Real estate development projects are complex ventures that often involve multiple parties. While partnerships can yield significant returns, disagreements among shareholders can derail even the most promising projects.
This blog will highlight common disputes that arise in real estate development projects and will explore strategies for resolution. Whether you are a seasoned developer or a first-time investor, understanding these challenges is crucial to protecting your interests.
A Familiar Scenario in Land Developments
Consider the following scenario: a businessman (“A”) operating a golf course wants to purchase a piece of land adjacent to the course to develop it, but he does not have sufficient funds. Another businessman (“B”), a golfer, agrees to form a joint venture with A holding equal and undivided shares to develop the land. Initially, A and B agree that the depth of the land parcel will be 110 yards.
When A and B signed a contract, the width was mistakenly recorded as 110 feet, thus reducing the area to develop by approximately 2/3. After signing, B insisted that the agreement was to be adhered to strictly, and he proceeded to start the project despite A’s demand for correcting the error. B also uses conduct that is fraudulent, dishonest and deceitful in order to carry out his own plan.
Does this sound familiar to you? What can a person or business in A’s position do?
Basic Ingredients in a Successful Real Estate Development
Successfully carrying out land development projects requires the availability of suitable land, ideas to develop the land parcels into commercially attractive lots and units which will be sold on the real estate market for good price, and shareholders bringing in their expertise (such as in construction) into the projects.
The key, therefore, is the close collaboration of the shareholders who pool their resources in financing, marketing, construction and creativity together in order to make profits.
This collaboration involves a high level of trust among the shareholders, as the ultimate goal is to run a successful business, the joint venture partners often rely on and trust each other.
Disputes in Land Development Projects
Disputes in a development project do occur. They can be as small as an overpayment by way of writing an extra payment cheque (see Nie v. Kwang Chyun Enterprise Ltd., 2017 BCSC 1941) which the recipient refused to pay back.
In a different case, instead of using yards as measurement in a land development project near a golf course, as the shareholder’s agreed verbally (Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19), the written agreement turned out to be in feet, which rendered the development project significantly smaller than the parties intended.
It is important to pay attention to how the courts resolve these disputes, as such decisions provide important guidance for land developers to avoid similar mistakes. However, as mistakes are an inevitable fact of life, these judgments offer solutions that developers should be aware of.
Is an Oral Agreement Barred by the Parol Evidence Rule?
A first question to ask is if shareholders made a written agreement, as in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, how come the parties previous oral agreement to develop a larger piece of land was not barred by the “parol evidence rule”?
In Hawrish v. Bank of Montreal, 1969 CanLII 2 (SCC), Hawrish disputed the guarantee he gave to the bank by alleging an oral assurance given by a bank manager limiting the scope of his personal guarantee. Because the alleged oral evidence had the effect of detracting from or modifying the written agreement, such evidence is inadmissible at trial – this is the “parol evidence rule”.
The underlying principle is to protect the contracting parties’ freedom to bargain, and once that bargain has concluded, with the parties’ minds meeting and the agreement accordingly reduced to a written contract, the common law rule of evidence in excluding parol evidence operates to protect the certainty of the contract: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at paragraphs 59.
Exception to the Parol Evidence Rule
If the logic is to prevent contracting parties who changed their minds to attack the written agreements they signed, mistakes such as the yards versus feet in a metes and bounds description are of a very different nature: in fact, the mistaken measurement itself does not reflect what the two shareholders agreed to, as their verbal agreement contemplated a large area to develop.
The evidence to rectify a mistake is an exception to the parol evidence rule as rectification reaffirms the real contract agreed upon, instead of the written agreement which contained a serious error. Sattva 2014 SCC 53, at paragraphs 60-61.
Clearly, rectification of mistakes has to be narrowly tailored to prevent opening the floodgate of parties reneging from their contractual obligations.
Land Development Joint Venture Results in Shareholder Dispute
Justice Binnie described the circumstance in which the dispute came about in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19: the respondent agreed with the appellant to develop a piece of land adjacent to the 18th hole of a golf course into a residential area. Both parties were familiar with the area to be developed, as the respondent leased the parcel of land to operate the golf course, and the appellant was a frequent golfer there.
They agreed to form a joint venture for land development, and the written contract was reviewed by lawyers on both sides. Due to an oversight, the respondent did not notice the mistake in the measurement unit. (See paragraphs 14, 47 and 88).
The 4-Step Test to Resolve the Dispute
Justice Binnie set down the law as to how this contract dispute can be resolved; the following steps 1-3 are sequential since if one requirement is not met, then the remedy of rectification cannot be applied. The 4th step of the test is a requirement on the clarity and strength of the evidence to prove steps 1-3. The steps are as follows:
- The Existence and Content of the Prior Oral Agreement;
- Fraud or Conduct Equivalent to Fraud;
- Precise Terms of Rectification; and
- Existence of “Convincing Proof”.
Step 1 – The Existence of an Oral Agreement
There must be evidence to show that, despite not using “lawyerly language”, the contracting parties clearly formed an oral agreement: Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 at paragraph 47.
Through testimonies, the court saw clear evidence that the two shareholders in the Sylvan Lake development agreed, initially, that the depth of the land parcel was going to be 110 yards – with 110 yards, 2 rows of lots could be developed, but with 110 feet, only one row.
Finding or rejecting certain evidence is a function of the trial judge, who has the benefit of determining which witness is more reliable. This is particularly crucial when it comes to an oral agreement: see paragraph 21 in Case National Investment Ltd. v 1219925 B.C. Ltd., 2022 BCSC 2250.
Step 2 – Fraud and Dishonesty in a Party’s Conduct
There is a requirement that the clear evidence shows that the party benefiting from the mistake exploited it in a fraudulent, dishonest and deceitful way.
In Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 (at paragraphs 51-53) the respondent (defendant) preferred the narrower one-row development plan, he knew the initial agreement was in yards but denied the appellant’s request to use the initial agreed measurements. This caused the courts to award the appellant damages in the end.
The fraud requirement can be seen, as a part of the requirement in real estate disputes, to prevent unjust enrichment: see Arbutus Bay Estates Ltd. v. Canada (Attorney General), 2017 BCCA 374 at paragraph 66.
Step 3 – Precise Term to Rectify to
This precise term requirement is to ensure that the earlier oral agreement contained a specific term which was mistakenly recorded in the signed written agreement. In this case, it was the 110 yards of depth that the shareholders agreed to.
Step 4 – Convincing Proof
Convincing proof is a requirement that the facts have to be unequivocal, as the Supreme Court of Canada clarified later in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 that correcting unilateral mistakes should be used sparingly, and only in cases that the facts leave little doubt like in Sylvan Bay as to what the shareholders initially intended.
Contact Experienced Litigation Lawyer Roland Luo for Skilled Representation in Real Estate Disputes
To safeguard your interests, when a real estate development dispute arises, earlier resolution with the help of experienced legal counsel is an efficiency multiplier. At Roland Law, our litigation team, led by Roland Luo, has extensive experience guiding clients through complex land development cases.
We understand the intricacies of a joint venture, in the forms of partnerships or in a corporate setting, and can help you navigate the legal process effectively. To schedule a confidential consultation, call us at 604-800-4623 or contact us online to learn more about how we can help you.