Seller’s Remorse: Presale Contracts in a Rising Real Estate Market

Presale Contracts in a Rising Real Estate Market

By Naomi Rozenberg and Lucas Johnson

The recent case of Zheng v. Anderson Square Holdings Ltd., 2024 BCSC 216 highlights the need for a presale buyer to carefully review their contract of purchase and sale and be prepared to legally challenge a developer’s attempt to improperly terminate the contract in order to capitalize on rising real estate values.

Background

Between May 2015 and January 2016, the 33 plaintiffs signed presale contracts with the defendant vendor Anderson Square Holdings Ltd. (the “Presale Contracts”). The presale purchasers provided deposits to the Developer for units in a residential development in Richmond (the “Development”).

Clause 2 of the Presale Contracts stated that if the completion date did not occur by September 30, 2019 due to events or circumstances beyond the Developer’s control, the agreement would be terminated unless all parties agreed in writing to extend.

Clause 21 of the Presale Contracts provided that:

  • if an event beyond the Developer’s control caused delay, the time for performance would be extended by that delay period; and
  • if events beyond the Developer’s control made it impossible or not reasonably feasible or economical for the Developer to perform its obligations, the Developer could terminate the Presale Contracts by written notice and return the deposits with interest.

 

In fall 2018, the general contractor of the Development sued the Developer for outstanding costs of $4,656,458.00 resulting from delays in the project (the “Contractor Claim”).

In July 2019, the Developer terminated the Presale Contracts with the plaintiffs. The Developer claimed that the Development would not be completed by September 30, 2019 due to serious delays in construction and circumstances beyond its control, which made it uneconomical to complete the Developer’s obligations under the Presale Contracts.

In particular, the Developer cited the Contractor Claim as the reason for frustrating the Developer’s attempts to secure financing to complete construction of the Development.

The purchasers declined the Developer’s offer to return the deposits from the Presale Contracts and commenced a lawsuit in November 2019.

Following the termination of the Presale Contracts, the Developer re-sold units in the Development to new purchasers at higher prices than in the Presale Contracts.

Trial

The primary issue at trial was whether the Developer had the right to cancel the Presale Contracts and simply return the presale purchasers’ deposits, leaving the buyers with no further legal recourse or ability to claim damages from the Developer for terminating the Presale Contracts.

The court found the Developer liable for damages of $13,093,000.00. The court was persuaded that the Developer’s reason for terminating the Presale Contracts was to re-sell the units at higher prices due to the rising real estate market between 2015 and 2019.

The court held that the Developer could not rely on the Contractor Claim as a basis for terminating the Presale Contracts. The Contractor Claim was not an event beyond the Developer’s control that made it impossible or uneconomical to perform its obligations under the Presale Contracts. The Contractor Claim was filed in December 2018, and the Developer felt it had no merit. Even if the Contractor Claim truly impacted the Developer’s ability to finance the Development, the Developer was reckless in disregarding the significance of the Contractor Claim with respect to the financial viability of the Development.

In any event, the court found that the Development was economical at all times. By July 2019, the Developer had secured over $34 million in funding from outside investors. In addition, the Developer had pled in their response to the Contractor Claim that they were “at all times able to finance the completion of the [Development]”. The Developer ultimately received sufficient financing and completed the Development.

Takeaways

In a rising real estate market, a developer that has presold units may be tempted to cancel the presale contracts and re-sell the units at higher prices.

This case underscores the importance for presale purchasers to understand the risks of buying into a presale development. Buyers should:

  • carefully review and consider the purchase and sale contract and obtain legal advice to understand the termination clause and other key terms,
  • thoroughly read through the disclosure statement and any amendments, and
  • get prompt legal advice if the developer purports to cancel the contract.