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Article

Construction Completion Dates: There and Back Again

Date

July 18, 2012

AUTHOR(s)

Scott Smythe
Virginia Wigmore


Many pre-sale cases decided by British Columbia courts under the Real Estate Development Marketing Act (REDMA) have emphasized that the REDMA is consumer protection legislation and have held developers to a standard of near perfection in respect of their disclosure obligations, regardless of whether a technical deficiency in the disclosure had any meaningful effect upon the purchasers. A number of more recent cases, however, have recognized that, although the REDMA is consumer protection legislation, a measure of common sense should be employed in determining whether a technical deficiency should render a purchase contract unenforceable. One of those cases is the British Columbia Supreme Court (BCSC) decision in 299 Burrard Residential Limited Partnership v. Essalat (299 Burrard). Another is Bosa Properties (Edgemont) Inc. v. Ban (Bosa), discussed below, where the BCSC held that a completion date that occurred earlier than what was contemplated in the developer’s disclosure statement did not negate the purchasers’ contractual obligations. Unfortunately, the trend suggested by these two cases has come to a grinding halt with the British Columbia Court of Appeal’s (BCCA) reversal of the decision in 299 Burrard.

A Glimmer of Hope

The BCSC’s decision in Bosa, released on January 12, 2012, provided purchasers and developers with greater certainty as to when a change to an estimated construction completion date set out in a disclosure statement will be considered a "material fact" and trigger an obligation for the developer to amend the disclosure statement. In that case, the developer sought damages of $157,336.36 (which included a deposit of $86,235) after the purchasers failed to complete their strata lot purchase. The disclosure statement provided that construction was scheduled to commence by May 2007, and that the estimated date for substantial completion of construction was 29 months thereafter (i.e., October 2009). The developer commenced construction in February 2007 and notified the purchasers that the completion date for the purchase and sale would be April 7, 2009, although that date was eventually extended to July 7, 2009 by agreement. The developer did not amend its disclosure statement to set out the revised commencement and completion dates, and the purchasers argued that the purchase contract was therefore unenforceable.

The BCSC analyzed several recent cases dealing with estimated construction commencement and completion dates and determined that, regardless of whether it applied the approach to materiality set out in Chameleon Talent Inc. v. Sandcastle Holdings Ltd. (Chameleon) (discussed in Volume 2, Issue 1 of Real Estate MATTERS) and Maguire v. Revelstoke Mountain Resort Limited Partnership (Maguire) or the approach to materiality set out by the BCSC in 299 Burrard (discussed in Volume 2, Issue 2 of Real Estate MATTERS), the result would be the same.

The BCSC stated that the materiality of the indefinite language in the disclosure statement and the developer’s failure to file an amendment to the disclosure statement was conditioned by the fact that, unlike the delays in completion dates addressed in Chameleon, Maguire and 299 Burrard, the completion date in this case was accelerated. The BCSC held that acceleration is "qualitatively different" than delay since an accelerated completion date does not have an "inevitable or irremediable" effect on the value, price or use of a development unit (i.e., the longer a purchaser has to live in or rent a development unit, the greater the unit’s value and use and the more integral the price of the unit will be) whereas, if completion is delayed, there is a period of ownership that is irrevocably lost. Consequently, the purchase agreement was found to be enforceable, and the developer was entitled to damages.

In reaching its decision, the BCSC noted, somewhat puzzlingly, that any inconvenience suffered by the purchasers due to the acceleration of the completion date was mitigated by the three-month extension of the completion date. If, as the BCSC stated, an acceleration is "qualitatively different" than a delay and actually increases the value and use of a development unit, one would have expected that the extension of the completion date granted by the developer would have been irrelevant. In our view, the BCSC’s comment regarding the extension of the completion date may leave open the argument that, in some circumstances, an acceleration of the completion date may be material and, further, that a developer may need to agree to an extension if the acceleration of a completion date inconveniences a purchaser or risk the purchase agreement being unenforceable.

Notably, the BCSC did not discuss the decision in McEachern v. 752265 B.C. Ltd. (McEachern) (discussed in Volume 2, Issue 1 of Real Estate MATTERS), where the BCSC found that an eight-month acceleration of an estimated construction completion date was a "change of sufficient gravity" that it "materially" affected the offering and triggered the purchasers’ contractual rescission right. In Bosa, the actual construction completion date of April 2009 was six months earlier than the original estimate of October 2009 (although the developer extended the completion date such that the ultimate acceleration in the completion date was only three months).

The Bosa decision suggests, as a general principle, that the acceleration of a completion date will enhance, rather than diminish, the value, price or use of a development unit and, thus, will not trigger an obligation to amend a disclosure statement. However, because the BCSC also relied on the fact that the developer extended the completion date so that the effective period of acceleration was only three months, and because the BCSC did not address the eight-month acceleration that was held to be unacceptable in McEachern, it remains prudent for developers to ensure that their disclosure statements and pre-sale purchase contracts reserve the developer’s right to postpone and to accelerate closing, and to amend their disclosure statements if the completion date is accelerated by any material period of time, and certainly if that period is more than three months.

Hopes Dashed?

The BCSC in 299 Burrard ordered that a developer was entitled to a $1,136,000 deposit after a purchaser refused to close on a strata lot, even though the developer had failed to disclose a delay in the estimated completion date by formally amending its disclosure statement. The purchaser had argued that the estimated completion date set out in the disclosure statement was a misrepresentation of a "material fact" and that, because the developer did not correct the misrepresentation by filing an amendment, the purchase contract was unenforceable pursuant to section 23 of the REDMA. In essence, the purchaser’s argument was that any failure to disclose a delay in completion (other than a "trivial" delay) will result in a misrepresentation and render a purchase contract unenforceable. However, following the common law test for "materiality" established by the Supreme Court of Canada (SCC) in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. (Sharbern) (discussed in Volume 2, Issue 2 of Real Estate MATTERS), the BCSC found that the delay was due to "normal" construction delays that any purchaser would reasonably expect to occur, that the delay would not have assumed "actual significance" to a reasonable purchaser and that the developer had given informal notice of the change in the completion date (without any complaint by the purchaser). As a result, the BCSC found that the statement in the disclosure statement was not "false or misleading" and, therefore, the purchase contract was enforceable.

On June 21, 2012, the BCCA reversed the decision of the BCSC in 299 Burrard and, in doing so, made the following key findings:

  • In Sharbern, the SCC was required to formulate a common law test for materiality under the (now-repealed) Real Estate Act, which contained no statutory definition of "false or misleading" statements; however, because the REDMA provides statutory definitions of "misrepresentation" and "material fact," Sharbern is not a binding precedent. (This conclusion is an extremely important one, as Sharbern made it clear that, although disclosure of material information is important for consumer protection, the materiality standard should not be set so low as to require excessive disclosure of unimportant facts, thereby subjecting a developer to liability for trivial omissions. This common sense approach to materiality is no longer the law in British Columbia).
  • Although not bound by Sharbern, the trial judge was bound (but failed) to follow Chameleon where the BCCA held that whether there has been a misrepresentation of a material fact is not dependent upon the purchaser’s state of mind (i.e., the requirement to disclose material facts is a statutory obligation that is not affected by what a purchaser knows or does not know).
  • Except where an incorrect completion date is "trifling" in nature (the BCCA expressly stated that a discrepancy of roughly four months is not "trifling"), an incorrect completion date is a material fact that must be corrected immediately by way of an amendment to disclosure statement, and informal construction updates or newsletters will not satisfy the requirements of the REDMA.
  • The REDMA balances the rigour of the disclosure regime as a consumer protection measure against the flexibility given to developers to amend disclosure statements whenever necessary to address unforeseen circumstances. According to the BCCA, the strictness of the filing regime must be maintained in order for the protection to be meaningful for consumers.

In summary, the BCCA ruled that the REDMA requires developers to file amendments to their disclosure statements immediately if they become aware that the estimated completion date set out in a disclosure statement is no longer accurate, and they will only be relieved from that obligation where the delay is "trifling."

Lastly, the BCCA declined an invitation to provide judicial guidance as to the appropriate margin for error in disclosing the estimated completion date of a development. Given the abundance of litigation over the past few years with respect to discrepancies between estimated and actual completion dates, the BCCA noted that the issue could be addressed by the Superintendent of Real Estate, which has been delegated the administrative authority to prescribe the form and content of disclosure statements. Hopefully, the Superintendent of Real Estate will see fit to address this issue (and other issues that continue to create uncertainty in the real estate disclosure context), for the benefit of consumers and developers alike.

Commentary

While the Bosa and 299 Burrard cases can rightly be distinguished on the basis that Bosa involved an accelerated completion date and 299 Burrard involved a delayed completion date, the reasoning of the BCCA in 299 Burrard is broad in scope and could, at least arguably, be applied to any change in the estimated construction completion date that occurs in the course of construction. Whether the BCCA would agree with the BCSC in Bosa that an accelerated completion date is not a material fact is uncertain. As such, until the matter is addressed either by legislative amendment or, as the BCCA suggested, by policy statement or directive issued by the Superintendent of Real Estate, a developer has no practical choice but to consider amending its disclosure statement whenever it becomes aware that the estimated construction commencement or completion date set out in the disclosure state has changed. This may require multiple amendments to address construction schedule changes with no meaningful impact upon purchasers, each coming with the attendant risks relating to proof of delivery.

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