Rescission of Pre-Sale Contracts
Section 14 of the Real Estate Development Marketing Act (British Columbia) (REDMA) provides, among other things, that a disclosure statement must plainly disclose, without misrepresentation, all "material facts." The REDMA defines "material fact" to include "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." Where a developer becomes aware that a disclosure statement does not comply with the REDMA or regulations, or contains a misrepresentation, the developer must immediately file with the Superintendent of Real Estate a new disclosure statement, or an amendment to the disclosure statement, that clearly corrects the failure to comply or the misrepresentation, and must also provide a copy to each purchaser.
The Superintendent of Real Estate has issued various policy statements regarding the marketing of development property. Policy Statement 1, which specifies the form and content for a disclosure statement applicable to a development property consisting of five or more strata lots, requires disclosure of the actual or estimated dates of construction commencement and completion. Given that the actual dates of construction commencement and completion will vary given a host of economic factors and market conditions, developers are typically conservative in disclosing these estimated dates so as to provide for maximum flexibility. Developers often go further by including additional language in their disclosure statements to make it clear that the dates are merely estimates and may vary based on such factors and conditions.
Developers also generally include "outside completion dates" in their pre-sale purchase contracts in order, among other things, to avoid any argument that the purchase contract is unenforceable due to uncertainty associated with the completion date.
To date, developers have generally relied on the combination of a conservative outside completion date in the pre-sale contract and the fact that the construction commencement and completion dates set out in the disclosure statement are merely "estimates" as a basis for concluding that a change in the actual construction commencement and completion dates will not require an amendment to the disclosure statement or create legal rights and remedies for purchasers.
Against this backdrop, some recent decisions of the British Columbia Supreme Court indicate that courts will scrutinize the progress of construction commencement and completion very closely, and that developers must be more vigilant in disclosing changes in the estimated dates than previously believed.
Accelerating Completion Dates
In McEachern v. 752265 B.C. Ltd., 2009 BCSC 1290 (released on September 21, 2009), the British Columbia Supreme Court decided that an eight-month acceleration of the estimated completion date set out in a disclosure statement gave rise to a contractual right of rescission.
The disclosure statement estimated a completion date of December 31, 2009; however, in May 2008, the developer amended its disclosure statement and accelerated the estimated completion date by eight months to April 30, 2009. The purchasers then gave notice terminating their three purchase contracts in reliance on the following clause: "This Contract is terminable at the Buyer’s option for a period of seven days after receipt by the Buyer of any amendment which materially affects the offering." They sought an order, on the basis of their contractual right to rescind (and not the statutory rescission right under the REDMA), that their purchase contracts were void and that their deposits be returned.
The court granted the order, stating that there was a "substantial likelihood" that the completion date would be "significant to a reasonable purchaser in deciding whether or not to purchase a unit" in the development and that such a purchaser might not have signed the contract if advised of the April 2009 completion date up front. The court held that the eight-month acceleration was a "change of sufficient gravity" that it "materially" affected the offering, thereby triggering the purchasers’ contractual rescission right.
In reaching its conclusion, the court distinguished a case where a five-month delay in the estimated completion date was found not to constitute a "material change" entitling the purchaser to exercise a contractual right to rescind, as the purchase contract in that case expressly contemplated potential delays. The purchase contract in McEachern also gave the developer the express right to extend the completion date and, in addition, the court specifically acknowledged the reality that construction delays in the pre-sale context are not unusual. However, the purchase contract did not expressly contemplate an acceleration of the completion date. The court ruled that, viewed both objectively from the perspective of a reasonable purchaser, and subjectively from the perspective of the purchasers in McEachern, an eight-month acceleration of what was originally to be a period of 23 months materially affected the offering and that, as a result, the purchase contract was terminable.
It is important to note that the contractual termination right provided to the purchasers in McEachern was broader than the rescission right afforded to purchasers under the REDMA and that, had the rescission right in the contracts been limited to the terms of the statutory rescission right, the court’s decision may well have been different.
Most purchase contracts will not contain a contractual rescission right that is broader than the rescission right available under the REDMA; nevertheless, the decision in McEachern counsels prudence and, in order to preserve maximum flexibility, pre-sale purchase contracts and disclosure statements should specifically refer to a developer’s right both to postpone and to accelerate closing.
Failure to Amend Construction Completion Date May Render Contract Unenforceable
In Chameleon Talent Inc. v. Sandcastle Holdings Ltd., 2009 BCSC 1670 (released on October 2, 2009), the British Columbia Supreme Court considered whether a developer’s failure to file and deliver an amendment to the disclosure statement that reported a delay in the completion of construction had constituted a breach of the REDMA, so as to render a pre-sale purchase contract unenforceable against the purchaser.
The original disclosure statement set out an estimated date of November 30, 2006 for the issuance of a building permit, an estimated construction commencement date of November 2006, and an estimated construction completion date of November 2008. The purchase contract provided for an "outside completion date" of November 30, 2009. Due to a delay in building permit issuance, construction did not commence until five months after the original estimated construction commencement date of November 2006. On May 2, 2007, the developer filed an amendment to its disclosure statement advising that a building permit had been issued by the municipality on April 23, 2007; however, that amendment did not amend the estimated construction commencement or completion dates. Beginning in July 2008, the developer circulated construction updates to purchasers indicating that completion of construction was expected to occur in the fall of 2009. Ultimately, the project was not completed by November 2008 as originally disclosed. On August 10, 2009, less than two weeks after the purchaser’s action was commenced, the developer filed and delivered an amendment to the disclosure statement that changed the estimated construction completion date to October 2009.
The purchaser sought a declaration that the purchase contract was unenforceable and an order for the return of the deposit on the basis that, by failing to amend the disclosure statement to disclose the delay in completion of construction, the developer had failed to comply with the REDMA by not disclosing this material fact.
Despite the fact that the definition of "material fact" is arguably a narrow one, the court interpreted it broadly in stating that it could not think of any circumstances when the date of occupancy, or the construction completion date, would not be a material fact. The court considered the May 2, 2007 amendment to be inadequate and misleading because it did not explicitly state that construction was delayed, and because it failed to re-estimate the completion date when it was known, or ought to have been known, that a November 2008 completion date was unlikely. As a result, the court found that the developer had failed to comply with the REDMA. The developer also breached the REDMA by failing to amend immediately the disclosure statement when the estimated November 2008 completion date passed. The court held that the purchaser was entitled to a declaration that the purchase contract was unenforceable and to the return of the deposit. Notably, the court reached its decision despite the fact that there was no evidence that the purchaser, which apparently wanted to get out of the deal solely due to financial difficulty, would suffer any inconvenience, harm or damage of any kind as a result of the construction delay.
In the course of its decision, the court made the following observations:
- The purchaser could not be expected to accept a delay in the "estimated" construction commencement date of more than one or two months, and a delay of five months was unacceptable. (Although the judgment is not entirely clear on this point, it implies that any delay in the "estimated" construction completion date of more than one or two months would also be unacceptable. It is not clear, however, whether an amendment to the disclosure statement is required for a one- or two-month delay and, if so, whether an amendment is required for any delay, no matter how brief.)
- If an "estimated" date was interpreted to permit indefinite delays, that would "destroy the intention" of the REDMA and the purchase contract would be void due to uncertainty, even though it contained an "outside completion date." (This statement by the court is surprising, given that one of the primary purposes of an outside completion date is to avoid any argument that a pre-sale purchase contract is uncertain and, therefore, unenforceable.)
- Even though the purchase contract set out an "outside completion date" of November 30, 2009, the parties did not intend an "elasticity" allowing the developer to delay the completion date until November 30, 2009, and a reasonably prudent buyer would not have expected the actual completion date to occur a full year after the estimated November 30, 2008 completion date. (With respect, it is difficult to accept the court’s conclusion that the parties did not intend what they specifically agreed to in the purchase contract.)
- The requirement to disclose estimated construction commencement and completion dates implies disclosure of an actual date (e.g., "November 1, 2006") and not a period of one month (e.g., "November 2006").
The developer’s circulation of construction updates explaining the construction delays did not constitute effective disclosure. The decision in Chameleon has been appealed, and the declaration and order made by the court have been stayed pending the results of that appeal. In the interim, however, it would be prudent for developers to:
- Ensure that any delays in either the estimated construction commencement or completion dates are disclosed to purchasers, by way of disclosure statement amendment, prior to the applicable estimated date set out in the disclosure statement (although developers will need to assess, depending on market conditions, whether the benefit of being prudent and filing an amendment outweighs the drawbacks associated with doing so).
- Include in their disclosure statements specific estimated dates for the commencement and completion of construction (e.g., March 1, 2010 rather than March 2010).
- Know that informal construction updates do not constitute legally effective disclosure of material facts.
- Consider stating, when filing new disclosure statements, that the construction commencement and completion dates may be accelerated by a substantial period of time or delayed to as late as the "outside completion date" set out in the purchase contract. (Although this will provide the purchaser with knowledge of the extent of potential acceleration or delay, it may be unpalatable from a marketing perspective.)
Breathing Life into an Expired Contract
In Stark v. Humboldt Street Project LP, 2009 BCSC 1006, the British Columbia Supreme Court considered whether a contract that had technically expired because a condition precedent had not been waived by the required date could be resurrected by the subsequent conduct of the parties.
The purchase contract contained a "subject to" financing condition in favour of the purchaser that expired on May 8, 2006. On May 10, 2006, the purchaser and the developer signed an addendum whereby the purchaser purported to remove the condition. The purchaser also paid an increased deposit of $54,490. She subsequently behaved as if the contract were in existence, and even signed a receipt for a disclosure statement amendment on February 4, 2007. On January 5, 2009, the purchaser tried to get out of the deal on the basis that the contract had terminated two-and-a-half years earlier when the financing condition was not removed.
The judge held that a new contract was created on May 10, 2006, when the parties signed the subject removal addendum. The reasons are not extensive, but the judgment is clear. The case stands for the proposition that parties may "breathe life" into an expired contract by virtue of their conduct alone.