositions at death.

Corporations.  The traditional approach to avoiding US estate taxation has been to own the US real estate through a corporation.  If the US property is owned through a US corporation, it would be necessary to create a tiered structure in which the shares of the US corporation are owned by a foreign (presumably Canadian) corporation in order to avoid US estate taxation.  Otherwise, the stock of the US corporation will be treated as US situs property for US estate tax purposes (Code Section 2104(a)).  While effective if structured properly to avoid US estate taxes, ownership of US property through a corporation  results in adverse income tax treatment.  First, shareholder use of the property without payment of a fair market rental results in income in the form of deemed dividend distribution to the stockholder.  Second, no favorable capital gains relief is provided to corporations on sale of assets, including US real estate.  As a result, gain on sale of the property will be subject to US corporate tax rates of between 15% and 35%.

Partnerships.  Although partnership interests are not identified in Code Section 2104 as property deemed to be within the United States for US estate tax purposes, partnership interests are also not identified in Code Section 2105 as a non-US situs for US estate tax purposes.  This uncertainty regarding holding US real estate through a partnership as an effective way to avoid US estate tax suggests that this approach should only be used if the Canadian resident is willing to request a private letter ruling from the Internal Revenue Service.  The author’s informal conversations with representatives of the Internal Revenue Service suggest that the Service continues to be unwilling to rule on this issue (see Revenue Procedure 91-6, 1991-1 C.B. 431) or will not rule favorably if a ruling request were to be granted.

Robert E. Ward has practiced as a tax attorney for 30 years.  He is a principal in the law firm of Robert E. Ward and Associates, P.C., which has offices in Bethesda, Maryland and Vancouver, British Columbia.  Robert E. Ward and Associates, P.C. provides tax, business, and estate planning services and represents taxpayers before the Internal Revenue Service and the United States Tax Court.  The firm focuses on providing tax planning and representation to owners of privately-held businesses, integrating business succession planning with personal estate planning needs.  The firm also provides advice to citizens and residents of the United States who wish to expatriate so as to escape the US  tax system and assists clients in establishing foreign asset protection trusts, public and private tax-exempt charitable organizations, and all forms of business entities, both domestic and foreign.  Working closely with Canadian legal counsel and tax advisors, the firm offers these same services for individuals and businesses residing in Canada who acquire U.S. assets or engage in U.S. investment and business activities.

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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 | ....
Dan Parlow
Thursday, June 23rd, 2011    Posted by Dan Parlow (posts)
Dan Parlow
Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.

A seemingly counter-intuitive process has just come a bit closer to being the final law of Canada.

We often act for clients who are asserting or defending claims against multiple parties.  These can arise in a myriad of situations, for instance:

  • claims by purchasers of land may target the buyer’s lawyer and realtor as well as the vendor
  • developers’ construction claims may assert wrongdoing by contractors, subcontractors, engineers and architects
  • actions alleging securities misrepresentations may target the issuer, the issuer’s principals, and the underwriters

In most cases the various defendants will have very different legal positions and, just as importantly, the prospects of recovery against deep-pocketed or insured defendants will be drastically different than against others.

It only makes sense, therefore, that settlements between some, but not all, parties to the dispute should be explored by all parties.    For instance:

  • a defendant whose potential liability is minimal may wish to pay a relatively small sum early  to avoid being entangled in the morass of a lengthy dispute;
  • a plaintiff may find it advantageous to collect some money from one defendant to fund its claims against the others;
  • even where multiple defendants have similar prospects of liability, differences in personality or in the availability of funding may dictate completely different responses to the litigation.

Recently, the Ontario Court of Appeal ruled that settlements involving some but not all parties – sometimes called “Mary Carter agreements” – must be immediately disclosed to level the playing field between the remaining parties: Aecon Buildings, a Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited (2010 ONCA 898, 328 D.L.R. (4th) 488)    There has been considerable buzz about this ruling and whether it will be applied in British Columbia.

Arguments in favour of immediate disclosure focus on the notion that a plaintiff shouldn’t recover more than the total amount of its losses and costs (except in rare cases involving punitive damages).  People also insist that if a defendant claims “over” against a third party, that party should know whether the defendant is truly fighting the primary claim or is whether its position is a mere fiction.

Consider, for example, the common scenario where a developer claims its prime contractor provided deficient building and the contractor claims that fault actually originated in misleading architectural plans and/or deficient structural steel of its subcontractor.     Even if – leaving aside the possible architect’s negligence – the owner recognizes the source of the deficient steel, it must claim against the party it has a direct contract with.     The contractor wishing to wash its hands of the dispute may pay a small sum upfront and pass on to the owner any recovery against the subcontractor.

Another scenario is that the owner and contractor may be related parties such that the owner’s shareholders will not, in reality, gain anything unless blame can be passed further down the line to the subcontractors.   In this case, it may be argued that the subcontractor should be entitled to be informed of any “sweetheart deal”.

On the other hand, to encourage settlements and minimize litigation there is a strong argument that disclosure of such settlements to remaining parties should not be required, at least until it is time to enter judgment.   One reason concerns secrecy – the settling defendant will almost always wish to protect its own name through a confidentiality clause; if secrecy cannot be assured it will often not be willing to settle.  Another argument is that commercial parties are best left to settle their own disputes in their own ways, without having the court as a big brother.  There is nothing stopping the remaining parties from asking whether there has been a settlement with some parties, and  at what price.

In my own experience, and in that of other litigators I have spoken with on this matter,  settlements of entire cases often follow after partial settlements are made, even if not yet disclosed.  The more  It follows that partial settlements should be encouraged on whatever terms, so long as there is no deceit or subterfuge involved.

It does not appear that the Supreme Court of Canada shares my view on this.  Today in an interim ruling on the Aecon appeal the court moved a step closer to endorsing the requirement for immediate disclosure: .

Once this appeal is finally heard and judgment rendered, we will know whether the immediate disclosure principle applies in BC.  In the meantime, parties wishing to enter into “Mary Carter” settlements must beware.  Plaintiffs in particular must know that if they fail to immediately disclose such a settlement to the remaining parties to the dispute, they may well face a stay of the entire proceedings.   For this reason, confidential partial settlements are not currently part of the landscape in British Columbia.

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