Strata Alert: BCSC Upholds Developer’s Sale of Caretaker Suite to Strata Corporation
The Owners, Strata Plan BCS3642 v. Unimet Levo Development Limited Partnership, 2015 BCSC 1921
Paul G. Mendes, Partner
Phone: 604-685-4894
Email: pgm@lmlaw.ca
Condominium developers in BC often enter into binding contracts on a strata corporation’s behalf. Sometimes the developer does it before the deposit of the strata plan, and sometimes the developer does it after the deposit of the strata plan. The significance of the timing is that under the Strata Property Act (SPA), a strata corporation only comes into legal existence once the strata plan is filed at the Land Title Office.
When a developer binds the strata corporation after the deposit of the strata plan, the SPA requires the developer to act honestly and in good faith with a view to the best interests of the strata corporation. So long as the developer is in control of the strata corporation, the developer must prefer the interests of the strata corporation over its own self-interest. This is understood to be the developers “fiduciary duty” to the strata corporation under the SPA.
A common transaction that developers enter into after the deposit of the strata plan is a contract that commits the strata corporation to buy a “caretaker suite” from the developer at fair market value. And that begs the question: who determines fair market value when the buyer and the seller are essentially controlled by the same person?
As sometimes happens in Condolandia, relations between strata owners and developers sour once the owners take control of the council table. At that point, strata councils might start scrutinizing the developer’s conduct to see if the developer did anything that was not done “honestly and in good faith with a view to the best interests of the strata corporation”.
This is what happened at BCS 3642, known as the Levo, located in Coquitlam, British Columbia.
While acting in its capacity as the strata council, the developer of the Levo caused the strata corporation to buy a caretaker suite and to finance the purchase with a second mortgage from the developer.
This transaction was fully disclosed in the disclosure statement that the developer filed with the Superintendent of Real Estate and distributed to all original purchasers in the development. In November 2006 the developer removed the suite from the presale inventory and showed it as being “sold” with a list price of $372,800.
The strata plan was finally deposited in November 2009. On the same day as the deposit of the strata plan, and while the developer still was in control of the strata corporation, the developer caused the strata corporation to buy the suite for $339,000. The sale only completed in February 2010. By then, however, the real estate market had taken a bit of a nose dive and the market price of the condo at the time of closing was only $305,000.
Once the honeymoon between the developer and the strata corporation was over, the new strata council, comprised of strata lot owners, became concerned that the strata corporation had overpaid for the suite, and that the purchase was not properly authorized. In 2013, the strata corporation authorized the lawsuit to set aside the purchase of the suite and to seek recovery of the money that the strata corporation spent on the suite, including strata fees, property taxes, and mortgage interest totaling about $170,000 as well as $35,000 for loss of market value.
Part of the strata corporation’s argument centered around whether or not the developer passed a formal resolution to authorize the purchase. The strata corporation tried to argue that no formal resolution to authorize the purchase of the suite was ever passed. That turned out to be a bit of a non-issue in the case because the Judge concluded that the documents tendered by the developer in support of the purchase, met the minimal requirements of the SPA. The real issue in the case was whether the developer breached its fiduciary duty by causing the strata corporation to pay more than fair market value for the suite.
If the strata corporation was right, the Court would likely have set aside the transaction and ordered the developer to repay the strata corporation all of the damages it was seeking.
At trial, the strata corporation tendered appraisal evidence showing that the suite was worth $305,000 at the time of completion in February 2010. The developer countered with evidence showing that the suite was valued at $340,000 in November 2006, when the developer removed the suite from the presale inventory.
The Judge ruled that the difference in market value between 2006 and 2010 was not sufficient evidence for the Court to conclude that the developer had breached its fiduciary duty to the strata corporation on the sale. In reaching this conclusion, the Court relied on the fact that the sale was fully disclosed in the disclosure statement, and that the final price of the suite was actually lower than the amount disclosed. Implicit in the Judge’s reasoning was the fact that original purchasers were prepared to buy into the development knowing full well that the strata corporation was going to buy the caretaker suite at $372,800.
The take away from this case is that there is no presumption that a developer has breached its fiduciary duty to the strata corporation simply because a deal is made on the strata corporation’s behalf turned out to be a poor one in hindsight. In scrutinizing the developer’s conduct while the developer controls the strata corporation, the Court will place heavy emphasis on what the developer disclosed to prospective purchasers in the disclosure statement. If a transaction was fully disclosed in the disclosure statement, the fact that the transaction may not have been completely advantageous for the strata corporation will not be enough to find the developer in breach of its fiduciary duty.
WHO WE ARE: Lesperance Mendes represents and advises strata corporations and strata councils on a wide range of strata governance matters, including relations with developers. If you strata corporation has concerns about a lease, easement or other contracts the developer entered into on your strata corporation’s behalf, call Paul G. Mendes at 604-685-4894 or send an email to pgm@lmlaw.ca.
Lesperance Mendes Lawyers
900 Howe St #550, Vancouver, BC V6Z 2M4
(604) 685-3567