Can a Developer Limit its Liability for Construction Defects?
Lawyers representing strata lot purchasers in British Columbia have, to date, made considerable hay by emphasizing that the Real Estate Development Marketing Act (British Columbia) is “consumer protection” legislation to be interpreted in favour of purchasers. The bias in favour of the consumer has arguably lost some of its lustre in the past year or so (see, for example, the decision in Woo v. Onni, discussed here), but there is still concern that, when in doubt, the courts will invoke the consumer protection nature of the legislation to justify a decision in favour of the proverbial “little guy”, even when the facts do not favour the purchaser.
Although courts must interpret consumer protection legislation with a view to protecting the public (a laudable goal), the courts in Ontario have proven themselves willing to stand on principle and decide in favour of developers, regardless of the consumer protection nature of the Condominium Act, 1998 (Ontario). For example, in Toronto Standard Condominium Corp. No. 2095 v. West Harbour City (1) Residences Corp., 2013 ONSC 5987, a developer sought to limit its liability for construction defects to the minimum warranty coverage required by the Ontario New Home Warranties Plan Act (the Ontario equivalent of the Homeowner Protection Act (British Columbia)). It did so by:
- entering into an agreement (the “Liability Agreement”) with the condominium corporation, while it was controlled by the developer and its nominee directors, whereby the developer’s liability for construction defects was limited to the new home warranty coverage;
- inserting provisions in its purchase agreements whereby the purchasers acknowledged the limits of the developer’s liability;
- advising purchasers of the limits in the developer’s disclosure material; and
- describing the limits in the registered bylaws and registering a copy of the Liability Agreement with the bylaws.
At trial, the court held that a developer should be entitled to limit its liability by contract, and that nothing in the Ontario legislation prohibited such a limitation. The limitation on liability was imposed by the developer as a condition of developing and selling the strata lots and, although a developer cannot contract out of the legislation, it may limit its risk at common law by contract.
The trial decision was recently upheld on appeal: Toronto Standard Condominium Corp. No. 2095 v. West Harbour City (1) Residences Corp., 2014 ONCA 724. Significantly, the appeal court held that the initial directors, although nominees of the developer, were not acting as fiduciaries for the purchasers. Their role was to organize the condominium corporation’s affairs in the manner contemplated by the declaration and agreed to by purchasers. The bylaw and the Liability Agreement were disclosed to purchasers and the bylaw was registered on title, thereby giving notice to the world of the limitation on the developer’s liability. There was nothing inherently unreasonable about a developer seeking to limit its liability for construction deficiencies. The arrangement was part of the content, character and structure of the condominium project implemented by the developer before it sold any units and the purchasers were aware of the warranty limits associated with their purchase. In the court’s view, the condominium structure implemented by the developer, and the associated limitation of liability, would affect the value of each purchaser’s ownership interest in the common elements and, thus, the purchase price payable by each purchaser. Without the protection afforded by the Liability Agreement, the developer might well have sought higher purchase prices to offset the additional risk the developer would have faced but for the limit on its liability.
In short, the West Harbour City decision suggests that the consumer protection nature of legislation should not tip the balance in favour of a purchaser where a developer does exactly what it said it was going to do in its disclosure material. That disclosure represents the bargain offered to purchasers and condominium units will be priced in accordance with the terms of that bargain. If a purchaser knowingly proceeds with a purchase despite limits on the developer’s liability, he or she should not expect to be able, in the name of consumer protection, to rescind his or her contract or claim damages against the developer.
It remains to be seen whether developers in British Columbia will, like the developer in West Harbour City, seek to limit their liability for construction defects to the warranty coverage mandated by the Homeowner Protection Act (British Columbia). Even if they do not, the West Harbour City decision is nevertheless high authority for the proposition that developers should not be punished for doing exactly what they said they were going to do in their disclosure materials.
Condominium Act construction consumer consumer protection Developers legislation liability purchaser