Developers and Lenders Beware: Failure to Comply With British Columbia’s Real Estate Project Marketing Rules May Have Serious Consequences
Developers and lenders should be aware of the sweeping effects of the British Columbia Real Estate Development Marketing Act (REDMA), which is aimed at protecting British Columbia consumers purchasing real estate. It governs the marketing and sale in British Columbia of real estate projects located anywhere in the world.1 The REDMA itself, as interpreted by the courts, contains a broad definition of what constitutes "marketing." Marketing encompasses not only the types of marketing activities typically undertaken by developers and real estate representatives, but also less formal activities including, in certain situations, conversations amongst acquaintances about potential real estate investment opportunities. Compliance with the REDMA is crucial for developers and their lenders because failure to comply can lead to unenforceable purchase contracts.
Although the disclosure obligations under the REDMA are not all that different than those imposed by similar statutes in other Canadian jurisdictions, such as the Condominium Act in Ontario, there are some variations, including the requirement under the REDMA to obtain signed acknowledgements from purchasers as evidence that they received the required disclosure materials (and to keep such acknowledgements on file).
The REDMA requires a developer to file a disclosure statement before marketing commences. The disclosure statement must, without misrepresentation, plainly disclose all material facts. Before a purchaser enters into a purchase contract with a developer, the developer must provide the purchaser with a copy of the disclosure statement and a reasonable opportunity to review it. Purchasers have a right of rescission during seven days after the later of entering into the purchase contract or receiving the disclosure statement.
There is also a continuing disclosure obligation imposed on developers. This is significant, as failure to comply can trigger purchasers’ rights to rescind their purchase contracts and have their deposits returned.
Under the REDMA scheme, there is an important distinction between new disclosure statements and amendments to disclosure statements. A new disclosure statement is required mainly in two circumstances: (i) where the identity of the developer changes (which includes amalgamations of related parties or a change in the general partner of a limited partnership) or (ii) where a receiver, liquidator or trustee-in-bankruptcy is appointed in respect of the developer. The filing of a new disclosure statement triggers purchasers’ rescission rights (which can be exercised by a purchaser serving written notice to the developer within seven days after receiving the new disclosure statement).2
In all other circumstances where there is a new material fact or a change to a material fact,3 an amendment to the existing disclosure statement is required; however, the provision of an amendment does not trigger purchasers’ rescission rights (except in limited, specified circumstances). The legislative scheme is designed this way so that developers are not penalized for informing purchasers of changes (although a purchaser may still have a statutory or common law claim for misrepresentation) and are encouraged to notify purchasers, on a timely basis, of new material facts and/or material changes. Conversely, failure to file and provide an amendment to a disclosure statement when required can result in purchase contracts being unenforceable or purchasers having a right to rescind their contract (even after they have completed their purchase). In particular, there have been several recent court decisions allowing purchasers to rescind their purchase contracts and obtain a return of their deposits where the developer failed promptly to amend the disclosure statement to advise purchasers of a change in the estimated construction completion date for their project.
Note that the courts have held that informal communications, such as newsletters and construction updates that refer to changes to the project, do not constitute amendments to the disclosure statement for the purposes of the REDMA.
In addition to triggering rescission rights, breaches of the REDMA can lead to other consequences, such as the issuance of cease marketing orders, administrative penalties, imprisonment or other regulatory action by the British Columbia Superintendent of Real Estate.
There is recent British Columbia case law where the courts have accepted purchasers’ claims that the REDMA requirements had not been complied with in respect of out-of-province projects marketed in British Columbia. The British Columbia Supreme Court recently considered the meaning of "marketing" for the purposes of the REDMA in the context of a project located in Edmonton, Alberta, and concluded that British Columbia purchasers of units were entitled to rescind their contracts and have their deposits returned on the basis that the developer failed to comply strictly with the REDMA. In that case, verbal and e-mail exchanges between the developer and a realtor in British Columbia aimed at retaining her services to promote the sale of the project in British Columbia (including the delivery to her of price lists and pre-signed contracts) were deemed to constitute "marketing" within the meaning of the REDMA so as to impose on the developer the burden of complying with it.4
One of the most recent illustrations of the impact of the REDMA on developers operating outside of British Columbia is the filing of a number of lawsuits by British Columbia purchasers against the developer of a luxury condominium project in Toronto for the developer’s failure to comply with the REDMA. The purchasers allege that the developer breached the REDMA in a number of different ways, including by failing to provide a copy of the disclosure statement before the purchaser entered the contract, failing to provide a copy of the plans for the strata lot and the development, failing to disclose the dimensions of the strata lot, failing to disclose a change in floor number and failing to disclose changes to the estimated date for completion of construction. These claims, along with the numerous decided cases involving projects located within British Columbia, highlight how purchasers can use the REDMA to their strategic advantage in cooling markets and get out of their purchase contracts.
Implications for Developers
Developers of real estate projects located outside British Columbia should be aware of the REDMA and its disclosure requirements when marketing in British Columbia and, in particular, that the REDMA extends to both formal marketing and informal marketing activities. When unsure, it is prudent to seek legal advice and, if required, file a disclosure statement. Similarly, when evaluating whether an amendment to a previously filed disclosure statement is necessary in light of new material facts or changes in material facts, it is prudent to file an amendment when in doubt.
Developers and their marketing teams should also ensure that proper procedures are in place for ensuring compliance with the REDMA, including foolproof mechanisms to collect and retain evidence that purchasers received the disclosure statement and any amendments so that such evidence may be produced at the request of lenders or regulators or, worse, in the event of litigation.5
It is important for developers to recognize that non-compliance with the REDMA can impede their ability to obtain and implement construction financing. To mitigate the risk that purchasers may be able to rescind their purchase contracts and have deposits returned, before providing project financing, lenders may require increased equity, higher pre-sales coverage and/or the developer’s covenant to inject additional equity to replace sales and deposits from terminated contracts, among other things.
Considerations for Lenders
Lenders also need to be cognizant of the onerous obligations imposed by the REDMA. There are a number of measures lenders can implement to protect themselves from the risk of purchaser rescissions. The recommendations set out below should form part of the standard due diligence conducted by lenders when evaluating whether to provide financing to a particular project.
If insisting on a certain level of pre-sales as a pre-condition to the provision of financing, it is important to inquire as to whether pre-sales to British Columbia residents have been made in compliance with the REDMA (and to ask the developer for evidence of same).
If the developer has commenced marketing before obtaining a financing commitment, the lender should ensure that, once it has committed to finance the project, the developer files an amendment to the disclosure statement in order to inform purchasers that the necessary financing has been obtained (this is a fundamental requirement in the pre-sale context).
Lenders should be in contact with the developer’s quantity surveyor or project manager to monitor the construction schedule and make inquiries (i.e., to ensure that the developer is filing necessary amendments to the disclosure statement).
If a project is in financial trouble, before appointing a receiver, liquidator or trustee-in-bankruptcy, lenders should be aware that the appointment of a receiver, liquidator or trustee-in-bankruptcy triggers an obligation on the developer to file a new disclosure statement. This will entitle purchasers to rescind their purchase contracts and to have their deposits returned. Such remedies can therefore have unintended consequences where other remedies may not.6 Lenders should obtain legal advice concerning the implications of the REDMA in connection with exercising their rights and remedies in an event of default.
The REDMA is an onerous statute, and the marketing of real estate projects to British Columbia residents by developers unfamiliar with the legislative requirements should be approached with diligence and caution. Lenders financing projects marketed to British Columbia residents also need to ensure compliance with the REDMA, as failure to comply may effect a developer’s ability to complete unit sales and repay its construction lender.
Although the REDMA has been the focus of this update as a result of significant media attention it has recently been receiving in Ontario, it is essential for developers to ensure that they are in compliance with local legislative requirements, if applicable, when marketing real estate in any external jurisdiction (whether within Canada or internationally).
For more information with respect to this update or with respect to the legal requirements of the marketing of real estate in Ontario, Québec, Alberta or British Columbia or the United Kingdom, please contact any member of our Real Property Planning Group.
1 Per Bulletin Number REDMA 07-01 and REDMA 08-01, issued by the British Columbia Financial Institutions Commission, Superintendent of Real Estate, on April 30, 2007, and March 25, 2008, respectively.
2 Purchasers must provide such notice in accordance with the procedure stipulated in the Regulation made under REDMA.
3 A "material fact" is a fact that affects, or could reasonably be expected to affect, the value, price or use of the development unit or development property.
4 This case is currently under appeal to the British Columbia Court of Appeal.
5 Under the REDMA, developers are required to keep these signed acknowledgements on file for a period of three years (or longer if prescribed by regulation).
6 Note that the institution of proceedings under the Companies’ Creditors Arrangement Act against a developer in respect of a distressed project has been held not to trigger purchasers’ rescission rights.