Pre-Sale Litigation: A Change In Attitude From The Courts?

By Bradley Cronquist

The economic downturn in 2008 created circumstances where purchasers were unwilling or unable to complete on strata units that were now valued at less than the purchase price in the Purchase Agreement.

Purchasers sought to avoid their obligations under the purchase agreement which developers wanted to enforce. This led to litigation with developers seeking damages from the purchaser’s breach of contract and the purchasers seeking an order they were not bound by the Purchase Agreement and a return of their deposit.

The Courts consistently found against the developer until recent rulings.

The first case is the Supreme Court of Canada case of Sharbern Holdings Inc. v. Vancouver Airport Centre. The case dealt with a developer who was constructing 2 strata hotels on the same property, the Mariott and the Hilton. The developer managed both projects, but provided a guaranteed return on the Mariott project, but not on the Hilton project. The investors in the Hilton project suffered losses and brought an action against the developer saying it had failed to disclose the guarantee of return to the Mariott project in the disclosure statement which amounted to a conflict of interest.

The legislation in effect at the time of filing of the disclosure document was the Real Estate Act which made the developer liable to the purchaser for a “material false statement”. The Court considered the important aspects of materiality and found as follows:

a) materiality must be considered objectively from the perspective of a reasonable investor;

b) an omitted fact is material if it would have been considered important rather than might have been considered important; and

c) materiality must be proven through evidence of the person alleging the materiality.

The Court found that the failure to disclose the conflict of interest was not material, and refused to find in favour of the purchasers on their claim.

The finding in Sharbern strengthened the developers position against a purchaser wanting to terminate its Purchase Agreement, but the case was determined under the Real Estate Act which is no longer in force in British Columbia. The Real Estate Marketing Development Act (REDMA) governs marketing of real estate and contains a definition of material fact. The definition states, in part, that a material fact is ” 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”.

It was uncertain how, or if, the Courts would apply the test set out in Shabern to case in which REDMA applied.

The answer came in the case of 299 Burrard Residential Ltd Partnership v Essalat. The developer had disclosed in the Disclosure Statement that the estimated completion date for the project would be September 2009 when the project was not completed until April 2010. The purchaser claimed that the extension of the completion date was a material fact that was not disclosed in the Disclosure Statement, which permitted the purchaser to terminate the Purchase Agreement.

The Court had no trouble finding that the test set out in Sharbern applied to determine if a fact was a  material fact   under REDMA even though material fact had been defined in the Act.

The Court went on to find that the Purchaser had failed to meet the test of materiality, and found the Purchase Agreement enforceable by the developer.

The findings in the Sharbern and 299 Burrard cases confirm that not all facts that are failed to be disclosed will be material, and has levelled the playing field between the developer and purchaser in disputes.

For more information or questions please contact Pushor Mitchell Partner Brad Cronquist at cronquist@pushormitchell.com or (250) 869-1150.