1 Welcome to Volume 2, Issue 2 of, a periodic publication of our BC Real Property & Planning Group. This publication is intended to give you a summary of recent developments in real estate law in British Columbia and, more importantly, what they mean to you. We hope you will find informative and useful. Please let us know if you have any suggestions to make this publication even more helpful, or if there are topics or issues you would like to see covered in future issues. Scott Smythe and Russ Benson (Editors) In This Issue Disclosure Obligations: Courts Adopt a Balanced Approach... 1 Perpetually Renewable Leases... 4 The E-mail s the Thing... 4
1 Disclosure Obligations: Courts Adopt a Balanced Approach By Scott D. Smythe Recent decisions from the Supreme Court of Canada and the B.C. Supreme Court have shifted the legal landscape relating to real estate developers disclosure obligations. Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. On May 11, 2011, the Supreme Court of Canada released its decision in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23. In Sharbern, the Supreme Court considered, for the first time, the common law test for materiality and clarified important aspects of the test, all in the context of the disclosure obligations of real estate developers under the (now repealed) Real Estate Act (British Columbia) (REA). The issue of materiality is, of course, extremely important for developers and, against a recent tide of B.C. Court decisions that have tended to favour purchasers, Sharbern brings a common sense approach to bear on the issue that will be welcomed by developers and diminish the ability of purchasers to escape pre-sale contracts on merely technical grounds. In Sharbern, a developer marketed strata lots within two interconnected hotels (one a Marriott, the other a Hilton) near the Richmond airport that were to be managed by the developer as rental pools under long term hotel management agreements, but with differing financial schemes. Purchasers of Marriott strata lots were guaranteed a gross annual return of 12% of the purchase price, with the developer receiving management fees equal to the aggregate of a monthly fee of 5% of gross rental revenue, and an incentive fee equal to 25% of the amount by which the owners net annual return on investment exceeded 8%. Purchasers of Hilton strata lots, however, received no guaranteed return and the management fee payable to the developer was limited to a monthly fee of 3% of gross rental revenue. Purchasers of Hilton strata lots suffered losses, when the Richmond hotel market proved less profitable than anticipated, and alleged that the differing financial arrangements between the two hotels gave rise to a conflict of interest by incentivizing the developer to favour the Marriott over the Hilton in its operation and management of the two hotels. They also claimed that the developer s disclosure materials, which did not expressly identify the details of the differing financial arrangements, contained material false statements and that the developer was liable to the purchasers under the liability provisions of the REA. The REA contained no statutory definition of material so the Supreme Court was called upon to consider the common law test for materiality. The key conclusions were as follows: Materiality is to be determined objectively, from the perspective of a reasonable investor. A fact omitted from a disclosure statement is material if there is a substantial likelihood that it would have (not just might have) been considered important by a reasonable investor or, put another way, that disclosure of the omitted fact would have been viewed by a reasonable investor as significantly altering the total mix of information made available to investors by the developer. Proof is not required that an omitted fact would have changed the reasonable investor s investment decision, only that there was a substantial likelihood that the fact would have assumed actual significance in the reasonable investor s deliberations. The determination of materiality involves a fact-specific inquiry into all the relevant considerations and circumstances forming the total mix of information made available to investors.
2 The purchaser, not the developer, bears the burden of proving that a fact, statement or omission is material, except only where materiality may be inferred as a matter of common sense. In assessing materiality, a court should review the information disclosed to investors and assess it against what was omitted. The court may take into account both behaviour evidence of developers and purchasers in the same or similar situations, and contextual evidence that helps place the omitted information in a broader factual setting. Applying these principles, the Supreme Court held that the trial judge made three legal errors in finding that the alleged conflict of interest was material. First, she treated the existence of a potential or actual conflict of interest as inherently material such that it had to be disclosed, without having determined that the conflict was, in fact, material. The Supreme Court took issue with this approach on the basis that it would result in excessive disclosure, regardless of materiality, and overwhelm investors and impair (not enhance) their ability to make decisions. Second, the trial judge reversed the onus of proof, requiring the developer to show that the conflict of interest was not material rather than requiring the plaintiffs to show that it was. Third, she failed to consider all the evidence available to her on the issue of materiality (such as the economic environment at the time the strata lots were marketed). In the result, the Supreme Court concluded that the purchasers had failed to demonstrate a substantial likelihood that disclosure of the differing financial arrangements would have assumed actual significance in a reasonable investor s decision. The Sharbern decision is very important in the real estate development context, as the Supreme Court made it very 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, and thereby subject a developer to liability for trivial omissions. Although the Supreme Court s decision involved an analysis of the common law test for materiality, it was reasonable to expect that B.C. courts would follow the Sharbern approach in the context of the Real Estate Development Marketing Act (British Columbia) (REDMA), even though the REDMA contains a statutory definition of material fact. A recent decision of the B.C. Supreme Court has done just that heralding what may be a new era in the judicial approach to pre-sale contract disputes in British Columbia. 299 Burrard Residential Limited Partnership v. Essalat In 299 Burrard Residential Limited Partnership v. Essalat, 2011 BCSC 996 (released July 26, 2011), the developer sought an order that it was entitled to retain a $1,136,000 deposit after a purchaser refused to close on a strata lot. The purchaser alleged that the developer s failure to disclose a two-month delay in the estimated completion date, set out in the developer s disclosure statement, constituted a misrepresentation of a material fact and that, because the developer failed to correct the misrepresentation by filing an amendment to the disclosure statement, 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 completion date delay that is not trivial will result in a misrepresentation and render a purchase contract unenforceable. The Court began its analysis by stating that, although the REDMA, unlike the REA, contained a definition of what constituted a material fact, it had to be read together with the REDMA definition of a misrepresentation, being a false or misleading statement of a material fact or an omission to state a material fact. The Court then went on to apply the Sharbern framework to determine whether there was a substantial likelihood that the undisclosed delay in the completion date would have assumed actual significance to a reasonable purchaser when deciding whether to purchase. In doing so, the Court
3 considered recent B.C. Court decisions where a failure to disclose a delay in an estimated completion date was found to constitute a misrepresentation (see Chameleon Talent Inc. v. Sandcastle Holdings Ltd. 2010 BCCA 300, discussed in Volume 2, Issue 1 of, and Maguire v. Revelstoke Mountain Resort Limited Partnership, 2010 BCSC 1618), but distinguished them on the basis that, in those cases, the delays were significantly longer and arose from events that purchasers would not reasonably have anticipated. Although the court acknowledged that a developer cannot avoid the obligation to disclose material delays simply by saying that the originally stated date was nothing more than an estimate, the delay in Essalat was due to normal construction delays that any purchaser would reasonably expect to occur in the course of a significant construction project and, further, the total delay was less than 10% of the originally anticipated construction duration of 38 months. In the result, the court found that the purchaser had failed to discharge its burden of proving that the delay would have assumed actual significance to a reasonable purchaser. As in Sharbern, the court also took into account the surrounding circumstances forming the total mix of information and behaviour evidence of purchasers in the same situation. In particular, it noted that the purchaser s agent had been informed before the purchase agreement was executed that a two-month delay was likely. Moreover, when the developer sent a newsletter to all purchasers containing the updated completion date, no complaints were received. In the result, the purchase agreement was found to be enforceable and the deposit was forfeited to the developer (although an appeal has been filed by the purchaser and a stay was granted pending the outcome of the appeal). Overall, by applying the Sharbern principles to the interpretation of the REDMA, the court in Essalat has introduced a nuanced approach to the issue of materiality and the disclosure obligations of developers. It found that even consumer protection legislation requires a balance between too much and too little disclosure and that facts and circumstances beyond the strict wording of the legislation and the language of the purchase contract, including the knowledge of the purchaser, may be taken into account. As a result, future purchasers who wish to avoid their obligations under pre-sale contracts may find the road to success somewhat more difficult to navigate.
4 Perpetually Renewable Leases By Russell G. Benson Options to renew in a commercial lease typically give the tenant the right, on written notice, to renew the lease for a specific period on the same terms and conditions as the lease, except for the renewal rents and the inducements initially provided to the tenant, and except for the exercised option to renew, thereby ensuring that the tenant will not acquire an additional renewal option to renew. Insufficient attention to the terms of the renewal option may lead to unintended consequences. We were recently asked to review various leases of premises within a potential redevelopment site. Some of the leases did not contain a demolition clause (i.e., a clause allowing the landlord to terminate the lease and demolish the building), which was troublesome in itself. In addition, a handful of the leases contained poorly drafted options to renew that effectively granted the tenants a perpetual right of renewal. This left the landlord with no ability to redevelop the site without coming to a settlement with these tenants; an uncertain and potentially expensive proposition. Courts treat perpetual rights to renew as extraordinary and tend to favour the landlord when interpreting them. For example, if a renewal option states that the renewal lease will be on the same terms and conditions as this lease, the option will be treated as not including the exercised option to renew, thereby avoiding the issue of perpetual renewal rights. If, however, the renewal option states that the renewal lease will be on the same terms and conditions as this lease, including the covenant for renewal, a perpetual renewal option will be created. While it is a simple matter to draft leases so that perpetual renewal rights do not arise, a lack of attention to detail when drafting renewal options may stifle site redevelopment, and thus adversely impact value. The E-mail s the Thing By Russell G. Benson You know the situation. You have been communicating back and forth by e-mail with the other party and somewhere along the way it occurs to you, Do we have an agreement here, or have we just been talking? Your next call is to your lawyer. In Nicholas Prestige Homes v. Neal (2010) EWCA Civ 1552 (released on December 1, 2010), the English Court of Appeal was asked to determine whether an exchange of e-mails created a binding agreement between a real estate broker and a potential seller of residential property. The facts were quite straightforward and may well sound familiar. The seller contacted the plaintiff brokers to discuss matters relating to the sale, and the brokers visited her at her property. The next day, the brokers followed up by e-mail to thank the seller for her instructions and to confirm the agreed arrangements. They attached both a multiple-agency agreement which they said was to be effective for an interim period while the seller wrapped up matters with her previous broker, and a sole agency agreement which was to apply thereafter. They asked her to acknowledge safe receipt. When the brokers had not heard back for a few days, they called her to ask about the selling of the property after which she replied to the original e-mail (which had the listing contracts attached to it), writing, Hi Mark, That s fine, look forward to some viewings. Sally. The agreements, however, were never signed. The seller eventually sold the property through the previous broker but after the date the sole agency agreement with the new brokers purportedly came into effect. The new brokers sued, among other things, for loss of commission and were successful.
5 The England and Wales Court of Appeal found that the e-mail exchange between the brokers and the potential seller had created a binding agreement. In particular, the Court noted that the seller s e-mail was a direct reply to the new brokers e-mail, rather than a new e-mail that did not reference the earlier message. The new brokers e-mail attaching the agreements left no confusion as to which of the two attached agreements was to operate at any particular time; that is, during the period for which they had sole selling rights, they were to be the only persons marketing the property. The Court found that, by permitting a broker other than the plaintiff brokers to sell the property, the seller breached the sole agency agreement with the new brokers that was in place at the time of the sale, thereby depriving the new brokers of their full commission. Although this decision is not binding on courts in Canada, it is high authority and could be persuasive here in similar circumstances. It is also consistent with the approach that Canadian courts have taken. Take the case of Mira Bogdanovic and Van Buchanan, for example. They lived together in a same sex, common law relationship for nearly 20 years. When the relationship ended, they tried to negotiate a settlement without legal counsel. To this end, they discussed possible settlements almost entirely by e-mail. Ms. Bogdanovic found that the negotiations were not progressing and consequently brought an action against Ms. Buchanan who argued that the parties had reached a binding settlement in their e-mail exchanges. The B.C. Supreme Court accepted into evidence the various e-mails that allegedly constituted proof of an agreement, and considered the evidence to determine if the conditions for the formation of a valid and binding contractual settlement had been met. Ultimately, it found that the parties e-mails did not demonstrate the necessary level of consensus and, consequently, that no binding settlement had been formed. Applying similar principles to the English Court of Appeal in the Neal case, the Court found that, although there may have been a series of offers and counter-offers in the e-mail exchange, there had never been a true meeting of the minds. Keep in mind, however, that there is relevant law that applies specifically to contracts relating to land. In particular, section 59 of the Law and Equity Act (British Columbia), provides that, subject to a couple of exceptions, a contract respecting land or a disposition of land is not enforceable unless, effectively, it is in writing signed by the parties, there has been part performance by a party of obligations that are consistent with the alleged contract or a party has relied on the existence of the contract to their detriment. The courts have interpreted the meaning of a contract respecting land quite broadly. However, the Electronic Transactions Act (British Columbia), would seem to override, in part, section 59 of the Law and Equity Act. Among other provisions, it states that unless the parties agree otherwise, an offer or the acceptance of an offer, or any other matter that is material to the formation or operation of a contract may be expressed in electronic form. It also states that a contract is not invalid or unenforceable solely because information in electronic form was used in its formation, and that the use of the words in writing does not, by itself, prohibit the use of information in electronic form. In summary, the effect of the Electronic Transactions Act would appear to be that, with the exception of documents that create or transfer an interest in land and require registration to be effective against third parties (such as a transfer), electronic communications and signatures are sufficient to form a contract relating to land despite section 59 of the Law and Equity Act. Having said this, the provisions of the Electronic Transactions Act have not yet been tested in the land context before a court in British Columbia. Depending on the facts of your situation, the advice you receive from your lawyer could well be that your e-mail exchanges with another party have created a binding contract, even though nothing has actually been signed. Therefore, if you do not intend to create binding legal obligations, you should always say so explicitly. If this topic is of interest to you, the book E-mail Law (by McCarthy Tétrault LLP lawyers Charles Morgan and Julien Saulgrain) (LexisNexis Canada, 2008, ISBN 9780433447177) contains a full chapter on contract formation by e-mail, and an extensive discussion of Canadian laws on related topics.
6 Our BC Real Property & Planning Group Russell Benson 604-643-7101 rbenson@mccarthy.ca Keith Burrell, QC 604-643-7939 kburrell@mccarthy.ca Jonathan Carter 604-643-5880 jcarter@mccarthy.ca John Doolan 604-643-7938 jdoolan@mccarthy.ca Beverly Ellingson 604-643-7122 bellingson@mccarthy.ca Greg Fabbro 604-643-7190 gfabbro@mccarthy.ca Natalie Garton 604-643-5960 ngarton@mccarthy.ca Jennifer Hayes 604-643-5892 jhayes@mccarthy.ca Glenn Leung 604-643-7108 gleung@mccarthy.ca Michael Mitchell 604-643-7937 mmitchell@mccarthy.ca Gillian Piggott 604-643-7151 gpiggott@mccarthy.ca Conrad Rego 604-643-5882 crego@mccarthy.ca Craig Shirreff 604-643-5955 cshirreff@mccarthy.ca Scott Smythe 604-643-7152 ssmythe@mccarthy.ca Lisa Vogt 604-643-7935 lvogt@mccarthy.ca Cameron Whyte 604-643-5933 cwhyte@mccarthy.ca Virginia Wigmore 604-643-7164 vwigmore@mccarthy.ca Elizabeth Yip 604-643-7198 eyip@mccarthy.ca Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not constitute legal advice in any manner whatsoever. Clients are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.