Remember when Vancouver real estate went down? In the late 1990s, the value of 89 units in Vancouver’s Westin Grand Hotel collectively decreased in value from C$18-million to C$10-million in two and a half years. Investors in the units then discovered that the developers’ disclosure statement had materially misrepresented occupancy projections, and brought a class action against the developers. Yet, in its September 15, 2016, decision, The Owners, Strata Plan LMS 3851 v. Homer Street Development Limited Partnership, the B.C. Court of Appeal dismissed the investors’ claim, because their loss had resulted from a general market decline, not the misrepresentation. The moral? Real estate developers are not responsible for market forces that impact unit values.
The Real Estate Act (Act), predecessor to the current Real Estate Development Marketing Act, required that developers marketing pre-sale units provide disclosure statements setting out the project’s financial details. The Act provided that buyers were deemed to rely on the disclosure statement. Most importantly, the Act provided that if the disclosure statement contained a material misstatement, the developer would be liable to buyers for any loss or damage sustained.
In this case, the developers of the Westin Grand Hotel in Vancouver (Hotel) conducted pre-sales of Hotel units in 1996. Investors paid a total of C$18-million for 89 units, with the developers retaining a further 118 units. All of the units were required to be in a rental pool, operated as a hotel.
The disclosure statement the developers provided to investors contained a general warning of the inherently risky nature of such investments. The disclosure statement also included a financial projection of the potential return on investors’ investments (Projection). That Projection stated that it was based in part on expected occupancy rates of other major hotels in downtown Vancouver of similar quality between 1999 and 2003 (which would be the first four operational years of the Hotel). In fact, when the disclosure statement was prepared, the expected occupancy rates in similar Vancouver hotels were lower than those used in the disclosure statement. In effect, the Projection was optimistic.
The sale of units to the investors closed in April 1999. After that time, it became apparent that the Hotel was not as profitable as projected. The value of the units purchased by the investors dropped significantly — nearly 45 per cent. The investors commenced a class action against the developers in November 2002. The investors claimed that the Projection was a material misrepresentation they relied on to purchase the units, they suffered a loss, and the developers were required to compensate them under the Act.
The trial proceeded in two stages. The first stage considered liability. The trial judge determined that the Projection was a false statement made by the developers and, accordingly, that the developers were required to compensate the investors for their losses. That decision was upheld on appeal in 2009.
The second stage of trial considered the quantum of damages owed to the Investors. Accepting expert evidence of the value of the investors’ units at the closing of the sale transactions in 1999 as being approximately C$10-million, the trial judge assessed the damages owing to the Investors as C$8-million (being the difference between the purchase price and the closing value) plus pre-judgment interest. The developers appealed to the B.C. Court of Appeal (Court).
STATUTORY RELIANCE PRINCIPLES
The first issue before the Court was whether the developers could introduce evidence that individual investors did not rely on the Projection when making their decision to purchase units.
The Court affirmed the trial judge’s rejection of this evidence. The Act presumes that investors rely on information provided to them by developers in disclosure statements. In this way, the legislation removes the need for investors to prove that they received, reviewed and relied on information in a disclosure statement. That presumed reliance can only be rebutted by proving that an investor had knowledge of the misrepresentation at the time the investment was made. Essentially, unless the investors knew the Projection was wrong, they were presumed to have relied on it. The developers’ proposed evidence did not address that question, so it was inadmissible.
The investors claimed that they were entitled to recover the full loss of their investment because of the misrepresentation in the disclosure statement. The Court held otherwise.
The Court acknowledged that while the purpose of the Act was to protect the investing public, the remedial provisions of the Act do not extend to make developers liable for losses arising from market changes. Imposing liability for market changes would impose a significant burden on developers, and would effectively require them to insure investors for the risks inherent in investment.
As such, the Act imposes limited liability on developers. Developers are required to provide full and accurate information in disclosure statements, and are required to compensate buyers for losses caused by inaccuracies in disclosure statements; but developers are not required to advise potential investors of market risks or to compensate investors for market losses.
The Court determined that the misrepresentation in the disclosure statement as to “expected average occupancy rates for downtown Vancouver hotels of similar quality” was not the reason the investors’ units declined in value. Rather, the Court held that the investors’ loss resulted from general market decline. Whatever the disclosure statement had said, the investors would have lost money on their investment. They were not entitled to be backstopped by the developers for that risk or loss.
Causation is always important in legal claims. Although the law is not entirely settled on this point, most cases require the plaintiff to prove that the loss was caused by the defendant’s wrongdoing. In what the Court characterized as “exceptional” cases, such as fraud, a wrongdoer will be required to restore the plaintiff to the original position regardless of the precise cause of loss. Such cases are exceptional because they transfer significant risk to defendants.
The Act, and its successor the Real Estate Development Marketing Act, have been interpreted as generally favourable to buyers, who have less information than developers. The legislation imposes strict requirements on developers to ensure they provide complete and accurate information to potential purchasers. However, as this case makes clear, vendors cannot be expected to control the market. Investors and developers share the risk that the market will decline and they will lose money on their investment.
There is speculation that the Vancouver housing bubble will burst. Perhaps the market will decline again. If so, this case will impact buyers’ ability to recover their losses.
Finally, while the defendant developers succeeded in this case, that success only came after fourteen years of litigation, which included four hearings before the B.C. Court of Appeal. Lengthy litigation is costly for all parties. The prudent course is to ensure that disclosure statements are carefully checked for accuracy before being published, and that any recognized inaccuracies are promptly corrected.