Nov 4, 2016

Singh v Trump: How ONCA Trumped Toronto Real Estate Developers Gone Wild

Singh v. Trump, 2016 ONCA 747 (CanLII)

In 2009, fully oblivious to the housing market collapse in the United States, I thought it a good idea to get into the Toronto condo market. With down payment money borrowed from my parents, I signed an Agreement of Purchase and Sale in a development project that promised to create a whole new neighbourhood on King Street West. The new and hip neighbourhood was one of the main sales pitches by the developer. With a palatable sense of urgency, the idea of consulting a lawyer was not even in the periphery of my thoughts when I signed the Agreement. Five years later—when my condo finally closed—the major features of the sales promotion did not materialize. In retrospect, I am lucky that my risky investment even closed at all. Tales of buyers getting caught in real estate development projects gone bad are many, and should serve as a cautionary tale to those wanting to enter the market. If you are sinking your life’s savings into a real estate deal that sounds too good to be true, you should really consult a lawyer.

The recent Ontario Court of Appeal (“ONCA”) decision in Singh v Trump, 2016 ONCA 747 [Singh 2] serves as an extreme cautionary tale for buyers and developers alike. The ONCA ruling in Singh 2 is instructive in many respects. However, this post concentrates on the analysis of the contract law implications and statutory protections for real estate investors.

The Sales Pitch

Mr. Singh and Mrs. Lee are two of two hundred individuals who purchased units in the Toronto Trump International Hotel (“Trump Hotel”), the brainchild of Talon International Inc (“Talon”). Mr. Singh, a warehouse supervisor, had an annual income of $55,000. Mrs. Lee was a Richmond Hill homemaker. Both plaintiffs were not sophisticated investors. They both purchased the Trump Hotel units because they saw the “Reservation Program,” promoted by Talon, as an opportunity to make a profit by renting out their unoccupied suites. The Trump Hotel units ranged in price from $784,000 to $843,000. The money for the down-payments used by the plaintiffs was borrowed from their parents.

During the sale, Talon’s sales representatives provided both plaintiffs with a document entitled “Estimated Return on Investment” (“Estimates”). The Estimates outlined occupancy rate projections and profits of $18,000 to $63,000 a year. Sounds too good to be true? Turns out it was. In the end, Mr. Singh, who backed out of the deal, had lost $248,000 in the pre-closing period. Mrs. Lee, who finalized the sale, lost about $991,000.

At trial, Justice Perell found that the Estimates’ specifications were just opinions or forecasts (Singh v Trump, 2015 ONSC 4461 [Singh 1]). However, the opinions were “uninformed and ill-informed” and the figures “were essentially just pick-a-number speculations about what might be charged and what might happen in the marketplace” (Singh 1, para 213). Even though the plaintiffs had established four out of the five elements required to prove a claim for negligent misrepresentation, at trial, they failed to show that they reasonably relied upon the misrepresentation (para 227). Their claim was not successful.

Reasonable Reliance on Estimates

The ONCA found that the fact that the Estimates were “for discussion purposes only” and “not a guaranteed investment program” did not inevitably lead to the conclusion that it would be unreasonable for the plaintiffs to have relied upon the document (Singh 2, para 102). The actionable misrepresentations in this case were: 1) the figures in the Estimates were based on the best information available; and 2) the Hotel would be immediately profitable. Whereas the sales documents only spoke of risks arising due to the change in market conditions, the fluctuations in rental and occupancy rates and the possibility of the increase of expenses (para 104). These were considered to be two different sets of risk.

More problematic to the plaintiffs’ case was the fact that the “Disclosure Document” required under the Condominium Act, SO 1998, c.19, which is a binding legal document, and the “Reservation Program Agreement,” contained various exclusionary clauses. Unless they were found to be inapplicable, unenforceable or invalid, contractual provisions could limit the ability to sue. The Supreme Court of Canada (“SCC”) has said that duties based in tort must yield to the parties’ superior right to arrange their rights and duties in a different way (BG Checo International Ltd v British Columbia Hydro & Power Authority, [1993] 1 SCR 12.)

However, in Tercon Contractors Ltd v British Columbia, 2010 SCC 4 [Tercon], the SCC set out an approach to be used in deciding whether to enforce exclusionary clauses. The inquiry requires a determination of:

  1. Whether the exclusion clause applies to the circumstances established on evidence;
  2. If the exclusion clause applies, then the Court can look at whether the exclusion clause was unconscionable at the time the contract was made;
  3. If the exclusion clause is valid and applicable, then the Court can look at if it should be denied enforcement based on overriding public policy (paras 122-3).

In Singh 2, the ONCA found that the Entire Agreement Clause functioned “as a trap to these unsurprisingly unwary purchasers” (para 116). Due to the placement of the Clause, the inexperience of the plaintiffs and the circumstances of the sale, it was not reasonable for the plaintiffs to have understood that Talon was exempting itself from any liability flowing from their misrepresentation (para 118). The Court thus found the exclusionary clauses unconscionable, and therefore unenforceable.

The ONCA ruling implies that simply because something is written in a contract, it does not mean that it is enforceable. Up until now, “buyer beware” had been the law in Ontario with respect to real estate transactions. In Singh 2, the ONCA seems to point to a possible expansion to the courts’ approach to unconscionability. To sum it up with a quote from my first year contract law professor, Angela Swan, the Court in Singh 2 seems to be saying to the developer, “don’t be a scum bag.”

Investment Scheme or Condo Ownership?

The ONCA ruling is instructive in an additional way. If the plaintiffs’ common law claim had failed, as it did at the lower court level, they still had the ability to seek remedy in statutory schemes. The statutory claim in Singh 1 & 2 relates to Ontario’s Securities Act, RSO 1990, c S.5 [SA]. In this respect, Singh 2 confirms that courts can conduct their own analysis of SA claims, despite the Ontario Securities Commission’s (“OSC”) decision to not pursue regulatory action. The remedy sought in Singh 2 fell under section 130.1 of the SA. Importantly, unlike a negligent misrepresentation claim in common law, the SA does not require reasonable reliance on the misrepresentation. An action under the SA has the potential to lower the threshold significantly.

Talon’s lawyers had recognized that selling Trump Hotel units could be seen as an “investment contract.” They applied to the OSC seeking a ruling under section 74(1) of the SA. In its May 25, 2004 ruling, the OSC exempted the sale of the hotel units from the dealer registration and prospectus requirements under sections 25 and 53 of the SA. The Ruling also stated that the hotel units would be marketed as luxury condominium units, while the “Reservation Program” would merely be a secondary feature as opposed to an investment vehicle for making a gain or profit (para 23). Further, prospective purchasers of units would not be provided with rental or cash flow forecasts, guarantees, or any other form of financial projection or commitment (para 24).

The plaintiffs had lodged a complaint with the OSC in regards to Talon’s breach of the terms of the 2005 Ruling, in relation to the forecasts and projections. However, after Talon’s submission, the OSC had not pursued regulatory action. The ONCA found that it would be unconscionable and would shock the conscience to allow a party to use an entire agreement or other exculpatory clause to escape liability for misrepresentations made in breach of the OSC’s terms for granting an exemption (Singh 2, para 129). As such, the Court conducted its own analysis and found that the sales scheme was in violation of the OSC Ruling.

Shortcomings and Protections

In its failure to pursue regulatory action, the OSC showed a reluctance to get too involved in real estate schemes. To be clear, the OSC was very aware and vigilant in determining whether an exemption under section 74(1) of the SA should be granted in the first place. Once that exemption had been granted, the OSC seemed more reluctant to delve into the details of a transaction that it now considered a pure real estate sale, unless the breach of the exemption was painfully obvious.

The marketing practices outlined in Singh 2 are unusual only in the amount of the loss that resulted. At the risk of promoting over-regulation, Ontario should seriously consider a legislative scheme that protects consumers from dubious real estate development marketing practices. Until then, Singh 2 is a welcome development in extending protection for real estate buyers and investors.