Thursday, September 4, 2014

Changes Affect Buyer’s Rights

The Real Estate Development Marketing Act1 (REDMA) has received significant attention in recent years.

While REDMA applies to a wide variety of multi-unit properties, including time shares, leasehold interests and cooperative interests, it is most often associated with pre-sale strata developments.

REDMA came into force in 2004 at the beginning of a market upswing. Many purchasers signed pre-sales contracts and completed their purchases before the financial crisis of 2008. Others, when the crisis unfolded, found themselves committed to closing on properties at prices that were far higher than the pre-crisis values. At the same time, mortgage qualification rules tightened. Many buyers found themselves unable or unwilling to complete their purchases.

The fallout of the financial crisis led to judicial scrutiny of the protections contained in REDMA. The courts viewed REDMA as consumer protection legislation and interpreted its provisions generously in favour of consumers2. Rescission of many contracts ensued for seemingly trivial breaches of REDMA.

Yet if REDMA was treated as consumer protection legislation, it also provides developers with significant benefits. Developers may change anything that affects the price, value or use of the property, and, so long as those changes are disclosed in an amended disclosure statement, a purchaser cannot rescind the contract.

Recent case law has seen the courts recognize the dual purpose of the legislation to both protect purchasers and to facilitate the efficient and profitable pursuit of real estate developments. The B.C. Court of Appeal recognizes these competing purposes and holds that only negative changes need to be disclosed in an amended disclosure statement3.

However, an earlier decision of the Court of Appeal was clear that errors in disclosure must not create different rights for different purchasers4. A change to a development may be negative to one purchaser, positive to another, and irrelevant to yet another. How will these decisions be reconciled?

Recent changes to REDMA
Following several purchaser-friendly court decisions, the B.C. Legislature made significant changes to REDMA which came into force on May 29, 20145. Some proposed changes are sensible and are not obviously detrimental to purchasers. For example, developers may now:
         provide separate disclosure statements for each phase in a phased development; and
·         provide a consolidated disclosure statement rather than each of the disclosure statements for the development.
However, there are important changes in remedies available to purchasers and the handling of deposits.

REDMA provides three remedies: rescission, unenforceability, and damages; this article will address the first two.

Previously, a purchaser could rescind a contract if entitled to a disclosure statement or amended disclosure statement they never received. There was no time limit for rescission.

As a result of changes to REDMA, the right to rescind the contract expires one year after closing. This right to rescind is automatic if a disclosure statement is not received – but a purchaser can rescind only if the information in that disclosure statement would have been “reasonably relevant to the purchaser in deciding to enter into the purchase agreement.”

In addition, under Section 23 of REDMA Agreements Void for Non-Compliance – a contract is unenforceable against a purchaser if Part 2 of REDMA (the heart and soul of the legislation) is breached. This encompasses a wide variety of breaches and applies to a number of situations where rescission doesn’t apply. This remedy is not available after closing.
However, certain breaches of Part 2 are excluded from the reach of Section 23 as a result of the new amendments, which incorporate a test of reasonable relevance to the purchaser. These changes take away the “slam dunk” argument available to purchasers when REDMA appears to have been breached. Developers will be emboldened to vigorously defend purchasers’ claims for return of their deposits.

The recent amendments to REDMA also change how deposits are handled in ways particularly troubling for purchasers. REDMA always permitted developers to get a deposit without any adjudication of a purchaser’s claim that REDMA was breached. Section 18 provides that a trustee must release the deposit to a developer if the developer certifies:
         the purchaser has no right of rescission;
         the purchaser has failed to pay a deposit;
         the contract permits the developer to terminate the contract; and
         the developer has terminated the contract

Release of the deposit is based solely on the certification of the developer, not an independent person or the court. The purchaser may pursue the matter in court, but in the meantime the developer has the deposit and may use it. This is a concern given that a purchaser’s contract is often with a single-purpose company that will become asset-less upon sale of the units in the development. This is in stark contrast to the provisions of the Real Estate Services Act, which ensures the security of the deposit pending resolution of a dispute between seller and buyer.

The recent amendments include a small, but significant change to Section 18 that allows a developer to get the deposit if the balance of the purchase price (not only a deposit) is not paid and upon the developer certifying there is no right of rescission. As a result, if a purchaser exercises their right of rescission prior to closing, the developer may still get the deposit when the purchaser refuses to complete the transaction.

A developer may honestly believe there is no right of rescission (even though the purchaser has delivered notice
of rescission) and get the deposit. This effectively makes the developer judge, jury and executioner with respect to whether a purchaser has a right of rescission.

Notably, Section 18 of REDMA makes no reference to a contract being unenforceable. It is only where the developer acknowledges a right of rescission that it cannot get the deposit. A contract may be unenforceable in circumstances that do not provide for a right of rescission. In those circumstances, REDMA allows for the release of a deposit to a developer in circumstances in which the contract is unenforceable.

It is important to understand all of the risks of the intended purchase. Pre-sales come with additional risks that may not be obvious to purchasers. It is always appropriate to seek independent legal advice about the risks of purchasing a pre-sale.

1 S.B.C. 2004, c. 41
2 Pinto v. Revelstoke Mountain Resort Limited Partnership, 2011 BCCA 210
3 Woo v. Onni Ioco Road Five Development Limited Partnership, 2014 BCCA 76
4 299 Burrard Residential Limited Partnership v. Essalat, 2012 BCCA 271
5 REDMA, supra, as amended by the Miscellaneous Statutes Amendment Act, 2014, ss. 56 - 63
6 Ng (Re), 2011 CanLII 13607 (BC REC)

Exerts from Article by Wesley McMilliam – Lawyer
(Source: REBGV)