• REDMA Revisited
  • April 1, 2014 | Author: Scott Smythe
  • Law Firm: McCarthy Tétrault LLP - Vancouver Office
  • For at least 10 years prior to the market correction in 2008, strata lot prices in British Columbia were on a decidedly upward trend and, not surprisingly, the market attracted not just homebuyers, but also speculators who signed purchase agreements with a view to making a profit by either assigning their contracts or selling their strata lots. In the wake of the correction, litigation under the Real Estate Development Marketing Act (British Columbia) (REDMA) proliferated as homebuyers and speculators alike, faced with the realization that they had agreed to pay more than current market value, sought to avoid their obligations by identifying technical deficiencies in the disclosure made by developers as required by REDMA. Many of the ensuing court decisions, mindful of the consumer protection objectives of REDMA, strictly applied the legislation in favour of the purchaser, regardless of his or her motive in seeking to avoid a purchase agreement. Consequently, real estate industry participants have called for changes to REDMA to achieve a better balance between the goal of consumer protection and the practical realities of the development industry.

    On March 10, 2014, B.C. Attorney General and Minister of Justice Suzanne Anton introduced Bill 17, the Miscellaneous Statutes Amendment Act, 2014, in the B.C. Legislature. Bill 17 includes several proposed amendments and additions to REDMA which, according to the government, will “bring clarity to the scope of purchasers’ remedies and certainty to the enforceability of purchasers’ contracts” and are “designed to increase industry efficiency and provide purchasers with a more readable disclosure statement.”

    Delivery of Disclosure Statements to Purchasers

    One common defence raised by purchasers in REDMA litigation is that the developer failed to deliver an amendment to disclosure statement as required. Depending on the method by which a developer delivered an amendment, it can be difficult to prove delivery. Bill 17 proposes to allow developers to deliver disclosure statements (including amendments) by electronic means (i.e., by fax or email), so long as the purchaser has provided his or her written consent. Developers will therefore want to prepare purchase contracts that specifically include such consent, as delivery of disclosure statements by fax or email will ease the administrative burden on developers, reduce cost and, depending on the delivery method used, sanction a simple method of obtaining proof of delivery.

    Consolidated Disclosure Statements and Phase Disclosure Statements

    Disclosure statements can be lengthy, complicated documents and, where there has been one or more amendments to a disclosure statement, they can be very difficult for purchasers to follow. As a result, it became standard industry practice for developers to provide purchasers with a “consolidated” disclosure statement which amalgamated the original disclosure statement and all subsequent amendments into a single document. This practice continued for several years until a judge noted, in a decision considering REDMA, that a developer who provided a purchaser with a consolidated disclosure statement technically had not complied with the statute. Although the judge’s observation was not the focus of his decision, it had a chilling effect on developers’ use of consolidated disclosure statements even though, arguably, they advance the goal of consumer protection.

    Bill 17 proposes to address this issue by allowing a developer to provide a consolidated disclosure statement to new purchasers. The developer must file any amendment (and deliver it to existing purchasers) and the consolidated disclosure statement (which may be delivered to all new purchasers) with the Superintendent of Real Estate.

    Similarly, Bill 17 allows developers of a phased strata development to market strata lots in phases subsequent to the first phase by filing a “phase disclosure statement” (instead of an amendment to a disclosure statement), but only if the developer is not then marketing any strata lots in previous phases. This legislative amendment, if implemented, will again allow developers to provide new purchasers with a single document that is far easier to understand than a disclosure statement and a potentially lengthy series of amendments.

    A new purchaser who receives a consolidated disclosure statement or a phase disclosure statement will have the right to require the developer to provide free copies of the original disclosure statement and any amendments within 30 days after written request by the new purchaser.

    Post-Closing Rescission Rights

    REDMA currently provides that, even if the sale of a strata lot has closed and title has transferred to a purchaser, a purchaser who is entitled to receive a disclosure statement (including an amendment), but does not receive one, may rescind the purchase agreement at any time. There is no time limit on this right and, theoretically, a purchaser may rescind his or her purchase agreement years after acquiring the strata lot, regardless of whether the failure to disclose would have affected the purchaser’s decision to purchase the strata lot.

    Bill 17 proposes to restrict a purchaser’s post-closing right of rescission to situations where the amendment which should have been provided to the purchaser (but was not) discloses or would have disclosed facts that were material at the time of rescission or closing and were reasonably relevant to the purchaser, as well as to situations where the purchaser has owned the strata lot for less than one year. This will assist in preventing purchasers from rescinding their agreements for technical reasons that are not in fact relevant to them, and introduce a measure of transaction certainty by eliminating the current ability of purchasers to seek rescission years or even decades after closing.

    Specifically, Bill 17 proposes that the right to rescind post-closing will not apply if the disclosure statement to which a purchaser is entitled (but does not receive) is:

    • an amendment to a disclosure statement; or

    • a disclosure statement that a purchaser who receives a phase disclosure statement or consolidated disclosure statement is entitled to request as contemplated in Bill 17 (which may include the original disclosure statement and any amendments, any previous consolidated disclosure statement and any consolidated disclosure statement or phase disclosure statement in respect of other phases of the development property).

    Bill 17 also proposes that, regardless of whether title has been transferred to a purchaser, the purchaser may rescind a purchase agreement if the purchaser does not receive an amendment to a disclosure statement to which he or she was entitled and all of the following apply:

    • the purchaser is a recipient of a phase disclosure statement or consolidated disclosure statement and does not become entitled to receive an amendment only as a result of a request for the original disclosure statement or any amendments;

    • the amendment relates to or would have related to a fact or proposal to do something that is a material fact on the earlier of:

    • the date on which the notice of rescission is served on the developer; and

    • the date on which the purchase agreement requires the developer to transfer title to the purchaser;

    • the amendment relates to or would have related to a fact or proposal to do something that was or would have been reasonably relevant to the purchaser in deciding to enter into the purchase agreement; and

    • no more than a year has elapsed after the transfer of title.

    Lastly, Bill 17 proposes that, where a purchaser rescinds post-closing and recovers the purchase price paid, a developer may recoup some of its losses by applying to court for an order requiring the purchaser to pay the developer market rent for the occupation of the strata lot.

    Agreements Void for Non-compliance

    REDMA currently provides that an agreement to purchase or lease a strata lot is not enforceable against a purchaser if the developer has breached any provision of Part 2 of REDMA (which deals with marketing and holding deposits). Bill 17 retains this concept as a general principle but goes on to provide that a purchase agreement will be enforceable against a purchaser if either:

    • the breach involves a disclosure statement that does not comply with REDMA, but there is no misrepresentation in the disclosure statement concerning a material fact that was or would have been reasonably relevant to the purchaser in deciding to enter into the purchase agreement; or

    • the breach involves a disclosure statement that includes a misrepresentation concerning a material fact, but the developer was not aware of the misrepresentation when it entered into the purchase agreement and the misrepresentation is corrected in an amendment to the disclosure statement that is:

    • filed with the Superintendent no later than 30 days after the developer becomes aware of the misrepresentation and the amendment is provided to the purchaser within a reasonable time after filing; and

    • filed with the Superintendent and provided to the purchaser no later than 14 days before the closing date.

    Identity of the Developer

    At present, there is uncertainty as to whether registered (but not beneficial) owners of development property that are not themselves developing the property and selling strata lots to purchasers, must nevertheless sign a disclosure statement. There are several types of registered owners of land that should not be required to sign disclosure statements. For example:

    • a university that grants a long term ground lease to a third party developer who then develops a strata project and sells strata lots to purchasers;

    • a municipality that retains registered title to land pending completion of a development by a third party developer;

    • an owner that is contractually obligated to transfer land to a developer but has not completed the sale at the time the developer files its disclosure statement; and

    • a bare trustee (even if related to the developer) that holds registered title to land on behalf of a developer but has no beneficial ownership or economic interest in the development.

    Bill 17 provides express authority for the government, by regulation, to exclude a person or class of persons from the definition of “developer” and, therefore, from the application of REDMA and the requirement to sign a disclosure statement. Hopefully, the government will clarify the current uncertainty by excluding the registered owners listed above, and perhaps others, from the application of REDMA.

    Handling Deposits

    One major “gap” in the current version of REDMA is that, although a trustee (such as a law firm) holding a purchaser’s deposit may release the deposit to the developer if the developer certifies that the purchaser has failed to pay a “subsequent deposit” (e.g., a second or third deposit), there has been uncertainty as to whether, if a purchaser pays all deposits when due but fails to pay the balance of the purchase price on the closing date, the trustee may release the deposit to the developer. There is no obvious policy reason for allowing a deposit to be released when a purchaser fails to pay a subsequent deposit, but requiring a developer to obtain a court order authorizing the release of the deposit if the purchaser fails to complete the transaction. Bill 17 fills this legislative gap by expressly permitting a trustee, upon receipt of a developer’s certificate, to release the deposit to the developer if the purchaser fails to pay the balance of the purchase price when due. This is a significant (and overdue) legislative amendment that will avoid unnecessary court proceedings.

    Summary

    While parts of Bill 17 may face criticism from consumer protection advocates, the proposed changes will be welcomed by developers and other industry participants. Developers will need to remain vigilant in meeting their disclosure obligations under REDMA but, if implemented, Bill 17 will:

    • expand the permissible methods of delivery of disclosure statements to purchasers (including the use of email and fax);

    • enhance the ability of developers to provide purchasers with understandable disclosure by way of consolidated disclosure statement and phase disclosure statements;

    • reduce the ability of purchasers to avoid their purchase agreements on technical grounds that are not actually material or relevant to the purchaser;

    • facilitate the release of deposits to developers, without court proceedings, where purchasers have defaulted on their obligation to complete their purchases; and

    • enable the government to prescribe, by regulation, persons or classes of persons who will not constitute “developers” under REDMA and therefore will not be required to sign disclosure statements.