A number of decisions by the British Columbia courts over the past four years have emphasized the additional risks faced by developers under the province’s Real Estate Development Marketing Act (REDMA) when pre-sale condo purchasers are confronted with the reality of a falling market.
REDMA came into force Jan. 1, 2005, replacing Part 2 of the Real Estate Act. REDMA is consumer protection legislation that is intended to protect purchasers – primarily in the condo pre-sale context, though it applies to completed condo projects as well – to ensure they get what they bargained for by imposing strict disclosure requirements on developers.
REDMA did not receive much court consideration prior to 2009 because before the market slumped in 2008, purchasers were generally happy to close due to the soaring market. When the market turned, purchasers began searching for ways out of their contracts and looked to REDMA.
The cases decided since 2009 highlight how purchasers can use REDMA to their strategic advantage in a cooling market to try and get out of their purchase contracts when they find, at closing, their units are no longer worth the price they agreed to pay. As a result, REDMA has been the bane of many developers’ existence.
In a nutshell, REDMA requires a developer that is marketing five or more “development units,” to comply with REDMA’s disclosure requirements. This includes filing a disclosure statement that plainly and without misrepresentation discloses all material facts about the development. Before a purchaser enters into a contract, the developer must provide the purchaser with a copy of the disclosure statement along with a reasonable opportunity to review it.
REDMA also imposes continuing disclosure obligations on developers. If there are any changes to material facts in a project as it moves forward, the developer must file amendments to the disclosure statement or, in certain circumstances, file a new disclosure statement, and provide a copy of the amendment or new disclosure statement to all purchasers.
The continuing obligations are particularly important since failing to comply can trigger purchasers’ rights to rescind their contracts and have their deposits returned. As a result, non-compliance with REDMA can affect the viability of multi-unit residential construction projects and hamper a developer’s construction financing.
The question that has most often arisen in REDMA cases: Is the change material?
REDMA defines a “material fact” as a fact “that affects or could reasonably be expected to affect the value, price or use of the development unit.”
Changes in estimated construction completion dates frequently occur and most often will be a material fact requiring an amendment to be filed. In one case, an acceleration of the construction completion date was found not to be material. Other cases have found that although some delay is expected, only delay that is “trifle” is not material.
The B.C. Supreme Court attempted to bring some clarity to the issue of a “material fact” in Bosa Properties (Esprit 2) Inc. v. Kim. In this case, the purchasers argued their agreements were unenforceable because the developer had changed the hot water system during construction and failed to file an amendment. The court concluded the real reason the purchasers refused to complete was because of the significant drop in real estate values; however, this was irrelevant as REDMA deemed a purchaser to have relied on a misrepresentation – if it is of a material fact. The B.C. Supreme Court ultimately held the developer did not breach REDMA and made the following general statements:
- The test for whether a fact is “material” is objective and a purchaser’s view of the materiality of a fact is not admissible;
- To decide if, objectively, there has been a misrepresentation under REDMA, the court can consider: contract documents; surrounding circumstances at the time of delivery of disclosure statement or other information; and common sense; and
- The onus is on the purchaser to establish the change was a “material fact.”
In response to the REDMA cases, many developers have begun disclosing “everything” and filing frequent amendments to avoid being offside of the act. This strategy is not without risk, as a failure to deliver an amendment containing a material fact can entitle purchasers to rescind even years after closing and receive a return of the full purchase price, with no offset for wear and tear or occupational rent, as the B.C. Supreme Court held in Woo v. ONNI Ioco Road Five Development Ltd. Partnership.
REDMA is an onerous statute and the courts have tended to interpret developers’ obligations broadly. An appeal of the Woo v. ONNI case is expected to be heard this fall. The decision is eagerly awaited by many.
Renata Germann is an associate at Jenkins Marzban Logan LLP in Vancouver.