BCCA clarifies developer disclosure requirements

In June 2012, Harper Grey’s Bryan Baynham, QC and Jeremy Shragge were successful in an appeal of the British Columbia Supreme Court’s ruling in 299 Burrard Residential Partnership Limited v. Essalat. The decision clarifies the obligation of real estate developers to immediately and formally disclose material changes to condo pre-sale purchases under the Real Estate Development Marketing Act.

The following “Counsel Comments” was published in the August 2012 edition of Take Five, a publication of OnPoint Legal Research that summarizes the most interesting civil cases from the B.C. Court of Appeal and the Alberta Court of Appeal.

Counsel Comments: 299 Burrard Residential Limited Partnership v. Essalat

Under the Real Estate Development Marketing Act (REDMA), pre-sale condominium purchasers are entitled to accurate and formal disclosure of material facts related to the development into which they are buying. This information enables purchasers to arrange their affairs and acts as consumer protection against developers.

In furtherance of these objectives, REDMA requires a developer to plainly disclose all material facts and, if necessary, amend its disclosure statement to correct material facts that have become false or misleading. In our submissions to the court, we referred to this statutory protection as the “right to ongoing disclosure”. More casually, we called it the “ongoing right to know”; the purchasers ongoing right to be advised of significant changes unilaterally made by the developer that could affect the price, value or use of their yet-to-be constructed homes.

The critical importance of the ongoing right to know flows directly from the tremendous flexibility afforded developers under REDMA. A developer may change with impunity just about any material characteristic or fact respecting a pre-sale development as many time as it sees fit without giving prospective notice to – let alone obtaining the prior consent of – purchasers.

There is just one caveat: a developer must immediately and formally disclose all changes in material facts. Failure to do so renders the contracts of purchase and sale in respect of the development unenforceable. In this manner, the REDMA provides both a carrot and a stick to developers: change whatever you want, whenever you want, as often as you want, but risk losing your contracts if you fail to make timely disclosure.

The trial judge in Essalat applied the common law test (TSE Industries/Sharbern) for materiality to evaluate whether the undisclosed delay in construction completion (from September 2009 to late January 2010) triggered the developer’s statutory obligation to amend the disclosure statement. In doing so, he turned the ongoing right to know on its head.

The TSE Industries/Sharbern test was always an inappropriate and confused method of analyzing whether an undisclosed delay in construction rendered a disclosure statement false or misleading. Asking whether knowledge of an erroneous construction date “would likely have assumed actual significance in the deliberations of a purchaser” is qualitatively different from asking whether that date, which is always a material fact under REDMA, is itself false or misleading; materiality and falsity are distinct concepts. In addition, the common law framework was created to determine whether knowledge of undisclosed fact in existence at the time an investment was offered would have influenced a reasonable investor’s decision to invest. This could hardly apply to a delay in construction that was unforeseen at the time of purchase.

REDMA would offer scant consumer protection if a developer could avoid disclosing a delay in construction completion solely on the basis of its subjective evaluation of whether a “reasonable purchaser” would have cared about such a delay at the time of purchase. On this basis, and given developers’ ardent refusal to ever report construction delays, no purchaser could ever expect to be formally advised that his new home was not going to be ready on time. But such was the unfortunate state of the law following Essalat.

Fortunately, though, the Court of Appeal recognized the critical role played by the ongoing right to know in balancing consumer protection with developer flexibility. The court affirmed that the formal disclosure obligations created by section 14 and 16 of REDMA must be strictly construed and cannot be satisfied (per TSE Industries/Sharbern) by pointing to what an individual purchaser might have known anecdotally. Perhaps more important, a developer can no longer absolve itself of its obligation to amend the disclosure statement by suggesting that an individual purchaser would not have cared about the undisclosed material fact even if he had known of it at the time of purchase.

In the final analysis, we believe that this decision will benefit both purchasers and developers by strengthening the degree to which both sides of a pre-sale transaction can rely on the disclosure statement as an exhaustive and accurate compendium of the material facts that relate to a development.