BC Supreme Court

No fiduciary duty owed by condominium developers to purchasers

One West Holdings Ltd. V. The Owners, Strata Plan LMS 2995, 2021 BCSC 473

Harris commercial litigation lawyers Hein Poulus, QC, Joseph Ensom and Kasey Campbell were successful on behalf of a major developer following a 34-day trial before Mr. Justice Myers in the BC Supreme Court. The decision has significant implications for the legal structuring of condominium projects as well as the nature and scope of the disclosure duties owed by developers to purchasers of strata units. We summarize the decision and key takeaways below.

Background

The Plaintiff was the developer of a mixed-use condominium development in Vancouver known as Marina Pointe. The developer used a widely-used legal structure for the allocation of parking rights (the “Option/Lease Structure”) as follows:

  1. Just before the strata plan was filed, the developer had the registered owner of the development property grant, to an affiliate of the developer’s, an option for a long term lease of the entire parking lot. The lease gave the tenant the right to make partial assignments of individual stalls.
  2. The option was registered in the land title office (which does not attract Property Transfer Tax).
  3. The option was exercised; but the resulting lease (the “Parking Lease”) was not registered in the land title office.
  4. After stratification, the developer made assignments of parking stalls to buyers of strata units by way of a form of assignment in which the assignee acknowledged the Parking Lease and agreed to be bound by it. It used the same document to assign 106 visitor parking stalls to the strata corporation (the “Strata”).

After selling all of the condos in the Marina Pointe development, the developer was left with 40 unsold commercial parking stalls. The developer rented them to customers of the commercial owners and to others. The developer’s retention of the right to rent unsold stalls was disclosed in the disclosure statements for the development.

Years later, the Strata seized the commercial parking stalls and continued to rent them, for its own account.

When the developer sued, the Strata attacked the validity of the option/lease structure that the developer had used to create the titles to the parking stalls – the same structure that has been used to create the titles to tens of thousands of parking stalls in BC. The Strata’s attack was primarily made on three fronts:

  1. The Parking Lease was void due to a breach of fiduciary duty by the developer, which was alleged to have failed to disclose its intention to retain and rent out the parking stalls;
  2. The Option/Lease Structure failed to bind the Owners; and
  3. The Option/Lease Structure was prohibited by the Condominium Act and/or the Land Title Act.

Mr. Justice Myers rejected the arguments advanced by the Strata and found that the Option/Lease Structure was valid and binding. Significantly, the Court declined to follow numerous cases that had held that condominium developers owe a fiduciary duty to purchasers, concluding instead that developers owe no such duty.

Decision

There is no developer fiduciary duty

The Strata argued that that the developer owed a fiduciary duty to all buyers and that retaining and renting out the 40 stalls was a “self-dealing transaction” which violated that duty.  It relied on a 1981 Ontario Court of Appeal decision named York Condominium v. Newrey, which held that a developer “stands in a fiduciary relationship with purchasers and holds the property in trust for them”. York Condominium had been cited favorably for this proposition by a number of trial and appellate decisions across Canada, including decisions in BC.

Justice Myers rejected theYork Condominium doctrine and held that:

  • York Condominium was not reconcilable with later Supreme Court of Canada decisions: developers do not owe fiduciary duties to their purchasers.
  • Developers do owe fiduciary duties when they act as the strata council in the period between the filing of the strata plan and the election of the first strata council.
  • However, any act by the developer that might be a breach of fiduciary duty is permissible if the developer has disclosed fairly that it would take that step (and the developer in this case had in fact disclosed fairly its retention of the right to rent unsold stalls).

The option/lease structure binds the Owners

The Court held that the Owners were bound by the Option/Lease Structure, in two distinct ways.

First, the Court held that the registered option created “privity of estate” between the owners of the parkade (the condo owners, collectively) and the developer. The option included a promise by the optionor to sign a registrable form of lease if the optionee asked for one. The Strata had refused to comply with that term.  The Court ordered the Strata to comply.

Second, the Court held that there was “privity of contract” between the owners of the parkade and the developer because the Strata, after it had come into existence, had evinced an intention to be bound by a contract on terms identical to the terms of the Parking Lease. The single most important factor leading the court to that conclusion was that the assignment, by which the developer had conveyed the 106 visitor stalls to the Strata, had included a promise by the Strata to be bound by the Parking Lease. The court came to this conclusion – even though, at the time of the assignment, the  Strata was controlled by the developer – because the Option/Lease Structure had been fully disclosed to prospective owners.

The “privity of contract” was between the Strata and the developer. The Court found – following the recent Crystal Square decision in the Supreme Court of Canada – that the contract binds not only the Strata but also all then and future owners.

The option/lease structure is legal and valid

Justice Myers found that the Condominium Act did not apply before the strata plan is filed. So it did not apply to the grant of the option and lease, both of which predated stratification.

The Court also held that the option and lease did not require subdivision approval by an Approving Officer under Part 7 of the Land Title Act, because they fell within the exception in section 73(3) for leases of part of a building.   

Outcome of the case

The Court concluded that the Strata breached the Parking Lease when the Strata took control of the commercial parking stalls. The Court declared the option valid and binding and ordered the Strata to sign a registrable copy of the parking lease. The Court made similar orders respecting a roof lease that gave the developer the right to install telecom equipment on the roof. Damages for breach of the Parking Lease are to be assessed at a future hearing.


Key takeaways:

  1. Developers need not fear becoming liable for breach of fiduciary duty (except where they act as the strata council).
  2. The quality of the developer’s legal and disclosure documentation is critical. A significant factor in this case was the high quality of that documentation. Underinvesting in the legal documentation is risky, as is the failure to disclose fully.
  3. After the strata plan is filed and before a strata council is elected the developer – acting as the strata council – should have the strata corporation bind itself to any contracts that the developer wants to make binding on all present and future owners. Provided that there has been full disclosure, this should be effective.

If you have any questions about this decision, or its implications for condominium developers, please contact Hein Poulus, QC in Harris’ commercial litigation group.