Real Estate Investors Induced By Misrepresentations

In the mid 2000’s, two middle class Toronto residents, Mr. Singh and Mrs. Lee, were each (separately) looking to profit from Toronto’s rising housing market. When each heard about the planned Trump International Hotel and Tower, they decided to visit the sales center to learn more about the project. It was a visit each would come to regret.

Trump International Hotel and Tower is Born:

The Trump International Hotel and Tower was the brainchild of Talon International Inc., which wanted to develop a luxury hotel and condo in downtown Toronto. Talon’s President at the time was Val Levitan, a man with no previous experience in construction, hotel management or operations.[1] Talon joined forces with the ‘esteemed’ Donald J. Trump Sr. (yes, the reality TV star and US Presidential candidate) and the Trump International Hotel and Tower, which now sits at the corner of Bay and Adelaide, was born.

Novel Regulatory Issues Faced by the Project:

A number of the units offered for sale ‘pre-construction’ were ‘Hotel Units,’ which buyers could make available to the hotel to rent on their behalf through the ‘Reservation Program‘, allowing the buyers to make a profit, at least in theory.

However, the sale of ‘Hotel Units’ was itself problematic, in that much like selling stocks or junk bonds, it triggered (potential) regulation under the Ontario Securities Act, R.S.O. 1990, c. S.5. To deal with this issue, Talon applied for and was granted an exemption from such regulation, based upon its representations that:

23. Hotel Units will be marketed primarily as first-class luxury hotel condominium units to be used for short-term transient hotel occupancy or for longer term occupancy. The Reservation Program is merely a secondary feature which offers participating purchasers a means to defray related ownership expenses, as opposed to an investment vehicle for making a gain or profit.
24. Prospective purchasers of Hotel Units will not be provided with rental or cash flow forecasts or guarantees or any other form of financial projection or commitment on the part of the Applicant.
29. The economic value of a luxury hotel condominium of this type will be attributable primarily to its real estate component because Hotel Units will be marketed as luxury transient occupancy hotel condominium properties and will not be offered and sold with an emphasis on the expected economic benefits of the Reservation Program and the Reservation Program Agreement.

The Ontario Securities Commission ruling granting exemption was clear that Talon was not to market the Hotel units by emphasizing that prospective purchasers could profit through the Reservation Program.[2]

Marketing of the Property:

Despite the ruling of the Ontario Securities Commission, both Mr. Singh and Mrs. Lee were provided (by Talon’s sales agent) with documents titled “Estimated Return on Investment” which set forth projected revenues and expenses and ultimately, expected yearly returns, which ranged between 6.46% to 21.57% When questioned regarding these numbers, Talon’s sales agent Ms. Zak told Mr. Singh that “the Trump Hotel would be new and the “buzz” about it would be great, the hotel would be fully occupied.”

Reality Makes an Ugly Appearance:

The hotel opened years behind schedule on January 31, 2012. Shortly thereafter, the middle-class investors, Mr. Singh and Mrs. Lee, learned that actual expenses would be much (51-68%) higher than anticipated, while it soon became apparent that revenues would be much lower than provided for in the estimates. When expected returns turned into staggering losses, litigation ensued.

The Real Estate Litigation:

Mr. Singh and Mrs. Lee brought suit against Donald Trump Sr., Talon International and a number of other parties in the Singh v. Trump, 2016 ONCA 747 case, alleging that Talon had breached the OSC ruling, had made misrepresentations which offended section 130.1 of the Securities Act and had made misrepresentations in the estimates provided. The matter was heard by Justice Perrell on summary judgment, who held that:

“The Estimates’ specifications of hotel rates and occupancy rates, which emanated from Mr. Levitan’s mind, were, at best, just opinions or forecasts. However, they were uninformed and ill-informed opinions, and his figures were essentially just pick-a-number speculation about what might be charged and what might happen in the marketplace.”

Significantly, Justice Perrell also found that the plaintiffs had established four out of the five elements required to prove a claim of negligent misrepresentation, namely:

  1. the defendants owed them a duty of care;
  2. the defendants made an untrue, inaccurate or misleading representation;
  3. the defendants did so negligently; and
  4. the plaintiffs suffered damage as a result. It was in this context that the motions judge described the Estimates as “deceptive documents” that were “replete with misrepresentations of commission, of omission, and of half-truth.”

Despite that, the motions Judge held that the plaintiffs failed to show that they reasonably relied upon the misrepresentations, and dismissed their claims, which they appealed.

The Appeal:

Mr. Singh and Mrs. Lee appealed the Judge’s ruling, to the Ontario Court of Appeal, which ruled in favour of Mr. Singh and Mrs. Lee. In so doing, the Court of Appeal held that if the units were sold as investments, as expressed in the estimates, the motion Judge erred in holding that reliance upon those estimates was misplaced (such that the fifth required element of a negligent misrepresentation claim was present). As a result, Mr. Singh’s contract was rescinded, while Mrs. Lee was awarded damages, in an amount to be determined (note that her losses to the time of suit totaled almost $1 million dollars).

The Takeaway:

In the competitive world of real estate, sometimes the pressure to make a sale leads parties to fudge the truth, or to otherwise misrepresent facts, that if known, would have caused a buyer to walk away from a purchase. In my practice, I have seen parties fail to disclose easements and other encumbrances upon title, which can mean the difference between having make a solid investment and having walked into a certain loss.

If you’ve suffered losses as a result of a real estate investment or other misrepresentation, call the commercial litigation lawyers at Michael’s Firm located in Toronto and Hamilton, ON today.

Leave a Reply

Your email address will not be published. Required fields are marked *

*