The British Columbia Supreme Court released its reasons in the case of Strata Plan LMS 3851 v. Homer Street Development, 2008 BCSC 1160 (New Westminster Registry No. S76792) ("Homer Street Development") on August 26, 2008. The decision reinforces the duties and obligations owed by and placed upon developers, the directors and officers of developers and other parties involved in the preparation and dissemination of disclosure statements. This case was decided using the Real Estate Act, 1979 ch. 356 (the "REA"); however, this decision is very much applicable to current developers and their duties and obligations under the Real Estate Development Marketing Act, SBC 2004, chapter 41 ("REDMA"). While the provisions of REDMA vary from those in the REA, the underlying principles are similar.
The lesson for developers is that they must ensure compliance, in all material respects, with REDMA and its regulations or risk liability and the prospect of making compensation to individual purchasers. Developers and their directors and officers owe a duty of care to purchasers and liability can result from, among other things, breaching this duty, making material false statements within a disclosure statement, non-disclosure of material facts and failing to properly amend a disclosure statement. The lesson for other parties involved with the preparation of a disclosure statement, such as an expert providing information or opining on projections, is that they also owe a duty of care to purchasers and where a certain standard of care is not met, they may be liable to make compensation to individual purchasers.
In this case the individual plaintiffs (collectively the "Investors") were the owners of strata lots of the Westin Grand Hotel (the "Westin Grand") located in downtown Vancouver, British Columbia. The Investors entered into offers to purchase and agreements of sale (the "Sale Agreements") following the receipt of a disclosure statement issued under the authority of the REA and the Securities Act, R.S.B.C. 1996 ch. 418 (the "Disclosure Statement"). The Investors brought an action against the Grand Development Partnership and its partners (the "Developers"), the directors and officers of each of the Developers (the "Directors"), Hospitality Valuation Services Canada ("HVS") and O’Neill Hotels & Resorts Ltd. ("OHR") for alleged breaches of duty relating to the Disclosure Statement.
The Disclosure Statement was provided to the Investors on November 8, 1996 and included a financial projection (the "Projection") based on certain hotel occupancy rates. Also included in the Disclosure Statement was an opinion letter (the "Opinion Letter") from HVS who was a provider of consulting and valuation services. The Disclosure Statement did contain certain disclaimers about the Projection, including that the assumptions and hypotheses used in the preparation of the Projection, although considered reasonable by the Developer and OHR at the time of preparation, might prove to be incorrect.
The Investors entered into their respective Sale Agreements in 1996 and construction began in April of 1999. In July of 1998 a business plan, which included a detailed operating budget for 1999, concluded that the Westin Grand was expected to perform at only 80-90% of the Projections resulting in net income being down significant margins from that shown in the Disclosure Statement. The business plan was never finalized, but the 1999 budget was approved by the Developers. In March of 1999, a second amendment to the Disclosure Statement was issued with the previously determined occupancy rates and without the 1999 budget.
The British Columbia Supreme Court decision in Homer Street Development was a complex judgment determining a number of issues, but some of the key findings were that:
- the Developers and their Directors were held liable to make compensation for materially false statements regarding expected occupancy rates in the Disclosure Statement;
- the Developers and their Directors were liable to make compensation for a statement falsely attributed to an expert in the Disclosure Statement;
- HVS owed the Investors a duty of care in preparing its opinion and HVS was negligent in giving its opinion on certain projections in the Disclosure Statement;
- the Developers and OHR made negligent representations of the objective reasonableness of certain projections in the Disclosure Statement;
- certain projections and forecasts in the Disclosure Statement were not facts for the purpose of the declarations of material facts;
- the Developers and its Directors were liable for a false declaration by failing to disclose certain budgetary information in an amendment to the Disclosure Statement; and
- there are no common law obligations on developers to make further disclosure beyond the requirements of the statutes and regulations.
Were the Developers liable under the REA to make compensation for any loss or damage resulting from a material false representation?
Section 59 of the REA, which has now been replaced by the similar provision found at s. 22 of REDMA, provided a right of action by purchasers for damages resulting from a misrepresentation in a disclosure statement. In determining liability under this provision the Court first considered what standard of materiality was necessary to create liability and held that a fact is material if there is a "substantial likelihood that the disclosure of the admitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available."  In applying this standard the Court found that the fact that occupancy rates for the Westin Grand were projected to be higher than the projected average rates for downtown Vancouver hotels of similar quality to be a material fact. The Court then considered whether any defences were available under s.59 of the REA (S. 22 of REDMA), however, the Developers and their Directors could not avail themselves of such defences because the statement was not purported to be made on the authority of an expert and there were no reasonable grounds to believe the statement was true.
The Court also considered other statements in the Disclosure Statement such as "tourism is the number one growth industry in Vancouver". While the statement may or may not have been true, the attribution of this statement to HVS was a material part of the statement and because it was a false attribution, the Developers and their Directors were liable to make compensation under s. 59 of the REA (s. 22 of REDMA).
It is also worth noting that the Court determined that any implied assertions of fact, or representations, in a projection are not statements within s. 59 of the REA because the REA distinguished between statements, promises and forecasts. As a result, only statements expressly made in the Disclosure Statement can be subject to liability thereunder.
Was there a reasonable foundation for the Projections and was HVS negligent in opining that the Projections were reasonable and achievable?
The Investors were owed a duty of care by HVS because HVS agreed to have the opinion letter included in the Disclosure Statement. The standard of care regarding projections in a disclosure statement is relatively low and can be met if in making the projection, the person "acted reasonably having regard to the standards prevailing in the profession and the inexactitude inherent in the methods by which the value of the a property is determined." Ultimately, HVS was found to be negligent in opining that the Projection was reasonable and achievable because of the negligently overstated occupancy projections. The Developer and OHR were also negligent in representing in the Disclosure Statement that the Projection was objectively reasonable.
Was there full, true and plain disclosure as declared by the Developers and their Directors?
The Investors claimed that there was not full, true and plain disclosure of all material facts and that the projected hotel room demand growth was a half-truth and misleading. The court held that the Projections were not "facts" for the purpose of the declarations of material fact, but rather forecasts. Material facts are those matters dealing with existing facts or existing plans of the development.
Was there a false representation by the Developers and their Directors in the declarations to the second amendment to the Disclosure Statement?
Section 56 of the REA, which has now been replaced by the similar provision found at s. 16 of REDMA, places a duty on developers to amend a disclosure statement or file a new disclosure statement when a disclosure statement does not comply with the REA or its regulations or contains a misrepresentation. The Court held that where the Developer and OHR stated their beliefs as of the date of the Disclosure Statement there was no requirement to amend under s. 56 (s. 16 of REDMA) because of the date qualification.
The Court did find that Developer and their Directors were required to provide the 1999 budget in the second amendment to the Disclosure Statement. The moment the 1999 budget was approved it ceased to be a projection and the failure to provide it to the Investors resulted in a false declaration by the Developer.
Which Investors benefit from any deficiency in the second amendment to the Disclosure Statement?
Those Investors who entered into their Sale Agreements after the second amendment to the Disclosure Statement may rely on the rights provided in s. 59 of the REA (s. 22 of REDMA) regarding any such amendments. However, "any investors who contracted by binding Sale Agreement prior to any amendments are not entitled to rely for any statutory rights on any duty to amend for any changes thereafter. Their statutory rights [under s. 59 of the REA] are crystallized at the time they signed their binding Sale Agreement."
Are there common law obligations to make further disclosure beyond the requirements of s. 56 of the REA?
With respect to any common law obligation to make further disclosure beyond the requirements of s. 56 of the REA (s. 16 of REDMA), the Court held that "s. 56 is a complete code of disclosure requirements after the original disclosure statement and if any matters after the original disclosure statement are not required by s. 56 to be disclosed then there are no additional common law obligations to do so."