What is a real estate developer?
A natural or legal person who carries out, directly or through one or more intermediaries, a real estate draft1 ". The director is responsible for project design, land purchase and development, financing, administration, marketing, construction and sales.
For the purposes of divided co-ownership, he is also the person who owns at least half of all the fractions or his successors in title, except the person who acquires in good faith and with the intention of occupying a fraction for a price equal to its market value at the time of registration of the declaration of co-ownership’ and may be a legal or natural person.
It is common practice that, at the time of publication of the declaration of co-ownership in the land register, a representative or officer of the promoter is already named in the by-laws as provisional administrator. In his or her role as provisional administrator of the syndicate, this person is obliged to respect the obligations imposed on him or her by the Act, the constituting act and the by-laws, and to act within the limits of the powers conferred upon him or her.
What are the general obligations of a property developer as provisional administrator?
The obligations of real estate promoters as provisional administrators are governed by the Civil Code of Québec' (hereinafter "C.C.Q."), which has been clarified by the Act to provide a framework for building inspections and divided co- ownership, to replace the denomination of the Régie du logement and to improve its operating rules, and to amend the Act respecting the society of habitation of Québec and various legislative provisions concerning municipal affairs".
- Duty of care, diligence, honesty, and loyalty
There is sometimes a fine line between the functions of promoter and provisional administrator. So, it's important to distinguish between these roles". Why is this? To avoid extra- contractual liability.
The provisional administrator must act with prudence, diligence, honesty, and loyalty".
The promoter's representative has a duty of transparency in his administration at the transitional meeting. He must give an account of his provisional administration, produce financial statements, as well as a statement of debt and receivables". That's why it's important for the promoter to be aware of his obligations and to separate his financial investments from the syndicate's expenses, to avoid placing himself in a situation where certain sums may be claimed from him later.
- Obligation to act in the interests of the Syndicate
The promoter must not place himself in a situation of conflict of interest.
Conflicts of interest can compromise the integrity of real estate developers and harm buyers and investors. Developers have an obligation to be transparent and to act in the best interests of their stakeholders, avoiding placing themselves in situations of conflict of interest.
Indeed, as provisional administrator, the promoter must prioritize the interests of the legal entity, the syndicate, rather than his interests as promoter. Since 2015, the Leclerc" ruling has established that a promoter acting as provisional administrator can be found personally responsible. Indeed, a promoter who puts his interests as promoter first, rather than those as provisional administrators of the syndicate, may be liable for the reimbursement of certain expenses and/or profits incurred during his period of provisional administration, in accordance with the rules of extra-contractual liability".
Nor may the promoter confuse the property of the syndicate with his own or use for his own benefit or for the benefit of his alter ego the property of the syndicate or the information obtained in his capacity as provisional administrator unless he has the authorization of the syndicate'°.
Similarly, he must avoid placing himself in a situation of conflict between his personal interests and his obligations as a director".
As soon as the appearance of a conflict of interest becomes apparent, the pro- motor must disclose to the union any interest he has in a company or association'". The same applies to any contract between the provisional administrator and the union. If he fails to do so, the court, at the request of the syndicate or a co-owner, may annul any act or order the provisional administrator to render an account to the syndicate and to hand over any profits made.
- Obligation to relinquish administration/deadlines.
The promoter's provisional administration ends when he holds less than 50% of the units in the co-ownership", and by holding a special meeting of co-owners within 90 days. The purpose of this meeting is for the provisional administrator to render an account and appoint a new board of directors.
It is important for the promoter to keep separate and detailed accounts in his administration". During the transitional period, he must present the financial statements, which must be accompanied by comments from an accountant". He must therefore provide proof of payment and invoices supporting the sums incurred by the syndicate. All too often, however, the financial statements are missing or incomplete.
He must also reimburse the syndicate for expenses related not to administration, but to the completion of the real estate project (heating, electricity, compensation in the event of prejudice following work requested by the syndicate).
After the transition meeting, the promoter must also provide the syndicate with plans and specifications for the building, certificates of location (where available), a sufficiently detailed description of the private portions, and any other documents or information that the government may require by regulation. Following the release of a government regulation scheduled for this year, it will be necessary to developers will be required to provide a contingency fund study at the time of building delivery, to assess the condominium's future financial needs in terms of maintenance, major repairs, and replacement of common parts.
- Obligation of a realistic and adequate syndicate budget
All too often, developers present budgets that do not reflect the reality or the real needs of the condominium.
We often see promotions announcing low common- charge costs or a free year of common charges, all with the aim of boosting unit sales. Often, budgets are revised by the board of directors after the transition of administration, and there a r e insufficient funds available". The condominium thus starts off on the wrong foot, and the co- owners and the syndicate find themselves with a deficit budget that they must quickly correct.
However, this is to the developer's disadvantage. In fact, when the sums budgeted by the promoter for the fiscal years during which he is provisional administrator of the syndicate and the sums actually incurred by the syndicate differ by 10% or more, the promoter and/or provisional administrator is obliged to reimburse the difference, unless this difference is attributable to the syndicate after the appointment of a new board of directors.
- Obligations regarding the information memorandum
In addition to sales and construction obligations, the C.C.Q. requires the promoter to disclose all information relevant to an informed purchase by potential buyers. In practice, this translates into the information notice.
The information memorandum is an important document, if not the most important, to be provided by the developer. It completes the preliminary contract and must be given to the purchaser of a fraction of divided co-ownership. It contains :
- Names of architects, engineers, builders and developers;
- A plan of the entire real estate project and, if applicable, the general development plan for the project, as well as a summary of the specifications;
- The projected budget established on an annual basis starting from the date of registration of the declaration of co-ownership;
- Common facilities;
- Information on the management of the property and, if applicable, on any long lease or superficies to which the property is subject.
- If applicable, the warranty plan and the terms and conditions of the immovable that enable the promisor- purchaser to take cognizance of it.
- A copy or summary of the declaration of co-ownership or undivided ownership agreement and the by-laws of the immovable, even if these documents are in draft form;
- If the sale is of divided co-ownership, a statement of the leases granted by the developer on the private or common portions of the building and the maximum number of fractions intended for rental purposes".
If the buyer does not receive an information notice, or if it contains errors or omissions, he may request that the sale be declared null and void and claim damages if he suffers any loss as a result.serious prejudice within 90 days of the sale. It is also stipulated that the preliminary contract, which includes the "note information in divided co-ownership, must contain a right of withdrawal whereby the promisor-purchaser may withdraw from the sale within ten (10) days of the deed. If the promoter and/or the provisional administrator of the syndicate fails to provide the promisor-buyer with a complete information notice, the promisor-buyer may then claim damages, the nullity of the sale or withdraw from the sale as long as he has not received this information notice or, failing this, within 0 days of its receipt".
- Obligation to contribute to common expenses
All co-owners, whether buyers or developers, contribute to common expenses5 in proportion to the relative value of their fraction. They alone are responsible for the maintenance and ongoing repairs of the restricted-use common areas, from the date of publication of the declaration of co-ownership.
Indeed, as long as the developer has not yet sold all his units, he is liable for the payment of the building's common charges for the private portions he has not yet sold, regardless of whether he has abandoned his provisional administration or whether he occupies them or not.
It would be contrary to public policy for the developer not to contribute to the building's common expenses". What's more, the developer is responsible for all costs incurred during the construction of the building, as well as for all completion work. For example, in the Ciutenberg case^", the developer and his alter ego were ordered to pay electricity costs and to reimburse the syndicate for sums claimed in excess.
- Contribution exception for common breakdowns & restricted use
There is, however, one exception to the developer's contribution to common expenses. In phased condominiums, the developer often stipulates in the initial declaration of co-ownership that he does not have to contribute to the condominium's common expenses for use, maintenance, and ongoing repairs as long as the buildings in the concomitant phases have not been built.
How? By establishing that, as long as Jes phases have not been built, the common portions are for the sole restricted use of the co-owners of the concomitant phases whose buildings have been erected. Restricted common areas are areas that can only be used by one or more co-owners. The developer has a duty to protect his expenses from charges that do not benefit him in respect of phases that he owns, but which have not been built. Logic dictates that it is not fair for the developer to pay expenses, such as snow removal, for phases that have not yet been built.
However, this does not apply to everything. The developer must continue to pay all charges relating to the property rights, such as insurance, management and other costs. The cost of these services does not include fees, bank charges and professional fees, or any services not related to the maintenance or ongoing repair of the common areas for the exclusive use of the existing phases.
- Obligations of property developers under the Consumer Protection Act
A real estate developer is not only bound by the seller's legal warranties, but also by consumer protection provisions. Under the Consumer Protection Act (hereinafter "C.P.A."), the developer is considered a merchant who sells housing units to consumers (buyers).
Promoters must therefore refrain from any prohibited practice involving false or misleading representation. A false or misleading re-presentation to the buyer constitutes a prohibited practice. It may be an assertion, an act or an omission on the part of the promoter*. For example, in the preliminary contract and information memorandum, the developer provides for an elevator for exclusive use, full-size windows, the use of a certain material (quartz or marble countertops, a certain type of floor plan, etc.) and upon delivery, the unit contains none of these features.
In such cases, the buyer benefits from the presumption of fraud by the property developer or his representative". The presumption is such that if the buyer had been aware of the true state of delivery of the unit, he would not have contracted or would have contracted at a lower price.
The legal consequences of fraud include reduction of the sale price, nullity of the contract or damages. The promoter will have to prove that having known the true conditions of the unit, the buyer would still have contracted. In addition, the Supreme Court of Canada has ruled that the test for analysis is that of the gullible and informed consumer. This is a high burden of proof.
When developers sell their units through related persons, companies, or enterprises, also known as alter egos, they must make sure that potential buyers are clear about who the investing entity is, and that they do not refer to it to promote the sale. Failure to do so could result in the promoter being asked to cancel the sale on the grounds of fraud. This is to avoid any confusion on their part as to the identity of the promoter and the declarant (seller), as this could constitute a fault and engage the liability of both the investors and the declarant.
- Obligations under the Charter of the French Language and Law 96
Changes have been made to several sections of the C.C.Q., including the section on contract interpretation. From now on, preliminary contracts must be in French, otherwise the contract is deemed incomprehensible.
In addition, if the contract is considered to be a contract of adhesion51 and is not drafted in French at the request of the member, the latter is presumed not to have taken cognizance of it. Furthermore, any clause not written in French is deemed incomprehensible.
Lastly, the declaration of co-ownership and its deeds of modification are considered contracts of adhesion, since they are drawn up and imposed by the developer on the buyer, who cannot negotiate or refuse them.
From now on, they must be written exclusively in French. Not only must they be drafted in French, but the register, the documents held at the disposal of co- owners, any document drafted by the syndicate as well as requests for entry in the various registers must also be exclusively in French. As a result, the minutes of the provisional administrator's board of directors, as well as those of the co-owners' meetings held prior to his or her relinquishment of administration, must be in French.
Conclusion
This text shows that certain omissions on the part of a promoter and/or provisional administrator can have serious consequences. Costly legal action by syndicates of co-owners and co-owners could be avoided. In some cases, the promoter's administrator may be held personally liable.
It is strongly recommended that you seek the advice of a lawyer or notary with a specialized real estate law practice to obtain a thorough analysis of the standard contracts used by developers, as important pecuniary consequences are at stake.
