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$275,000 Pre-Sale Deposit Forfeited When Purchaser Backs Out

 

In Chen v. West Georgia Development Limited Partnership, 2017 BCSC 1293, the Supreme Court of British Columbia rejected all arguments put forward by the plaintiff in her claim for the return of a deposit paid to the defendant, a real estate developer, under a pre-sale contract for a strata lot in a project being constructed by the defendant.

Background

The plaintiff entered into a contract with the defendant, the developer of the Trump International Hotel and Tower project located in downtown Vancouver, BC, to purchase a residential strata lot in the project.  The plaintiff paid the first deposit of $275,290 due under the contract but then, for personal reasons, decided not to proceed, and failed to pay the second deposit when due.  The defendant then declared that the contract was terminated and that the first deposit was forfeited.

The plaintiff brought an action claiming that the defendant breached its obligations under the Real Estate Development Marketing Act (British Columbia) (“REDMA”) and that the contract was therefore unenforceable under section 23 of REDMA and the deposit should be returned to the plaintiff.  The plaintiff alleged three specific breaches of REDMA by the defendant.  The court rejected all three arguments and held that the defendant was entitled to retain the first deposit.

Section 11

Section 11 of REDMA provides, inter alia, that “a developer must not market a development unit unless the developer has made adequate arrangements to ensure that a purchaser of the development unit will have assurance of title…”.  The plaintiff alleged that because of section 16 of the contract (which provides that the contract “creates contractual rights only and not any interest in land”), the defendant breached section 11 of REDMA, because under the contract the plaintiff has no interest in land and therefore does not have adequate assurance of title.  The language of section 16 is fairly standard in pre-sale contracts, and is intended primarily to prevent purchasers from registering their contracts against title to the incomplete project.

The court rejected this argument, on the basis that section 11 of REDMA is intended to ensure that  a purchaser has the right to complete the acquisition of the strata lot free of financial encumbrances, and is not concerned with the type of interest that a purchaser has prior to the completion of the contract.  The court held that section 16 of the contract did not impede the right of the plaintiff to acquire a fee simple interest in the strata lot (including the right to sue for specific performance of the contract), and that the defendant made adequate arrangements to deliver that title to the plaintiff.

Section 15

The plaintiff also argued that she was not afforded a reasonable opportunity to read the disclosure statement prior to entering into the contract as required by section 15(1) of REDMA.

The court reviewed evidence that the plaintiff made two visits to the sales center for the project prior to signing the contract and, during one of those visits, spent time reviewing the disclosure statement for the project with the defendant’s agent.  The plaintiff was advised that she could consult her own realtor before signing the contract, and declined to do so.  The plaintiff also signed an acknowledgment confirming that she had been given a reasonable opportunity to read the disclosure statement prior to entering into the contract.  In addition, the plaintiff did not testify that she felt she was not given adequate time to read the disclosure statement or was subject to undue pressure to sign the contract.  On the basis of this evidence, the court concluded that the plaintiff was given a reasonable opportunity to read the disclosure statement.

The plaintiff further argued that section 15(1) of REDMA not only required the defendant to give the plaintiff a reasonable opportunity to read the disclosure statement, but also a reasonable opportunity to understand the disclosure statement.  The court rejected this argument on the basis that it is not consistent with the plain meaning of section 15, noting that legislature could have made this clear if they intended to impose such a requirement on developers.

In coming to this decision, the court noted that the fact the plaintiff signed an acknowledgment confirming she had a reasonable opportunity to read the disclosure statement before signing the contract would not estop the plaintiff from relying on a failure of the defendant to comply with section 15, and that the acknowledgment is simply evidence that the plaintiff was, in fact, provided with a reasonable opportunity to read the disclosure statement.  Accordingly, developers should not merely rely on obtaining acknowledgments from purchasers, but should also ensure they have robust procedures in place to review the disclosure statement and contracts with prospective purchasers, and give purchasers the opportunity to obtain professional advice, prior to signing the contract, and that such procedures are consistently followed with every purchaser.

Section 14

Finally, the plaintiff argued that the defendant breached section 14(2)(b) of REDMA (which requires the disclosure statement to plainly disclose all material facts, without misrepresentation).  Her position was that the developer failed to disclose certain material facts, including that the Duplicate Certificate of Title (the “Duplicate Certificate”) for the development lands had been withdrawn from the Land Title Office (the “LTO”).

The court considered the definition of “material fact” under REDMA, and determined that the matter in question must be something that could reasonably be expected to affect a purchaser’s decision to purchase a unit.  The Court found that the fact that the Duplicate Certificate was not in the LTO was not a material fact, as any inquiry by the plaintiff would have confirmed that the Duplicate Certificate was under the control of the defendant at all material times and was not held as security for any financial obligation of the defendant.  Accordingly, the fact that the Duplicate Certificate was not in the LTO could not affect value, use or price of the strata lot or the project.

While not expressly stated by the court, this finding implies that if a duplicate certificate of title is removed from the LTO as security for a loan, then the developer would need to disclose that fact, and the arrangements for returning the duplicate certificate to the LTO prior to the completion of the sale of the strata lots, to purchasers in the disclosure statement.  This is consistent with the general requirement for developers to disclose the details of any financing relating to the property or the project and the arrangements for dealing with any mortgage or other security relating to the financing.

While this decision is not ground-breaking in terms of establishing particularly significant new principles relating to disclosure statements and pre-sales, it makes for interesting reading and does reinforce the need for developers to ensure that their disclosure statements are carefully prepared and that they have reliable sales procedures in place.  Some purchasers will attempt to construct legal arguments based on REDMA in an attempt to obtain the return of their deposits and avoid closing on technical grounds.  Solid paper and procedures are the best ways to minimize the risk of such arguments being successful.


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