A recent decision of the British Columbia Court of Appeal (BCCA) reaffirms the need to balance the interests of developers and purchasers under the B.C. Real Estate Development Marketing Act (REDMA) by clarifying the "materiality" threshold underlying a developer's obligation to disclose facts and the concomitant right of a purchaser to rescind a purchase agreement for inadequate disclosure. In finding for the developer, the BCCA held that a developer's failure to provide purchasers with an amendment to a disclosure statement did not give rise to a purchaser's right of rescission under REDMA where such amendment did not contain objectively material facts or relate to adverse effects on the purchaser.
In Woo v. Onni Ioco Road Five Development Limited Partnership, the developer prepared a disclosure statement in compliance with REDMA for the sale of units in a residential development relying on policy statements from the Superintendent of Real Estate for pre-construction marketing prior to securing a building permit. Shortly after, in 2006, the respondent purchasers received the disclosure statement and entered into purchase agreements with the developer. In 2008, construction was completed and the purchasers took title to their properties. In 2009, the purchasers learned that they had not received a 2007 amendment to the disclosure statement and in 2010 they served notices to rescind their purchase agreements.
The amendment to the disclosure statement that the purchasers did not receive included updates on a revenue agreement entered into by the developer; receipt of subdivision approval; receipt of the building permit; and satisfaction of municipal conditions for strata lot creation. The purchasers argued that they were entitled to receive the amendment pursuant to section 16(1)(b)(i) of REDMA and that the developer's inadvertent failure to provide them with it gave rise to a right of rescission pursuant to section 21(3) of REDMA.
Section 21(3) of REDMA provides:
"Regardless of whether title, or other interest for which a purchaser has contracted, to a development unit has been transferred, if a purchaser is entitled to a disclosure statement in respect of a development property under this Act and does not receive the disclosure statement, the purchaser may rescind, at any time, a purchase agreement of a development unit in that development property by serving a written notice of rescission to the developer."
At trial, the Supreme Court of British Columbia judge "accepted that the facts disclosed in the amendment confirmed that events predicted in the disclosure statement had occurred as and when predicted." Nevertheless, he found the facts contained in the amendment were material because they "reduced the risk that the developer might not complete the project as contemplated". The trial judge held that the purchasers were entitled to rescind their purchase agreements and awarded them the return of the purchase price plus interest. The developer's counterclaim for occupational rent from the purchasers, who continued to live in the disputed properties, was denied.
On appeal, the BCCA applied general principles of statutory interpretation to reaffirm the twin goals of REDMA as not only protecting consumers by ensuring developers disclose material facts, but also "enabling the efficient and productive operation of this sector of real estate development." It then reviewed the materiality threshold underlying the disclosure obligations in REDMA.
MATERIALITY THRESHOLD
REDMA prohibits a developer from marketing a development property prior to its construction unless it has first prepared a disclosure statement which must, among other things, "without misrepresentation, plainly disclose all material facts." An amendment is required if such disclosure statement no longer complies with the requirements for a disclosure statement, or if it contains a misrepresentation in respect of a material fact, defined in this context as follows:
"material fact" means, in relation to a development unit or development property, any of the following...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.
In order for a fact to be material, the BCCA reasoned, it must be considered in context. Absent evidence of such context, a "reasonable person" could not conclude that the disclosure in the amendment was material. In this case, there was no evidence that the amendment had any impact on value, price or use of the properties.
Secondly, even if the amendment disclosed facts that could affect property prices, the purchasers had not presented any evidence as to how significant such an effect might be. According to the BCCA, a "minimum threshold consequence on price, value or use is built into the purpose of consumer protection" and it was up to the purchasers to provide the court with objective evidence as to the degree to which their interests had been affected.
Thirdly, the BCCA read into the definition of "material fact" a requirement that the effect on value, price and use be "adverse to the interests of the purchasers and not to their benefit." This adverse effect requirement is rooted in the purpose of REDMA as consumer protection legislation, while at the same time promoting the real estate development industry. Therefore, even if the amendment disclosed facts that could affect the price or value of the properties, that effect was positive and not negative and so the purchasers had not suffered any prejudice.
IMPACT OF DECISION AND BEST PRACTICES
In moderation of recent cases in B.C. involving purchaser rescission rights under REDMA, this decision moves towards a more balanced approach to implementing REDMA. The importance of both consumer protection and efficient promotion and development of real estate is recognized as a consideration in interpreting the provisions of REDMA. The decision removes the potential windfall situation created by the trial decision in Woo, whereby a purchaser was entitled to rescind a purchase agreement at any time, receive interest on the purchase price and live rent-free upon discovering the inadvertent failure by a developer to disclose facts that had no material or adverse impact on that purchaser.
However, this judgment also creates new uncertainties. It leaves to future cases the determination of what types of evidence will be sufficient for a purchaser to demonstrate a material and adverse effect on value, price or use of a property and whether such effect has reached an objective threshold necessary to support a right of rescission. Further, it is unclear how in practice the inherently subjective decision to purchase a particular home will be reconciled with the objective materiality threshold and adverse effect requirement articulated by the court.
This decision should not be read as weakening the ongoing and continual disclosure obligations of developers under REDMA. The statement given previously in the Court of Appeal still applies in that, "...the strictness of the [REDMA disclosure] filing regime must be maintained in order for protection to be meaningful to the consumer..." As a result, developers should continue to monitor their systems for updating disclosure filings and delivering such updates to their purchasers in a timely manner.
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