2008 BCSC 1160 Strata Plan LMS 3851 v. Homer Street Development

Before: The Honourable Mr. Justice Truscott

Reasons for Judgment

Counsel for the plaintiffs:	B.W. Dixon S.T.C. Warnett
Counsel for the defendants and Third Parties, Homer Street Development Limited Partnership and others:	D.C. Harbottle G.N. Carson
Counsel for the defendant and Third Party, MM&R Valuation Services Inc. dba HVS Hospitality Valuation Services, Canada:	G.M. Nijman H. Bromley
Counsel for the defendants and Third Parties, O’Neill Hotels & Resorts. Ltd., OHR Grand Management Ltd., Robert F. O’Neill, and John C. O’Neill:	D.G.S. Rae, Q.C. A.D. Borrell

Date and Place of Trial/Hearing:	April 2-5; 10-13; 16-20; 23-27; April 30 – May 4; May 7-9; June 26-29; July 16-20 July 27; August 8; September 7; October 9-12; 15-19, 2007
	Vancouver, B.C.

Table of Contents

The Parties. 5

Second Further Amended Statement of Claim.. 7

The Disclosure Statement of November 8, 1996. 13

The Master Agreement 20

1996 – 1999 Overview.. 22

The Pleading of “Projections”. 29

Attribution of the Financial Projection to OHR in the Disclosure Statement 32

Material False Statements and s. 59 of the Real Estate Act 40

(a) Note 2(a) of the Notes to Financial Projection. 42

(b) Section 6.7 of the Disclosure Statement 49

False Representations at Common Law in 1996. 54

Note 2(a) 54

The Projections. 57

Duty of Care with respect to the Projections. 60

Standard of care with respect to the Projections. 61

Representation of objective reasonableness by the Developer and OHR.. 62

Evidence of Ms. MacDonald. 65

Expert Evidence. 75

Mr. Kleinschmidt 75

Mr. Flood. 79

Mr. Rosen. 86

Submissions on the expert evidence. 98

The Investors. 98

HVS.. 106

OHR.. 109

The Developers. 111

Investors Reply. 111

Discussion and Analysis of the Reasonableness of the Occupancy Projections. 112

Consistency between Penetration Analysis and Month by Month Analysis. 128

1995 Segment Penetration Rates used for 1999. 129

Missing Information in the HVS Opinion Letter 131

Failure to ensure the exchange of relevant information between OHR and HVS and collaborate on the projections 134

Projections of Expenses. 141

a) Rooms Expenses. 141

b) Energy Expenses. 143

c) Property Operations and Maintenance Expenses. 144

Disclosure Declarations in 1996. 146

1999 Alleged False Representations. 147

The Second Amendment 148

Who benefits from the Second Amendment 149

Alleged non-disclosure. 153

Schedule “D” to the HMA. 170

Conclusion. 177

Is OHR Grand the alter ego of OHR?. 181

Summary of Findings. 182

The Parties

[1] In this action the individual plaintiffs (the Investors), apart from the strata corporation, are owners of strata lots in a hotel in downtown Vancouver, British Columbia, known as the Westin Grand Hotel (the Westin Grand).

[2] The Investors purchased their interests in the Westin Grand through Offers to Purchase and Agreements of Sale (the Sale Agreements) following the receipt of a Disclosure Statement of November 8, 1996 issued under the authority of the Real Estate Act, 1979 ch. 356, and the Securities Act, R.S.B.C. 1996 ch. 418 (the Disclosure Statement).

[3] The Investors claim is against:

a) Homer Street Development Limited Partnership, formerly Cressey (Homer) Limited Partnership, Trilogy Robson Development Limited Partnership and 455322 British Columbia Ltd., carrying on business as The Grand Development Partnership (the Developer or Developers). The Developers are sued as responsible for the issuance of the Disclosure Statement, the sale of all the strata lots in the Westin Grand to the Investors, the Amendments to the Disclosure Statement, and delivery of the Hotel Management Agreement (“HMA”) to the Investors in April 1999 for execution.

b) Cressey Development Corporation (Cressey) as the general partner of Homer Street Development Limited Partnership and alleged as such to be responsible for its debts and liabilities.

c) Norman Cressey and Joan Cressey as officers and directors of Cressey (the Cressey directors).

d) 511953 British Columbia Ltd., formerly Trilogy Pacific Enterprises Corporation (Trilogy) as the general partner of Trilogy Robson Development Limited Partnership and alleged as such to be responsible for its debts and liabilities.

e) John deC. Evans, Jonathon Wener and Douglas Pascal, as officers and directors of Trilogy (the Trilogy directors).

f) Norman Cressey, Scott Cressey, John deC. Evans and Jonathon Wener as officers and directors of 455322 British Columbia Limited (the 455322 directors).

g) MM&R Valuation Services, Inc. doing business as HVS Hospitality Valuation Services, Canada (HVS). HVS is sued over its opinion letter of November 8, 1996 on the Westin Grand’s annual operating projections for the initial five years, included in the Disclosure Statement.

h) O’Neill Hotels & Resorts Ltd. (OHR). OHR is also sued as responsible for the Westin Grand’s annual operating projections included in the Disclosure Statement, and as responsible for any liability of OHR Grand Management Ltd. (OHR Grand).

i) OHR Grand is sued over presentment in April 1999 of the HMA for execution by the Investors.

[4] The Cressey directors, the Trilogy directors and the 455322 directors are collectively referred to herein as “the Directors”.

[5] The Investors and the strata corporation also claim against some or all of the defendants with respect to the operation of the Westin Grand after it opened, but on my orders this trial was restricted to the issues of whether there were any breaches of duties of care to the Investors through representations by any of the defendants in the original Disclosure Statement, or in amendments to the Disclosure Statement, or in the delivery of the HMA for execution in April 1999 (all as defined in the Second Further Amended Statement of Claim).

[6] These issues included the issue of the duty of any of the defendants to disclose updated financial information to the Investors before the opening of the Westin Grand.

[7] Specifically the trial did not include the issue of whether any Investor had in fact reasonably relied upon any misrepresentation made to that investor, nor if so, what loss if any that Investor may have suffered.

[8] All issues other than those involved in this trial were reserved for determination until after the resolution of the issues involved in this trial.

Second Further Amended Statement of Claim

[9] The Second Further Amended Statement of Claim filed October 6, 2006 alleges that the Developers were obliged by the Real Estate Act and the Securities Act to file and deliver to each prospective Investor a Disclosure Statement containing prescribed information, and to amend that Disclosure Statement if a change occurred with respect to any matter that would have the affect of rendering a statement in the Disclosure Statement false or misleading.

[10] It is alleged that pursuant to s. 59 of the 1979 edition of the Real Estate Act, or s. 75 of the 1996 edition, the Investors are deemed to have relied on any representations made in the Disclosure Statement and the Developers and their Directors are liable under those sections to compensate the Investors for any loss or damage they have sustained as a result of any material false statement.

[11] Further it is alleged that by the Disclosure Statement the Developers and Directors as well as OHR expressly or impliedly represented and warranted to the Investors that:

(a) the return on investment would be sufficient to cover each Investor’s assumed 75% mortgage plus cash returns on an assumed 25% down payment of 11.5% in 1999, 10.4% in 2000, 13.1% in 2001, 11.5% in 2002, and 11.5% in 2003 (the “Projections”);

(b) there were no undisclosed material facts that would, or might, prevent the Projections from being realized or seriously undermine the accuracy of the Projections;

(c) the assumptions and hypotheses on which the Projections were based were reasonable and reflected circumstances that were likely to exist;

(d) the Projections had been prepared in good faith, using reasonable care and skill, objectively and independently and had not been prepared or adjusted so as to unreasonably or artificially increase the projected returns to Investors;

(e) the Projections were based on room revenues that assumed hotel occupancy rates equal to the expected average occupancy rates for downtown Vancouver hotels of similar quality except for 1999 and 2000 which were assumed at 92.5% and 97.5% of the average, respectively, recognizing the start-up nature of the operation … .

(the Representations and Warranties)

[12] It is alleged that the Projections were prepared in whole or in part by OHR and reviewed, approved and published to the Investors by the Developers and the Directors through the Disclosure Statement. It is alleged that OHR knew and intended that the Projections would be published to the Investors for the purpose of inducing entry into the Sale Agreements and the HMA.

[13] It is also alleged the Developers and the Directors expressly or impliedly represented and warranted to the Investors that:

the Developers had consulted with HVS and had been advised that:

(i) the hotel occupancy rate in Vancouver last year (1995) was as high as 78%;

(ii) demand for downtown luxurious hotels is more than supply; and

(iii) tourism is the number one growth industry in Vancouver.

[14] It is alleged that HVS was retained by the Developers to review and comment on the Projections and prepare an opinion letter dated November 8, 1996 (the “HVS Opinion letter”), that to its knowledge its opinion letter was intended to and did form part of the Disclosure Statement and its letter, opined that the Projections were “reasonable and achievable” and the Hotel would “perform well.”

[15] It is alleged that HVS impliedly represented that the assumptions on which the Projections were based were accurately described in the Disclosure Statement, that its opinion was prepared with reasonable care and skill and that there were no undisclosed material facts that would, or might, prevent the Projections from being reasonable and achievable or prevent the Westin Grand from performing well (the “HVS Representations”).

[16] It is alleged that the Disclosure Statement was incorporated by reference into each Sale Agreement that the Investors signed.

[17] It is alleged that the Representations and Warranties, the Projections and the HVS Representations were made negligently in that:

(a) the Developers, the Directors, OHR and HVS knew or ought to have known that the Projections would not, or could not, be achieved;

(b) the Developers, the Directors, OHR and HVS knew or ought to have known that the assumptions and hypotheses on which the Projections were based were unreasonable and reflected circumstances that were not likely to exist;

(c) the Developers, the Directors, OHR and HVS knew or ought to have known that the rooms revenues in the Projections were based on occupancy rates above the expected average occupancy rates for downtown hotels of similar quality in Vancouver in 1999 to 2003;

(d) the Developers and the Directors knew or ought to have known that HVS had not advised and it was not true that:

(i) the hotel occupancy rate in Vancouver last year (1995) was as high as 78%;

(ii) demand for downtown luxurious hotels is more than supply; and

(iii) tourism is the number one growth industry in Vancouver.

(e) further, or alternatively, the Developers, the Directors, OHR and HVS failed to review and change the Projections before the Investors completed their purchases to reflect changes in circumstances that they knew or ought to have known made the Projections unreliable or increased the risk that they would not be achieved.

[18] It is alleged against OHR Grand and the Developers that:

In or about April, 1999, by delivery for execution of a form of HMA containing the same projected operating results that formed the basis for the Projections, OHR Grand and the Developers expressly or impliedly represented to the Investors and each of them that, as of that time, the projected operating results and the Projections derived therefrom:

(a) represented the best judgment of OHR Grand as to the most probable set of economic conditions and the planned course of action for the hotel operations;

(b) were sound and reasonable and were prepared by OHR Grand in good faith, using reasonable care and skill;

(c) were believed by OHR Grand and the Developers to be reasonable and OHR Grand and the Developers were not aware of any undisclosed facts tending to seriously undermine their accuracy.

(collectively the “April 1999 Representations”).

[19] It is alleged that OHR Grand and the Developers intended that the HMA, containing the same projected operating results that formed the basis for the Projections, be delivered to the Investors for the purpose of inducing their completion of the Sale Agreements and entry into the HMA and that by the terms of the HMA, OHR Grand represented that Schedule D, containing the projected operating results that formed the basis of the Projections, was the Operating Plan and Budget for the first Operating Year, as defined in the HMA.

[20] It is alleged that these April 1999 representations were made by the Developers and OHR Grand knowing them to be false, without belief in their truth or recklessly not caring whether they were true or false.

[21] It is alleged that the Projections, the Representations and Warranties, the HVS Representations and the April 1999 Representations were false, inaccurate and misleading.

[22] It is alleged the Projections were never achievable or, alternatively, were achievable only in circumstances that were unlikely to exist, as the defendants knew or ought to have known. It is alleged the Projections had not been prepared in good faith, using reasonable care and skill, objectively and independently, but had been adjusted to induce the Investors to make their investments.

[23] Alternatively, it is alleged the Projections were not achievable because of changes in circumstances that were foreseen or foreseeable by the defendants, and which should have been, but were not, disclosed to the Investors.

[24] Against the Developers only it is alleged that the First Amendment to the Disclosure Statement dated July 22, 1997 and the Second Amendment dated March 19, 1999 did not include notification of any changes to the Projections and at the time of the Second Amendment the Developers knew or ought to have known that the assumptions underlying the Projections in the original Disclosure Statement had been fundamentally changed and failed to disclose this to the Investors.

The Disclosure Statement of November 8, 1996

[25] In order to contract with the Investors through the Sale Agreements the Developers had to first prepare and file with the Superintendent of Real Estate a Disclosure Statement as required by the Real Estate Act and provide that Disclosure Statement to each prospective purchaser.

[26] The Disclosure Statement in total is a very lengthy and detailed document and attaches and incorporates a number of other documents which themselves are quite lengthy and detailed. These attached documents are deemed to be included in and form an integral part of the Disclosure Statement by the wording of the Disclosure Statement itself. Such attached documents include the Sale Agreement to be executed by each Investor at Exhibit G, the HMA to be executed between each Investor and OHR at Exhibit K, an Auditor’s Report on Financial Projection with accompanying Financial Projection at Exhibit M and the HVS opinion letter of November 8, 1996 at Exhibit N.

[27] The Disclosure Statement informed the Investors in s. 7.1 that they would be required to enter into the Sale Agreement. The Sale Agreement required the Investor to acknowledge receipt of the Disclosure Statement.

[28] The Disclosure Statement informed the investors in s. 6.3 that OHR would be managing the Hotel and they would each be required to enter into the HMA.

[29] Article 5.1(1) of the HMA stated that the Operating Plan and Budget for the first operating year had been prepared by the manager (OHR) as set forth in Schedule D to that agreement.

[30] The Operating Plan and Budget in Schedule D to the HMA set out revenue and expense figures, and operating income and net income figures for the years ending December 31, 1999 through December 31, 2003 in a one page document that referenced a number of notes to the line items, although no notes were found in Schedule D or appeared anywhere else in the HMA.

[31] Article5.1(2) of the HMA stated that after the first operating year the manager would prepare a preliminary operating plan and budget for the following year and review it with the strata corporation.

[32] “Operating year” was defined in Article 1.1 of the HMA as the period from the commencement date (which itself was defined as the date that the Hotel opened to the general public for business as a hotel) to and including December 31 in the year after the year in which the commencement date occurred, and thereafter each calendar year.

[33] Section 1.4 of the Disclosure Statement stated as follows:

1.4 Financial Projection

The financial projection (the “Projection”) attached as Exhibit M to this Disclosure Statement was prepared by O’Neill for approval by the management committee of the Developer on November 8, 1996. The Projection has been prepared based on assumptions and hypotheses which reflect the course of action planned by the Developer and O’Neill for the period covered by the Projection (the “Projection Period”) given the judgment of the management committee of the Developer and management of O’Neill as of November 8, 1996, as to the most probable set of economic conditions. The Projection has been prepared solely to provide information to prospective purchasers of the Hotel Lots. An Auditor’s Report on the Projection is included as part of Exhibit M and a hotel appraiser’s opinion letter as to the reasonableness of the Projection is included as Exhibit N.

The reader is cautioned that some of the assumptions and hypotheses used in the preparation of the Projection, although considered reasonable by the Developer and O’Neill at the time of preparation, may prove to be incorrect. The actual results achieved for the Projection Period will vary from the Projection and the variations may be material.

[34] Exhibit M to the Disclosure Statement was entitled “Financial Forecast and Auditors’ Report” and consisted of an Auditors’ Report on Financial Projection, a Projected Statement of Net Income for the years ending December 31, 1999 through December 31, 2003 as Exhibit “A”, a Projected Net Cash Flow to an Individual Strata Lot Owner and Cash Return on Down Payment as Exhibit “B”, and Notes to Financial Projection as Exhibit “C”.

[35] The Projected Statement of Net Income, Exhibit “A” to the Auditors’ Report, was identical in makeup and contents to the Operating Plan and Budget attached as Schedule D to the HMA, save for the final line item in Exhibit “A”, “Owner’s share of net income per $1,000 of projected value”, which was an addition.

[36] The notes referenced against the line items in the Projected Statement of Net Income, Exhibit “A” to the Auditors’ Report, were those notes at Exhibit “C” to the Auditors’ Report. These presumably were the same notes referenced against the same line items in the Operating Plan and Budget in Schedule D of the HMA.

[37] Exhibit “B” to the Auditors’ Report was an illustration of the return to an owner of a $208,800 hotel strata lot, based on hypotheses contained in Note 1(f) in Exhibit “C”, and set out cash returns of between 10.4% and 13.1% for the years 1999-2003, on an assumed down payment of 25%. These are the “Projections” referenced as such in the Second Further Amended Statement of Claim.

[38] The Auditors’ Report described the accompanying Financial Projection as consisting of both Exhibit “A” and “B” and stated that they had been “prepared by management using assumptions, including the hypotheses set out in Note 1, with an effective date of November 8, 1996.” Note 1, in Exhibit “C” set out a number of matters referred to as hypotheses.

[39] The introduction to the Notes in Exhibit “C” to the Auditors’ Report, stated as follows:

The accompanying financial projection has been prepared on the basis of the following hypotheses and assumptions provided by the management of O’Neill Hotels & Resorts, Ltd. and the management committee of The Grand Development Partnership as of November 8, 1996. The assumptions used in the preparation of the financial projection are based on management’s judgment as to the most probable set of economic conditions if the hypotheses below are realised. The hypotheses are assumptions which are consistent with management’s intended course of action and represent plausible circumstances.

The assumptions disclosed herein are those that management believes are significant to the projection. The assumptions are inherently subject to uncertainty and variations depending on evolving events and circumstances occurring subsequent to the date of this projection. This financial projection is based on hypotheses and there is a risk that actual results will vary, perhaps materially, from the results projected.

The projection is prepared for inclusion in the disclosure statement dated November 8, 1996 with respect to an offering of 207 hotel strata lots by The Grand Development Partnership and may not be appropriate for other purposes. Management does not intend to update this projection subsequent to issue.

[40] Note 2(a) stated as follows:

2. Revenue

(a) Rooms Revenue –

Rooms revenue is derived from assumptions regarding hotel occupancy levels and average daily room rates. The following assumptions were derived in consultation with an independent consulting company with extensive experience in the hotel industry, Hospitality Valuation Services Canada:

1999

2000

2001

2002

2003

Hotel occupancy rate

72.1%

76.7%

80.0%

Average daily room rate

$167.73

$177.53

$185.26

$190.82

$196.55

The hotel occupancy rates are equal to the expected average occupancy rates for downtown Vancouver hotels of similar quality except for 1999 and 2000 which are 92.5% and 97.5% of the average, respectively, recognizing the start-up nature of the operation.

The average daily room rates are based on a month by month analysis of the competitive hotels actual average room rates by month in 1995, and adjusted for inflation and real growth.

This note 2 relates to the line item “Rooms Revenue” in the Projected Statement of Net Income for 1999-2003 in Exhibit ‘A’ to the Auditors’ Report.

[41] The HVS opinion letter of November 8, 1996 at Exhibit N was addressed to the Developers.

[42] The HVS letter stated that the Grand Development Partnership had retained HVS to review and comment on the annual operating projections prepared by OHR for the Westin Grand and the letter was signed by Elizabeth MacDonald as Managing Director - Canada.

[43] HVS stated in the letter that it had reviewed the Hotel’s annual operating projections for the initial five years (only as to the operating income before debt service) as prepared by OHR, and was of the considered opinion that they were reasonable and achievable based on the rationale that followed in the letter.

[44] The letter stated that the projected room revenues were based on estimated occupancy levels and average room rates. The proposed 207 suite hotel’s occupancy was estimated to be 72% in its first year of operation, increasing to 80% by its third year, which was stated as believed to be reasonable in light of the strength of the downtown Vancouver hotel market and HVS’s review of hotel occupancy levels and average room rates currently being achieved.

[45] The letter identified six hotels believed to be competitive and stated that in 1995 they achieved an overall average occupancy of 78.6% and a $148.63 average daily room rate and to date in 1996 both occupancies and average daily room rates had increased.

[46] HVS attached to its letter its analysis of month by month occupancy and average room rates for the hotel for 1999-2003 that it said was done for the purpose of determining if the projected occupancy levels and average room rates were reasonable. This analysis was stated to be based on monthly occupancy levels and average room rates achieved at the competitive hotels with a 4% annual increase in room rate to obtain the achievable future average room rates in 1999-2003.

[47] The letter went on to state that HVS had completed a room night analysis, taking into consideration future growth in room night demand in the competitive market, as well as future growth in the competitive room supply. HVS explained that it applied growth factors to each demand segment to estimate future room demand and also included unaccommodated and induced demand. No percentage was given for estimated future growth in room night demand.

[48] For future competitive rooms supply it stated that there were over 12 hotels proposed or rumoured for downtown Vancouver and it had increased the room supply by 60% by adding 1299 guest rooms to the existing competitive rooms supply.

[49] HVS cautioned that the Westin Grand’s estimated operating results might be positively or negatively affected depending on which new hotels entered the competitive hotel market but stated that based on its assumptions of future demand and supply and its knowledge of Westin Hotels and their outstanding performance in other hotel markets, it believed the proposed occupancies and average room rates to be achievable.

[50] The letter reviewed a number of projected expenses including departmental, energy, and property, operations and maintenance expenses and offered the concluding opinion that given proper and efficient management and marketing the Westin Grand would perform well in the competitive market and the annual operating projection for the initial five years was reasonable and achievable.

[51] The Disclosure Statement was signed for the Developers by their partners and directors of the partners under a declaration stating that “the foregoing declarations constitute full, true and plain disclosure of all material facts relating to the development … as required by the Real Estate Act … as of the 8^th day of November, 1996.”

[52] Mr. Evans as a director of Trilogy, the general partner of Trilogy Robson Development Limited Partnership, and as a director of 455322 B.C. Ltd., together with Mr. Norm Cressey as a director of Cressey, the general partner of Cressey (Homer) Limited Partnership, signed separate declarations stating that the Disclosure Statement “contains no untrue statement of a material fact, and does not omit to state a material fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made, and that every matter of fact stated in the Disclosure Statement is true.”

The Master Agreement

[53] A document executed shortly before the Disclosure Statement of November 8, 1996 was a Master Agreement between the Developer and OHR as the Manager dated for reference October 16, 1996.

[54] The Master Agreement in article 6.1(2) required the Manager as and when requested by the Developer to provide assistance with respect to strata lot sales including preparing for review and approval by the Developer and its consultants five year income projections for the hotel and for each of the individual strata lots, for use by the Developer in connection with the marketing of the strata lots.

[55] Article 6.1(3) required the Manager, as and when requested, to supply the Developer with information on the Manager, the rental pool, or any other information required, for inclusion in the Disclosure Statement.

[56] Article 7.2 required the Manager to offer to all purchasers the rental management services of the Manager in accordance with the form of HMA attached as Schedule E and the Developer undertook to include the form of HMA as an exhibit to the Disclosure Statement and the Manager acknowledged that.

[57] The HMA at Schedule E to the Master Agreement was the same as the HMA attached to the Disclosure Statement as Exhibit K and it also attached a Schedule D. However this document was somewhat different from the Schedule D to the HMA attached to the Disclosure Statement.

[58] Schedule D to the HMA attached to the Master Agreement was entitled “Operating Plan and Budget The Grand Development Partnership Hotel Component Proforma”, and was dated October 18, 1996, while Schedule D to the HMA attached to the Disclosure Statement was only entitled “Operating Plan and Budget”.

[59] Schedule D to the HMA attached to the Master Agreement was much more detailed and included a number of line items not in Schedule D to the HMA attached to the Disclosure Statement. One additional line item was entitled “Operating Income before Debt Serv”. It had similar, but not identical, figures to the Net Income figures in Schedule D to the HMA in the Disclosure Statement, within a couple of hundred dollars.

[60] This Schedule D to the HMA attached to the Master Agreement was approved by Mr. Evans for the Developer and Mr. Robert O’Neill for OHR as indicated by their initials thereon.

1996 – 1999 Overview

[61] All of the Investors entered into their Sale Agreements in 1996 prior to construction of the Hotel. The evidence is that the Developers had to have a certain number of commitments in order to secure construction financing.

[62] After signing up the Investors to the Sale Agreements around November 23, 1996 the Developers embarked upon the construction of the hotel and the construction continued through to the opening of the hotel in April 1999.

[63] On July 8, 1997 the First Amendment to the Disclosure Statement was issued by the Developers. In terms of issues involved in this trial there were no amendments to the Disclosure Statement by that first amendment that have any bearing on the issues under consideration herein. In that document the Developers declared that there was full true and plain disclosure of all material facts as of July 8, 1997 and there appears to be no issue with that statement at that time.

[64] In 1998 Mr. Evans was considering the development of another hotel in Yaletown, the Opus hotel.

[65] Mr. Evans commissioned HVS to provide an economic study of the Yaletown property and the proposed hotel development plan. HVS provided a report on April 27, 1998 and in the covering letter addressed to Mr. Evans at Trilogy Yaletown Development Corporation said that HVS had analyzed the hotel market conditions in the Vancouver market area. The letter said that the conclusions reached in the report were based on HVS’s present knowledge of the lodging market in the competitive area as of the completion of their field work on April 10, 1998.

[66] The Opus report is relevant to the claims being made in this action with respect to the financial projections for the Westin Grand because the Investors say that by that point in time the hotel market in downtown Vancouver was known to be softening, that both HVS and Mr. Evans knew this, and yet neither informed the Investors that changes were necessary to be made to the financial projections in the Disclosure Statement.

[67] Development of the Opus hotel did not proceed in 1998 although it was eventually developed and opened.

[68] In 1998 OHR as the proposed hotel manager began preparing an opening budget and business plan for the Westin Grand. As early as June 1998 OHR was tasked with the responsibility of preparing a revised rolling 12 month operational budget for the first year of operation.

[69] The Developers and OHR began meeting on a regular basis to discuss issues that needed to be resolved before opening of the Hotel, such as the pre-opening hard and soft costs. The opening budget to be prepared by OHR was one issue that was involved in the discussions.

[70] OHR was assigned the responsibility of preparing summaries of important decisions that had been made at each meeting and identifying who had responsibility for future actions required. Those summaries were then circulated to the participants and others.

[71] On July 8, 1998 such a meeting was conducted between the Developers and OHR. Mr. Zwickel of OHR subsequently prepared a memorandum of July 27, 1998 entitled “Re: Action Items from Update Meeting of July 8/98” that was indicated as being sent to a number of people within OHR and the Developers.

[72] One of the items covered in the memorandum was the 1999 operating budget and the memorandum stated, “Determined that the 1999 operating budget would not be disclosed to the owners until one week after official grand opening. Preliminary responsibility OHR.” It was a contested fact at trial whether any such statement was made at the July 8, 1998 meeting, or at any time.

[73] In a ruling of August 20, 2007 on the issue of what memoranda would be accepted at trial as business records under the Evidence Act, R.S.B.C. 1996 ch. 124, I determined that the memorandum of Mr. Zwickel of July 27, 1998 did not satisfy the requirements of a business record.

[74] Nevertheless the memorandum of July 27, 1998 is a document that was admitted at trial under a document agreement made by the parties which agreement records that all parties agree to the date on any document, agree that the author had knowledge of its contents at the time, and agree that if a memorandum it was received by the intended recipients in the ordinary course on or about the date shown.

[75] The document agreement is stated not to constitute an admission as to the truth of the contents of any document and the agreement also says it is subject to proof to the contrary as to whether any statement in a document was made.

[76] OHR presented a draft 1999/2000 business plan to the Developers at a meeting on November 6, 1998. The business plan included an executive summary, a marketplace assessment 1996-1998, and a three-year strategic plan as well as appendices containing detailed draft operating budgets for 1999 and 2000.

[77] The business plan concluded that the Westin Grand was expected to perform at only 80%-90% of the “disclosure” projections over the next three years with occupancy rates projected at 67.6% in the partial year 1999, 68.18% in the year 2000 and 64.75% in the year 2001.

[78] Net income was projected to be down from the Disclosure Statement by 5.41% in 1999, 21.42% in 2000 and 27.98% in 2001.

[79] This document in draft was never finalized by OHR and was never disclosed to the Investors. The Developers’ evidence is that it was never approved by them and they expected that it would be changed as they did not agree with it. The evidence of OHR is that they considered the draft complete although it never proceeded beyond the draft.

[80] Subsequently OHR prepared a revision to the draft 1999 operating budget that had been part of the business plan presented on November 6, 1998 that revised the food and beverage figures. Minutes of a meeting of December 4, 1998 indicate that year one operating food and beverage was discussed by the Developers and OHR. Mr. Cressey of the Developers recalls getting this revision showing a difference in the food and beverage from the business plan of November 6, 1998, but Mr. Evans and Mr. Johnson of the Developers have no recall of ever seeing this revision.

[81] This revision was also never disclosed to the Investors and no new operating budget for 1999 was ever disclosed to the Investors prior to closing of the sales.

[82] On December 9, 1998 the Developers sent a letter to the Investors confirming newspaper articles that referred to an increase in the number of hotel rooms in Vancouver, and indicating that the increase was 333 for 1999 of which 207 were attributed to the Hotel and 126 to a new boutique hotel property, representing only a 6% increase in supply. It was also stated that tourism continued to grow.

[83] In January 1999 HVS was commissioned by OHR to value its management contract for the Westin Grand. A draft report was sent to OHR by HVS on January 21, 1999. The draft gave an estimation of market value for the management contract based on annual operating projections for the Westin Grand prepared by HVS. The projections were stated to be an update from HVS’s original projections as presented in the Disclosure Statement.

[84] Among other projections HVS showed lower occupancies for the Westin Grand in the years 2001 and following although 1999 and 2000 were much the same as in the Disclosure Statement.

[85] HVS was never asked to proceed beyond the draft stage of this report.

[86] On March 19, 1999 the Developers issued the Second Amendment to the Disclosure Statement. One amendment was to substitute OHR Grand for OHR as the manager of the hotel. OHR Grand was identified as a wholly owned subsidiary of OHR. The balance of the Amendments made is not relevant to the issues involved at this trial although what is alleged to be missing is relevant.

[87] Again the declarations made by the Developers to the Amendment stated that the Amendment constituted full, true and plain disclosure of all material facts related to the development, as required, this time as of March 22, 1999.

[88] The directors Mr. Evans and Mr. Cressey signed new directors’ declarations stating that the original Disclosure Statement, as amended by the Amendment, contained no untrue statement of a material fact and did not omit to state a material fact required to be stated or that was necessary to prevent a statement made from being false or misleading, and stated that every matter of fact set out in the original Disclosure Statement, as amended by the amendment, was true.

[89] These declarations were an issue at this trial as to the non disclosure of the alleged change in belief of the Developers and Directors and/or OHR as to the reasonableness of the financial projections in the Disclosure Statement.

[90] The completion date for the Sale Agreements with the Investors was set for April 13, 1999, although the Westin Grand had opened for business as of April 1, 1999 with the Developers assuming the operation of the hotel until April 13^th.

[91] One of the closing documents for the completion date was the HMA for execution by each Investor.

[92] The HMA forwarded by the Developers for execution included the same Operating Plan and budget, Exhibit D, as had been included in the draft HMA attached to the Disclosure Statement in 1996.

[93] The Sale Agreements were completed on April 13, 1999. One day later on April 14, 1999 a presentation was made to the Investors by OHR Grand that included a 1999 operating budget presented as “per 1996 disclosure statement”, although the figures in the 1999 operating budget were figures taken from the December 1998 revision to the proposed 1999 operating budget that had been part of the November 6, 1998 business plan.

The Pleading of “Projections”

[94] The Second Further Amended Statement of Claim defines “Projections” as consisting of the express or implied representation and warranty to the investors that:

The return on investment would be sufficient to cover each investor’s assumed seventy-five percent mortgage plus cash returns on an assumed twenty-five percent down payment of 11.5 percent in 1999, 10.4 percent in 2000, 13.1 percent in 2001, 11.5 percent in 2002 and 11.5 percent in 2003. (the “Projections”)

[95] These percentage returns for the years 1999-2003 are found at Exhibit “B” to the Auditors’ Report at Exhibit M to the Disclosure Statement, as part of the chart of Projected Net Cash Flow to an Individual Strata Lot owner and Cash Return on Down Payment. As stated in Exhibit “B” it is an illustration of the return to an owner of a $208,800 hotel strata lot based on the hypotheses contained in Note 1(f).

[96] Note 1(f), part of Exhibit “C” to the Auditors’ Report gives further explanation to the chart at Exhibit “B”.

[97] The share of hotel net income going to each Investor shown in the chart at Exhibit “B” is a derivative of the Net income and Owners share of net income per $1,000 of projected value shown in the Projected Statement of Net Income at Exhibit “A” to the Auditors’ Report.

[98] The line items and figures that make up the Projected Statement of Net Income, Exhibit “A”, include the same line items and figures that Ms. MacDonald of HVS reviewed for the purpose of her HVS opinion letter at Exhibit N to the Disclosure Statement, down to and including the figures on the line “Operating Income.”

[99] In the HVS opinion letter it is stated that “we have reviewed the hotel’s annual operating projections for the initial five years (only as to the operating income before debt service) ….” The evidence from Ms. MacDonald is that she reviewed an earlier more detailed projection, entitled “Hotel Component Proforma” dated November 1, 1996, for the purpose of her opinion, which included the same figures as in Exhibit “A” to the Auditors’ Report. That Hotel Component Proforma is the same as the Proforma attached as Exhibit D to the HMA attached to the Master Agreement; the Proforma that Mr. Evans and Mr. Robert O’Neill approved.

[100] One of the line items in that November 1, 1996 Proforma is “Operating Income before Debt Serv.” The figures for years 1-5 on that line are the same figures as on the “Operating Income” line of Exhibit “A” to the Auditors’ Report, within a few dollars.

[101] The evidence is that the auditor, Mr. Donnelly, who prepared the Auditors’ Report as part of Exhibit M to the Disclosure Statement, also prepared the format for the projections at Exhibit “A”, using figures from yet another projection on a different format with the same figures. He also prepared the Notes to the projections at Exhibit “C”, getting his information from the Developers, OHR and HVS.

[102] The evidence at the trial of this first stage focussed on the figures in the Projected Statement of Net Income at Exhibit “A” to the Auditors’ Report, together with the Notes at Exhibit “C”. No time was spent on the chart at Exhibit “B” that had its origin in the figures of Exhibit “A”.

[103] Section 1.4 of the Disclosure Statement represents that the financial projection (the “Projection”) is attached as Exhibit M. The Auditors’ Report at Exhibit M identifies the financial projection as consisting of the projected statement of net income at Exhibit “A” and the projected net cash flow to an individual strata lot owner and cash return on down payment for the years ending December 31, 1999 through 2003 at Exhibit “B”.

[104] Section 1.4 of the Disclosure Statement also represents that the Projection has been prepared based on assumptions and hypotheses. The Auditors’ Report represents that the financial projection has been prepared by management using assumptions, including the hypotheses set out in Note 1 which is at Exhibit “C”.

[105] I intend to proceed on the basis that the “Projection” or “Projections” are those financial projections in Exhibit M consisting of Exhibits “A” and “B” to the Auditors’ Report together with the assumptions and hypotheses as set out in Exhibit “C”. I do not see any prejudice to any party, including HVS, to consider the figures in the projected statement of net income at Exhibit “A” to the Auditors’ Report as part of the “Projections”.

[106] If it is considered necessary to amend the pleading to properly define the projections at issue in order to be consistent with the evidence then I grant such an amendment.

Attribution of the Financial Projection to OHR in the Disclosure Statement

[107] Section 1.4 of the Disclosure Statement states that the financial projection (the “Projection”) attached as Exhibit M was prepared by OHR for approval by the management committee of the Developer, that it has been prepared based on assumptions and hypotheses which reflect the course of action planned by the Developer and OHR for the Projection period given their judgment of the most probable set of economic conditions, and that the assumptions and hypotheses used in the preparation of the Projection are considered reasonable by the Developer and OHR at the time of preparation, although they may prove to be incorrect.

[108] OHR submits that there is no evidence or insufficient evidence to prove that it had any knowledge that the Projection was going to be included in the Disclosure Statement and would be attributed to it. Therefore it submits it cannot be responsible for the Projection being included in the Disclosure Statement, nor for the representation in s. 1.4 that it prepared the Projection and considered the assumptions and hypotheses on which it was based to be reasonable.

[109] It submits it never saw the Disclosure Statement nor knew of any reference to it in the document, before it was issued.

[110] Further, OHR submits that it never reviewed the Auditors’ Report nor the Notes to Financial Projection attached as Exhibit “C” to the Auditors’ Report, and it was equally false for the Notes to attribute the hypotheses and assumptions for the Projection to it as well as to the Developer. It submits there is no evidence that the Auditors’ Report was ever sent to it for review before it was issued.

[111] OHR points out that while the Master Agreement that it signed with the Developer required it in Article 6.1 to prepare for review and approval by the Developer and its consultants five year income projections for the hotel for use by the Developer in connection with the marketing of the strata lots, it was only required to provide information to the Developer about itself or about the rental pool for the hotel or any other information, for inclusion in the Disclosure Statement. As a consequence, it submits a distinction is to be made in the requirements of it for income projections for marketing and information for the Disclosure Statement.

[112] OHR submits that up until October 10, 1996 when a new Securities Commission policy was declared, there is no evidence that the Developer intended to include the Projection in the Disclosure Statement. It points to the fact that as late as October 23, 1996 drafts of the Disclosure Statement only mentioned including the Auditors’ Report and a forecast, but did not mention including any HVS opinion and in those drafts the forecast was stated to have been prepared and approved by the management of the Developer and not by OHR as well.

[113] It points to evidence of Mr. Evans for the Developers where he says that he was not aware of any review by OHR of the Disclosure Statement and he had no discussion with OHR about putting the projections in the Disclosure Statement.

[114] OHR submits that evidence that Mr. Robert O’Neill gave on examination for discovery that was accepted by him at trial that he may have seen the Auditors’ Report and reviewed it before it was included in the Disclosure Statement is not sufficient to conclude that he did in fact receive it and review it.

[115] While OHR accepts that it had originally prepared its own projections for the Developer and had provided these projections to HVS, it submits that the final Projection included in the Disclosure Statement was solely the work product of HVS after HVS had made numerous changes and revisions to the original work of OHR.

[116] The other defendants submit that OHR in fact participated in the development of the Projection, knew that the Projection was to be included in the Disclosure Statement, knew that the Projection would be attributed to it, and had received and reviewed the Auditors’ Report before it was included in the Disclosure Statement.

[117] They submit that throughout the period of June 1996 to October 1996 OHR and HVS were exchanging five year proformas until they both agreed on the figures and the figures were then incorporated into the Operating Plan and Budget, Schedule D to the HMA in the Disclosure Statement, and into Schedule D to the HMA in the Master Agreement which both Mr. Evans and Mr. Robert O’Neill for OHR signed as approved. They submit that with Mr. Robert O’Neill approving Schedule D to the HMA in the Master Agreement, and knowing that the HMA was to be included in the Disclosure Statement and was attributing to the Operating Plan and Budget in Schedule D to OHR, as the manager, OHR must have known that Schedule D was the Projection being included in the Disclosure Statement.

[118] These figures in the Operating Plan and Budget, Schedule D, were the same figures that HVS used for the purpose of its opinion, with very slight amendments, and were the figures for the Projected Statement of Net Income included as Exhibit “A” to the Auditors’ Report as part of Exhibit M to the Disclosure Statement, described as the “Projection” in s. 1.4 of the Disclosure Statement.

[119] Mr. Johnston of the Developers says in his evidence that OHR knew their work was going to be in the Disclosure Statement because it was stated in the Master Agreement that they were preparing projections to be part of the marketing materials and the Disclosure Statement was part of the marketing materials.

[120] He is certain that during the course of meetings between the Developers and OHR in 1996 it would have been discussed that the Projection was going to be included in the Disclosure Statement and Ms. MacDonald of HVS was being involved for that purpose. He does not point to any particular conversation, however.

[121] The auditor, Mr. Donnelly, says he spoke to Mr. McAuley of OHR in October 1996 about how OHR came up with the numbers and went through the financial projection with him top to bottom, and he also talked with Mr. Robert O’Neill in October 1996 about information on OHR for the purpose of including in his report.

[122] On October 7, 1996, Mr. Robert O’Neill was asked to approve a mass mailout of promotional material on the investment in the hotel and to approve a reference in it to OHR. The reference to OHR in the mass mailout said that “rental income projections are derived from information provided by HVS and OHR.” Mr. Robert O’Neill approved this reference on October 8, 1996.

[123] Mr. Robert O’Neill says in his examination for discovery evidence, confirmed by him at trial, that the average daily rate in the projections that was ultimately used in the Disclosure Statement was narrowed and narrowed by common sense discussions and was the result of an iterative process that involved collaboration between OHR and HVS.

[124] He says further in his examination for discovery evidence, confirmed at trial, that it was the obligation of OHR to provide the Developer with its best proforma on the project and to work with Ms. MacDonald of HVS to produce a pro forma that made sense and to which he could agree.

[125] He says that OHR needed to agree with the projections as it was a collegial type of situation and if OHR had said there was no way these could be achieved he thinks there would have been a different outcome.

[126] He says that OHR was working with Ms. MacDonald to give her its best numbers for her report but OHR accepted her revenue figures immediately and came to accept her room division costs. He agrees that if Ms. MacDonald had given a number that he believed was totally unworkable he would have objected because OHR was required to work with these numbers. Consequently OHR and HVS were coming up with a set of numbers that both agreed to and ultimately he agreed totally with Ms. MacDonald’s HVS report.

[127] He also says in his examination for discovery, confirmed at trial, that he always knew that as part of the marketing there would be a Disclosure Statement and while he cannot remember the point in time when he knew that projections would be included in the Disclosure Statement, he had that information before the Disclosure Statement was issued. He knew that the auditor was working on the numbers for inclusion in the Disclosure Statement and he had a telephone conversation himself with someone at the auditors’ office.

[128] A copy of the Auditors’ Report with the Exhibits is in the OHR documents although how and when it got there is not the subject of any evidence.

[129] In his evidence Mr. John O’Neill says that by the time of the sales event around November 23, 1996 he knew that there was a Disclosure Statement in existence and that it would include projections, because of the requirements of the new B.C. Securities regulation that projections had to be audited, and the necessary involvement of Mr. Donnelly to audit the projections.

[130] He recalls seeing the Disclosure Statement for the first time at the sales event itself and he recalls reviewing it there and seeing the language in it about the Projection having been prepared by OHR.

[131] He says that when he saw this and saw there was no mention of HVS or the auditor being involved, he mentioned that to his brother Robert who confirmed that he had not noticed it either and it was not accurate.

[132] Mr. John O’Neill says he did not do anything further because he and his staff still felt comfortable with the numbers.

[133] He says that this statement was not entirely consistent with what he was lead to believe by his brother Robert, which was to the effect that Robert was collaborating with the Developers and HVS in the preparation of the projections for the purpose of the Disclosure Statement. He expected the language would have been different to reflect the collaborative nature of the projections as the OHR management team was quite involved with HVS and the Developers in the back and forth due diligence of the numbers before HVS ultimately changed some of the numbers and put its stamp on them.

[134] In his evidence Mr. Robert O’Neill says he made a comment to Mr. Evans at the sales event upon seeing the Disclosure Statement about not getting credit in the marketing brochures but receiving attribution in the Disclosure Statement, but he also did not require any correction to be made to the Disclosure Statement because it was not a significant issue at the moment for him as he believed in the projections.

[135] It is my conclusion that OHR knew that the projections were going to be in the Disclosure Statement although it expected that the projections would be attributed to HVS as well as to it. The purpose of involving HVS was to get an opinion on projections that would be given to prospective investors. That would be through the Disclosure Statement. The purpose of involving the auditor was because the Securities Commission required any projections in a Disclosure Statement to be audited. So by the time Mr. Donnelly became involved OHR had to know that projections were to be included in the Disclosure Statement. I believe Mr. Robert O’Neill knew the Operating Plan and Budget he was approving as Schedule D to the HMA in the Master Agreement was the financial projection to be audited and included in the Disclosure Statement as the Projection.

[136] The evidence of Mr. John O’Neill and Mr. Robert O’Neill at trial is telling that when they say they first saw the Disclosure Statement at the sales event, their complaint was not that they should not have received any attribution, but only that all of the attribution should not have been assigned to them.

[137] I conclude that the statement in s. 1.4 of the Disclosure Statement that the Projection attached as Exhibit M was prepared by OHR, while not entirely correct in that the Projection was prepared by OHR in collaboration with HVS, was partially correct. HVS was solely responsible for the revenue figures, and OHR accepted them. OHR collaborated with HVS on the average daily rate. HVS was also responsible for some of the expense figures, again accepted by OHR, while OHR was the source of some of the other expense figures, accepted by HVS. Regardless, OHR was content to have s. 1.4 represent that it prepared the Projection.

[138] I conclude s. 1.4 is otherwise accurate in stating that the Projection has been prepared based on assumptions and hypotheses which reflect the course of action planned by the Developer and OHR given their judgment as to the most probable set of economic conditions, and the assumptions and hypotheses are considered reasonable by them. I believe OHR knew and accepted that this representation was being made in its name and was content with that as well.

[139] This conclusion does not address the issue as to whether the Projection and the assumptions and hypotheses were also represented as objectively reasonable, which I will return to later, but I am satisfied that the Developers and OHR honestly believed both to be reasonable at that time.

[140] The opening words to the Notes to the Financial Projection, Exhibit “C” to the Auditors’ Report, state that OHR and the Developer provided the hypotheses and assumptions, that the assumptions are based on management’s judgment as to the most probable set of economic conditions if the hypotheses are realized and the hypotheses are consistent with management’s intended course of action and represent plausible circumstances.

[141] Again I believe that is an accurate statement based upon the evidence at trial. The Developer, through Mr. Johnston, provided some of the hypotheses and assumptions and OHR provided some as well and the reference to “management” is a reference to both OHR and the Developer.

[142] While I am not satisfied that there is any direct evidence of actual knowledge of OHR that the notes would attribute the hypotheses and assumptions to it as well, I believe that it must have known this, or reasonably expected this, at least as far as it had contributed, because of the evidence of direct communications with Mr. Donnelly by both Mr. McAuley and Mr. Robert O’Neill, for the purpose of Mr. Donnelly’s audit report.

Material False Statements and s. 59 of the Real Estate Act

[143] One of the disclaimers set out on the first page of the Disclosure Statement stated as follows:

Section 59 of the Real Estate Act provides that every purchaser of any part of the subdivided land to which this disclosure statement or prospectus relates shall be deemed to have relied on the representations made in the disclosure statement or prospectus and, if any material false statement is contained in the disclosure statement or prospectus, the developer, its directors and any person who has authorized the issue of this disclosure statement is liable to make compensation to the purchaser, subject to any defences available under s. 59 of the Real Estate Act.

[144] This disclaimer is a reference to s. 59 of the 1979 edition of the Revised Statutes of British Columbia. It is in substance the same as s. 75 of the 1996 edition. Many other sections of both editions are identical or the same in substance, as well.

[145] For the purpose of consistency I will confine my references to the sections of the 1979 edition putting the relevant 1996 section numbers in brackets beside them.

[146] The disclaimer is an accurate summary of s. 59(1) of the 1979 edition. Section 59 (s. 75) actually only refers to “prospectus” but under s. 50.1 (s. 66) a disclosure statement is deemed to be a prospectus.

[147] Section 59(2) (s. 75(1)) provides that “prospectus” includes every statement and report and summary of report required to be filed with the prospectus under this part.

[148] In this case the Disclosure Statement itself states that every document attached to it as an exhibit is part of the Disclosure Statement.

[149] As a consequence I need not determine if s. 59 (s. 75) is confined only to Disclosure Statements and documents required to be filed with the Disclosure Statement, as opposed to including other documents filed that are not required to be filed because here all documents filed are part of the Disclosure Statement.

[150] The defences available under s. 59(1)(b) (s. 75(2)(b)) for the Developer, its directors and any person who has authorized the issue of the Disclosure Statement, include ss. (viii) “that, with respect to every untrue statement not purporting to be made on the authority of an expert, … he had reasonable grounds to believe and did, up to the time of the sale of the subdivided land … believe that the statement was true,” and ss. (ix) “that, with respect to every untrue statement purporting to be a statement by or contained in what purports to be a copy of or extract from a report or valuation of an expert, it fairly represented the statement, or was a correct and fair copy or extract from a report or valuation, but the director, person named as director, developer or person who authorized the issue of the prospectus is liable to pay compensation as aforesaid if it is proved that he had no reasonable grounds to believe that the person making the statement, report or valuation was competent to make it.”

(a) Note 2(a) of the Notes to Financial Projection

[151] Note 2(a), being one of the notes in the Notes to Financial Projection, Exhibit “C” to the Auditors’ Report said as follows:

2. Revenue

(a) Rooms Revenue –

1999

2000

2001

2002

2003

Hotel occupancy rate

72.1%

76.7%

80.0%

Average daily room rate

$167.73

$177.53

$185.26

$190.82

$196.55

The average daily room rates are based on a month by month analysis of the competitive hotels actual average room rates by month in 1995, and adjusted for inflation and real growth.

Note 2(a) is noted next to the line item “Rooms Revenue”, under the heading “Revenue”, in the Projected Statement of Net Income for 1999-2003 in Exhibit ‘A’ to the Auditors’ Report.

[152] The statement that “the following assumptions were derived in consultation with an independent consulting company with extensive experience in the hotel industry, Hospitality Valuation Services Canada” was a true statement with respect to the following chart but the statement under the chart that “The hotel occupancy rates are equal to the expected average occupancy rates …” was a false statement of present factual comparison between the assumed hotel occupancy rates in the chart applicable to the Westin Grand and the assumed or expected average occupancy rates by HVS for downtown Vancouver hotels of similar quality in the same years.

[153] The Canadian Oxford Dictionary, 1998, defines “statement” as (1) the act or an instance of stating or being stated; expression in words (2) a thing stated; a declaration. I will use this definition for the word “statement” in the phrase “material false statement” in ss. 59.

[154] HVS’ projected hotel occupancy rates for the Westin Grand were accurately set out in the chart, but the occupancy rates for the downtown Vancouver hotels of similar quality for the same years that Ms. MacDonald of HVS expected were 66.6% in 1999, 69.1% in 2000, 71.2% in 2001, 72.6% in 2002 and 74.1% in 2003.

[155] Accordingly, the HVS hotel occupancy rates that were projected in the chart for the Westin Grand were in fact all above the projected occupancy rates for hotels of similar quality for all five years.

[156] Mr. Johnston and Mr. Evans of the Developers say they read this statement as indicating that the occupancy rates for the Westin Grand of 72.1% in 1999 and 76.7% in 2000 were respectively 92.5% and 97.5% of the 1995 average occupancy rates for the competitive hotels which was 78.6%. (Underlining added.)

[157] I reject this stated belief as having any reasonable grounds. The words of the statement refer to the expected average occupancy rates for downtown Vancouver hotels of similar quality and in the context of the chart that relates to the years 1999-2003. The references to 92.5% and 97.5% of the average for 1999 and 2000 are references to projected average occupancy rates for the Westin Grand in 1999 and 2000 in comparison to the projected average occupancy rates for downtown Vancouver hotels of similar quality for the same years. (Underlining added.)

[158] On the Developer’s explanation of the reference being to 92.5% and 97.5% of the average of 78.6% for downtown Vancouver hotels of similar quality in 1995, those percentages do not even result in the hotel occupancy rates projected for the Westin Grand in 1999 of 72.1% and 2000 of 76.7%.

[159] Other than the stated belief that the comparison was being made to the 1995 occupancy rates for the competitive hotels, the Developer and directors have not offered any other grounds for their belief that the statement was true. I do not find their stated belief to be based on reasonable grounds as the defence in s. 59(1)(b)(viii) requires.

[160] The Developers and directors do not seek to rely upon ss. (ix) but in any event the statement does not fairly represent any statement of HVS.

[161] In Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., [2006] 52 B.C.L.R. (4^th) 144, the Court of Appeal considered the standard of materiality in proxy solicitations and concluded that a Disclosure Statement was analogous to a proxy solicitation. MacKenzie J.A. writing for the court adopted the standard of materiality used by Levine J.A. in Inmet Mining Corp. v. Homestake Canada Inc. (2003), 24 B.C.L.R. (4^th) 1, quoting from the U.S. Supreme Court in TSC Industries Inc. v. Northway Inc. 426 US 438. In that case Marshall J. described the standard of disclosure in proxy solicitations as follows at p. 449:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. This standard is fully consistent with Mills’ general description of materiality as a requirement that the defect have a significant propensity to affect the voting process. It does not require proof of a substantial likelihood that disclosure of the admitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the admitted fact would have assumed actual significance in deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the admitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

[162] I will use this description of the standard of materiality in these reasons. Where I deal with facts or statements that are stated as opposed to omitted facts or statements, I will apply the same standard to those facts or statements that they are to be considered material if there is a substantial likelihood that they would have assumed actual significance in the deliberations of the reasonable investor.

[163] I have no doubt that a reasonable investor would have considered it very material to know that the occupancy rates for the Westin Grand for 1999-2003 were in fact all projected to be higher than the projected average occupancy rates for downtown Vancouver hotels of similar quality for those years.

[164] Accordingly I hold under s. 59 (s. 75) of the Real Estate Act that this was a material false statement contained in the Disclosure Statement, that it did not purport to be made on the authority of any expert including HVS and the Developers had no reasonable grounds to believe that the statement was true on the Developers’ interpretation given at trial.

[165] I find the Developers and their Directors liable to make compensation for any loss or damage to the purchasers for this material false statement. What that compensation may be remains to be seen.

[166] The question that remains is who actually developed this false statement. Mr. Donnelly, the accountant, prepared the wording of this statement but he says he obtained the information off footnotes to financial projections or proformas that he had received from either OHR or the Developer. The last one he received from the Developer was dated November 1, 1996 and it included as footnote number (1) the following:

(1) Occupancy Rate:

Year 1: 92.5% of projected market occupancy rate for First-Tier downtown hotel properties.

Year 2: 97.5% of projected market occupancy rate for First-Tier downtown hotel properties;

Year 3 and thereafter: 100% of projected market occupancy rate for First-Tier downtown hotel properties;

[167] Both the Developer and OHR deny they prepared this footnote. Mr. Donnelly says he received a computer disc at some point with projections on it that included footnotes, including this footnote number (1). On that disc Mr. Donnelly wrote, “from Innventures” (OHR), which might indicate that OHR prepared the notes. However that is not an end to the matter. Copies of projections with notes resided on the computers of both parties and when Mr. Donnelly received projections with this note on them from different parties that does not indicate where the note necessarily originated.

[168] Mr. Johnston of the Developer agrees in his evidence that he gave the assumptions in the Notes to Mr. Donnelly to use. In fact Mr. Donnelly’s retainer letter to the Developer, agreed to by the Developer, put the responsibility on the Developer, particularly Mr. Johnston, to provide the hypotheses and assumptions to Mr. Donnelly.

[169] Further, Mr. Johnston confirmed in a letter to Mr. Donnelly of November 8, 1996 that the Developer accepted sole responsibility for the preparation of the financial Projection and for the determination and appropriateness of the assumptions used.

[170] Mr. Donnelly’s retainer letter and Mr. Johnston’s confirming letter only deal with responsibility for the hypotheses and assumptions as between the Developer and the Auditor and do not necessarily indicate where the material false statement in Note 2(a) originated.

[171] However I conclude that the basis for this false statement, being the footnote number (1), probably did originate with the Developer. I have reviewed the changing mortgage rates found in footnote (11) through the various proformas leading up to the final proforma Mr. Donnelly was given on November 1, 1996 that showed a mortgage rate of 6.95% minus .5% equals 6.45%, being the ultimate mortgage rate found in Note 1(f) of the Notes to the Financial Projection in Exhibit C to the Auditors’ Report.

[172] I have concluded that the only party that would have been interested in the changing mortgage rates for the Investors would have been the Developer, and although it may not be necessary to conclude who originated the footnotes including number (1) because I have already found the Developer and its Directors liable for this statement under s.59 of the Real Estate Act, I do conclude that in all probability it was the Developer that developed that footnote.

(b) Section 6.7 of the Disclosure Statement

[173] The statements in s. 6.7 that are at issue under s. 59 (s. 75) are as follows.

The Developer has consulted with HVS International – Canada MM&R Valuation Services, Inc. (HVS), an international hotel consultant, which has advised the Developer as follows:

i) the hotel occupancy rate in Vancouver last year was as high as 78%;

ii) demand for downtown luxurious hotels is more than supply;

…

iv) tourism is the number one growth industry in Vancouver.

[174] The evidence from Ms. MacDonald of HVS is that HVS was never consulted on these matters and never advised the Developer as stated.

[175] Ms. MacDonald says that while the hotel occupancy rate in Vancouver the previous year (1995) for the competitive set of hotels she was considering in relation to the Westin Grand was as high as 78%, as stated in her opinion letter, that was not true for the hotel industry at large in Vancouver in 1995.

[176] She also disagrees with the statement that demand for downtown luxurious hotels is more than supply, and she says she would not have made the statement that tourism was the number one growth industry in Vancouver.

[177] Mr. Johnston of the Developer says he collected this information from his sales and marketing team who are no longer available to give evidence. He does not think that the first statement is inconsistent with Ms. MacDonald’s statement in her opinion letter of November 8, 1996, that “In 1995 these competitive hotels achieved an overall average occupancy of 78.6% …”, although he recognizes her competitive set was a sub-set of the overall downtown Vancouver hotel market.

[178] With respect to the statement that “demand for downtown luxurious hotels is more than supply”, Mr. Johnston went back into the Developer’s file to see what information they had from Ms. MacDonald that would support this statement. He refers to a fax from Ms. MacDonald that referred to a market with over 78% annual occupancy levels having significant unaccommodated demand, and he expresses the belief that this was the basis for the language in the Disclosure Statement of demand exceeding supply developed by his marketing people.

[179] Developers’ counsel submits that in a hotel publication of May 1996 found in the Developers’ files there is an article by Ms. MacDonald stating that the Vancouver hotel market is extremely strong and almost all general managers report the need for additional hotel rooms in downtown Vancouver.

[180] Developers’ counsel also submits that the underlying truth of the statements is not undermined by any attribution to HVS that is perhaps incorrect. It is submitted that there is no proof the representations were false or even material.

[181] I do not agree that it would be insignificant to a reasonable investor that the information was being attributed to HVS even if the information was true. The Developers retained HVS and included its opinion letter in the Disclosure Statement obviously because they expected that this would be a significant marketing tool for the sale of the strata units. If the Developer had attributed the information in s. 6.7 to itself it would not nearly have had the same impact on a prospective investor in my view. It was important to the Developer to be able to say that HVS, an international hotel consultant, had advised of this.

[182] Under s. 59 (s. 75) of the Real Estate Act the Developer and its directors are liable for material false statements in the Disclosure Statement unless it is proved that with respect to any untrue statement purporting to be a statement by an expert, it fairly represents the statement.

[183] I consider that the first two statements were material statements that would have assumed actual significance in the deliberations of a reasonable investor. These statements not only gave potential investors positive information on the state of the Vancouver hotel market but attributed those statements to an expert in the know – HVS.

[184] In my view the statement that “the hotel occupancy rate in Vancouver last year was as high as 78%”, attributed to HVS, is all a true statement. This was true as the competitive hotels, all top hotels, had an average occupancy rate that high as HVS had said in its opinion letter so the hotel occupancy rate in Vancouver in 1995 was as high as 78%.

[185] Accordingly I conclude that the statement is true and fairly represents the statement of Ms. MacDonald. Even if it does not exactly reflect what HVS said, I do not find it to be materially false. The Developers and directors are entitled to the defence under s. 59 (s. 75).

[186] The second statement is untrue if demand for downtown luxurious hotels was not more than supply and/or HVS did not advise this.

[187] Mr. Johnston says he thinks this information was taken from a fax from Ms. MacDonald that referred to unaccommodated demand, as well as from her opinion letter. Unaccommodated demand is demand that cannot be accommodated. Ergo, according to Mr. Johnston, demand is more than supply.

[188] The unaccommodated demand referred to in the HVS opinion letter was future unaccommodated demand in the projection period. The unaccommodated demand referred to in s. 6.7 is present unaccommodated demand. However the fax from Ms. MacDonald apparently referred to a market with over 78% annual occupancy and that was presumably in 1995, so that was a reference to present unaccommodated demand. I accept this evidence of Mr. Johnston.

[189] On this basis I conclude that the statement is true and fairly represents a statement of Ms. MacDonald.

[190] Not much in evidence was said about the third statement “tourism is the number one growth industry in Vancouver”. Ms. MacDonald only says that she would not have made that statement. She does not say it was not a true statement.

[191] I cannot say that it is a false statement because I have no evidence of that.

[192] It was falsely attributed to HVS because Ms. MacDonald says she would not have made the statement, and I have no evidence from the Developer attributing it to HVS.

[193] It was in my opinion a material part of the statement that HVS advised of this, and it was false to attribute it to HVS.

[194] The Developers and directors have no defence under s. 59 because it does not fairly represent a statement that Ms. MacDonald made.

[195] Accordingly the Developers and directors are liable under s. 59 to make compensation for any loss or damage to the Investors by this material false statement attributing it to HVS.

[196] I do not accept that the Projection itself consisting of the Projected Statement of Net Income, Exhibit “A” to the Auditors’ Report, the Projected Net Cash Flow at Exhibit “B”, and the Notes at Exhibit “C”, are statements within the meaning of that word in s. 59 (s. 75) of the Act.

[197] Section 57(1)(a) (s. 73(1)(a)) of the Real Estate Act distinguishes between statements, promises and forecasts. While the section is not applicable to disclosure statements by the wording of s. 50.1 (s. 66) it is an indication that the Real Estate Act treats forecasts differently from statements. In my view the Projection is a forecast and not a statement.

[198] Similarly I conclude that any implied assertions of fact, or representations, in the Projection are not statements within s. 59 (s. 75) either.

[199] Statements in s. 59 (s. 75) in my view are only those that are expressly made in the Disclosure Statement.

[200] Dureau v. Kemp-West Enterprises Ltd., [1989] B.C.J. No. 2123, cited by Investors counsel as an example of implied statements covered by s. 59, is distinguishable on the basis that there the statements under consideration were express statements in the prospectus in relation to the removal of peat from the site, where it was found by the court that the wording left the impression that all the unstable soil had been removed. The court concluded that the express statements were false and they were deceptive or misleading as partial truths.

[201] Here there is nothing deceptive or misleading in the Projection itself. It is the implied facts or representations that are alleged to surround the Projection that are in issue and they are not statements within s. 59 in my view.

False Representations at Common Law in 1996

Note 2(a)

[202] I have already dealt with this issue under my consideration of s. 59 (s. 75) of the Real Estate Act. I agree that it was a material false statement of comparison that the occupancy assumptions for the Westin Grand were equal to the expected average occupancy rates for the competitor hotels for 1999-2003 except for 1999 and 2000, when in fact Ms. MacDonald’s occupancy projections for the Westin Grand were all in excess of her expectations for the average occupancy levels of the competitor hotels, for all five years of the projections.

[203] I have already assigned responsibility for this material false statement to the Developers and directors under s. 59 (s. 75).

[204] Mr. Donnelly had asked Ms. MacDonald to review a draft of his notes and provide her comments especially as to whether the notes properly described the assumptions used. Specifically he asked her to assist him in drafting the portion related to average daily rates.

[205] Ms. MacDonald took Mr. Donnelly’s draft and wrote out in hand some proposed wording for the average daily rates. She also added a sentence to the statement in note 2(a) that compared the Westin Grand assumed occupancy rates to the competitor expected occupancy rates, again in handwriting. However she never observed the error in the statement that Mr. Donnelly had drafted and her handwritten notations were never sent to Mr. Donnelly. Instead Ms. MacDonald sent a typed note to Mr. Donnelly of her proposed additions for occupancy and average daily rates and Mr. Donnelly only used her suggested wording for average daily rates in the final version. He did not change his wording on the occupancy comparisons.

[206] In his evidence Mr. Donnelly says he recognized from Ms. MacDonald’s work product that he had that she was saying that the Westin Grand should outperform the market to achieve the occupancy rates that she projected. However he did not incorporate her views because according to him the Developer had provided the previous projections with the footnote on them that he used and the Developer was the client.

[207] In these circumstances with Mr. Donnelly choosing to use the Developers’ footnote rather than Ms. MacDonald’s views of projection comparisons, knowing of her views, I see no liability on HVS for the text of note 2(a) and accordingly I hold it not liable for the statement in note 2(a) dealing with the occupancy comparisons.

[208] I also can see no basis for holding HVS liable for any of the other hypotheses and assumptions set out in the Notes at Exhibit “C” to Exhibit M.

[209] On the evidence OHR had nothing personally to do with the preparation of Note 2(a). However s. 1.4 of the Disclosure Statement and the Notes to Financial Projection advised the investor that the assumptions and hypotheses were provided by OHR as well as the Developer and advised that the assumptions and hypotheses reflected the course of action planned by both given their judgment as to the most probable set of economic conditions, and were stated to be reasonable. OHR had knowledge of and accepted attribution to it of these statements. One assumption was at Note 2(a).

[210] The issue is whether OHR and the Developer have represented to the Investors by s. 1.4 of the Disclosure Statement, the offending text in Note 2(a) as a reasonable assumption or hypothesis.

[211] The notes are divided into a number of notes, one through eight. Only Note 1 is headed “Hypotheses”. Note 2(a) is part of Note 2 which is headed “Revenue”. There is no separate note headed “Assumptions”.

[212] Note 2(a) says that room revenue is derived from assumptions regarding hotel occupancy levels and average daily room rates and says the “following assumptions” were derived in consultation with HVS.

[213] Below these words is the chart of hotel occupancy rates and average daily room rates. These are clearly assumptions.

[214] Below the chart is the offending text of comparison between two sets of assumptions.

[215] In my view this comparison of two sets of assumptions is not an assumption at all. It is a present factual comparison of two assumptions.

[216] Accordingly, I do not find that the Developer and OHR made any representation about the offending text in Note 2(a) as part of their representation of reasonableness of the assumptions and hypotheses.

The Projections

[217] Ms. MacDonald of HVS issued the opinion letter of November 8, 1996, Exhibit “N” to the Disclosure Statement, based upon the figures in Exhibit “A” to the Auditors’ Report, although she had reviewed the same figures under a different format in a proforma given to her dated November 1, 1996.

[218] In addition, Ms. MacDonald was given a draft of Mr. Donnelly’s notes for review and knew that the hotel occupancy rates and average daily room rates being used in note 2(a) for determination of the rooms revenue figure in the Projections were in fact her rates and were rates stated to be derived in consultation with HVS.

[219] In the opinion letter of November 8, 1996, Ms MacDonald says that, “we have reviewed the hotel’s annual operating projections for the initial five years (only as to the operating income before debt service) and it is our considered opinion that they are reasonable and achievable.”

[220] The “annual operating projections for the initial five years” reviewed by her are not attached to her letter and are not otherwise identified in the letter as to location.

[221] I conclude however that a reasonable prospective Investor reviewing the Disclosure Statement in full would have concluded that Ms. MacDonald was referring to the items and figures in the Projected Statement of Net Income in Exhibit “A” to the Auditors’ Report in Exhibit “M”, down to the line “Operating Income”, and would have reviewed her opinions in that light as there were no other different operating projections identified as such in the Disclosure Statement. I conclude that Ms. MacDonald was in fact opining on these figures although she was doing so looking at them in a different format.

[222] The HVS opinion letter informs the reader that 85% to 87% of projected revenues are from rooms revenues and rooms revenues are based on estimated occupancy levels and average room rates. The Westin Grand’s occupancy is estimated at 72% in the first year of operation increasing to 80% by its third year of operation.

[223] It is these figures for occupancy that the Investors principally attack as being unreasonably projected.

[224] Specifically the Investors focus on the difference between the occupancy projections of Ms. MacDonald for the Westin Grand for the five years 1999 – 2003 inclusive of 72.1%, 76.7% and 80% for the last three years, and her occupancy projections for the competitive set of hotels for the same five years of 66.6%, 69.1%, 71.2%, 72.6% and 74.1%. This difference between the projected occupancy figures for the Westin Grand and the projected occupancy figures for the competitive set resulted in Ms. MacDonald concluding an overall penetration of the Westin Grand into the competitive market of 108.8% of its fair share in 1999, 111.2% of its fair share in 2000 and 112.3% in 2001.

[225] The Investors do not attack the Projections as not having been achieved in the final result. They recognize that they were not promised any result. The fact is that the results may not have been achieved for reasons that have nothing to do with the Projections.

[226] What the Investors do allege is that there was no reasonable foundation for the projections of occupancy rates for the Westin Grand as stated in the opinion letter, and HVS was negligent in opining that these projections were reasonable and achievable.

[227] The Investors also challenge the projections for departmental expenses, property operations and maintenance expenses and energy expenses, also part of the overall projections.

[228] The Investors submit that while the projections were not representations of fact in themselves, there were implied representations of fact involved in the preparation of the projections, including:

(a) that there were no undisclosed material facts that would or might prevent the Projections from being realized or seriously undermine the accuracy of the Projections.

(b) that the assumptions and hypotheses on which the Projections were based were reasonable and reflected circumstances that were likely to exist.

(c) that the Projections had been prepared in good faith, using reasonable care and skill, objectively and independently and had not been prepared nor adjusted so as to unreasonably or artificially increase the projected returns to investors.

[229] I accept that the representations of fact alleged by the Investors are to be implied in the projections as they mirror the implied factual assertions accepted in Danier Leather.

Duty of Care with respect to the Projections

[230] The Investors submit that HVS owed them a duty of care in preparing the HVS opinion letter because Ms. MacDonald knew before issuing the opinion letter that it would be included in the Disclosure Statement for consideration by prospective purchasers. The Investors also submit that the HVS retainer agreement with the Developer that limited its liability cannot prejudice the full rights of the Investors against HVS, when no such notice of limited liability was given to them in the opinion letter nor in the Disclosure Statement at large.

[231] I agree with both these submissions (See Kripps v. Touche Ross & Co. (1992), 69 B.C.L.R. (2^nd) 62 (C.A.); (1997, 33 B.C.L.R. (3d) 254 C.A.).

[232] I conclude that when Ms. MacDonald agreed to have her HVS opinion letter included in the Disclosure Statement, she took on a duty of care to the potential investors unrestricted by any limitation of liability HVS had to the Developers.

Standard of care with respect to the Projections

[233] I accept the comments of Wedge J. in Sharbern, at 2007 BCSC 1262, as to the standard of care of a market feasibility projection.

[185] The task of a market feasibility analyst is to assess the feasibility of building a new hotel and project the likely financial performance of the hotel in the future. The analysis involves the estimation of numerous variables to reach a final projection. Each variable requires prediction and estimation, which compounds the uncertainty of the projection. Market feasibility analysis is not a science. The consensus among the experts who testified at trial was that it is more an art than a science, engaging the analyst's judgment, experience, and opinion.

[186] Stated more candidly, market feasibility studies consist of a great deal of educated guesswork.

…

[189] An appraiser is not negligent simply because his or her appraisal proves to be wrong. While gross over-evaluation may be an indication of negligence in the absence of a reasonable explanation, it does not, by itself, establish negligence. In Regency Mortgage Corp. v. Buchan, [1984] B.C.J. No. 973 (S.C.) McLachlin J. (as she then was) said the following at para. 10:

What then is required to establish that an appraiser is negligent? Gross overvaluation (or undervaluation) which is not satisfactorily explained may suffice.... Conversely, a small overvaluation, or a large overvaluation which is adequately explained, will not give rise to liability. In the final analysis, the court must determine whether the defendant acted reasonably having regard to the standards prevailing in the profession and the inexactitude inherent in the methods by which the value of a property is determined.

(Emphasis added.)

[234] Even if the standard of care is low involving a great deal of educated guesswork, the implied representation of the exercise of reasonable care and skill, having regard to the inexactitudes inherent in the appraisal, must still be present and applicable. Otherwise no forecaster could ever be held liable in negligence for a forecast, and that cannot be the law. Gross overvaluation or undervaluation which is not satisfactorily explained may suffice as negligence.

[235] Wedge J. said that in considering the projections before her she must resist the temptation to compare the projections to the actual performance of the hotel and consider instead whether they were reasonable at the time they were made. I intend also to consider the reasonableness of the Projections only at the time they were made, and as well at any time they should have been updated and changed, if I should find any obligation on any of the defendants to update and change the Projections.

Representation of objective reasonableness by the Developer and OHR

[236] In my view the wording of s. 1.4 of the Disclosure Statement, together with the wording in the Auditors’ Report and in the Notes to Financial Projections, has imposed on the Developer and OHR an implied representation that the Projections in Exhibit M are objectively reasonable.

[237] Section 1.4 of the Disclosure Statement advises the Investors that the Projection prepared by OHR is based on assumptions and hypotheses that reflect the course of action planned by the Developer and OHR given their judgment as to the most probable set of economic conditions. The assumptions and hypotheses are also stated to be considered reasonable by the Developer and OHR at the time of preparation, although it is also stated that they may prove to be incorrect.

[238] The hypotheses and assumptions are those stated in Exhibit “M” to include the occupancy assumptions in the Notes at 2(a).

[239] The Auditors’ Report says that the financial projection has been prepared by management using assumptions, including the hypotheses set out in Note 1 and “the hypotheses are consistent with the purpose of this projection” and “as at the date of this report, the other assumptions developed by management are suitably supported and consistent with the plans of the Partnership and Manager, and provide a reasonable basis for the projection, given the hypotheses.”

[240] The Notes to Financial Projection, Exhibit “C”, to the Auditors’ Report say that OHR and the Developer have provided the hypotheses and assumptions and the assumptions are based on management’s judgment as to the most probable set of economic conditions if the hypotheses are realised and the hypotheses are assumptions which are consistent with management’s intended course of action and represent plausible circumstances.

[241] These statements in s. 1.4 of the Disclosure Statement and in the Auditor’s Report and in the Notes to the Financial Projection, all part of the Disclosure Statement, are to be compared to what the Supreme Court of Canada said about the forecast it had before it in Kerr v. Danier Leather 2007 S.C.C. 44.

[242] Writing for the court, Binnie J. under the heading “Did the forecast contain an implied representation of objective reasonableness?” said the following:

The trial judge found that the forecast contained an implied representation of objective reasonableness that extended until closing on May 20. The Court of Appeal disagreed, holding that the forecast contained no implied representation of objective reasonableness in fact, and that none is implied as a matter of law. In my view, as a matter of fact, the forecast did carry an implied representation of objective reasonableness rooted in the language of the prospectus, but this implied representation extended only until the prospectus was receipted on May 6. (Para. 49)

The forecast was prepared as of April 2, and in the prospectus it is stated that “[t]he Forecast is based on assumptions that reflect management’s best judgment of the most probable set of economic conditions and the Company’s planned course of action as of April 2, 1998” (Final Prospectus, at p. 26). Likewise, the Auditors’ Report, dated April 6, advises that “the assumptions developed by management are suitably supported and consistent with the plans of the Company, and provide a reasonable basis for the forecast” (Ibid.). The prospectus further states that the assumptions were “considered reasonable by the Company at the time of preparation of the forecast” and that “[t]he Forecast has been prepared using generally accepted accounting principles” (Ibid., p. 27). Significant assumptions are then listed. That is enough, it seems to me, for potential investors to infer not just that the forecast represents management’s best judgment (as the Court of Appeal held), but also that management’s judgment is based on facts and assumptions that reasonable business people in possession of the same information as Danier’s management would reasonably regard as reliable for the purpose of a forecast. (Para. 50)

[243] I do not see any distinguishing feature between the words of s. 1.4 together with the words of the Auditors’ Report and Notes here, about the Projection and the assumptions and hypotheses, and the words of the Prospectus and Auditors’ Report in Danier Leather, and accordingly I find that by the words of s. 1.4 of the Disclosure Statement together with the words of the Auditors’ Report and the Notes as outlined above, the Developer and OHR have represented to the Investors that the Projection prepared by OHR as well as the hypotheses and assumptions, are objectively reasonable.

Evidence of Ms. MacDonald

[244] To start with it is necessary to set out in some detail the evidence of Ms. MacDonald of the steps she says she took to provide the HVS opinion letter of November 8, 1996.

[245] Following receipt of projections from Mr. Robert O’Neill in June 1996, on July 14, 1996, she sent to Mr. O’Neill, by memo, her occupancy and ADR (Average Daily Rate) estimates by month as well as a penetration by market segment analysis.

[246] Her occupancy and ADR estimates by month assigned percentages for occupancy of the Westin Grand for all of the months of each of the years 1999-2003 inclusive. The average occupancy for each year was projected at 72.1% for 1999, 76.7% for 2000 and 80% for 2001, 2002, and 2003.

[247] Her penetration by market segment analysis included a page estimating the occupancy for six specific hotels for 1995, the fair share percentage for each of those hotels in 1995 in the commercial, convention, and leisure segments (based on each hotel’s number of rooms compared to the total number of rooms in all six hotels), the actual market share by percentage in 1995 that each hotel was achieving in each segment of commercial, convention, and leisure, and how each hotel’s actual results in each segment in 1995 compared to their fair share in each segment in terms of percentage (the penetration factor).

[248] These six hotels were the Four Seasons Hotel, the Wedgewood Hotel, the Metropolitan Hotel, the Pan Pacific Hotel, the Waterfront Centre Hotel, and the Westin Bayshore Hotel. The 1995 overall occupancy for the six hotels was 78.6%.

[249] Ms. MacDonald says that after she received Mr. O’Neill’s projections she looked for hotels in her database that were going after commercial demand because the Westin Grand was intending to be a commercial oriented hotel.

[250] The Westin Grand was to be an all suite hotel and she says her experience was that all suite hotels did well with commercial travellers. She says she had appraised approximately 25 all suite hotels.

[251] Another page of her market segment analysis showed the Westin Grand in 1999 achieving penetration rates in the commercial segment of 155%, in the convention segment of 45%, and in the leisure segment of 105% with similar figures for 2000 and 2001.

[252] Another page of her market segment analysis projected occupancy rates for the Westin Grand with 200 rooms at 71.75% for 1999, 76.76% for 2000, and 80.47% for 2001.

[253] On this page Ms. MacDonald showed the Westin Grand’s overall penetration at 100% for 1999, meaning that she projected at that time the Westin Grand would capture no more than its fair share altogether. The penetration rates for the Westin Grand for 2000 and 2001 in this run for 200 rooms were 104% and 107% respectively.

[254] A final page dealt with the projected revenues and expenses that had been proposed initially by OHR for the year 1999, with Ms. MacDonald’s comments about some of the items as “OK” or “low”.

[255] She says that her next step was to estimate the new hotels that would be entering the market before 1999 that she considered would probably be generally competitive with the Westin Grand, and the percentage of their rooms that would be expected to directly compete with the Westin Grand.

[256] Originally she says she estimated that 852 new competitive rooms would be added to the market, increasing the total number of competitive rooms in the market from 2,192 rooms in the six competitive hotels to 3,044 rooms.

[257] Subsequently, on October 11, 1996 she did a computer run that showed occupancy for the six competitive hotels dropping to 71.5% in 1999 from 78.6% in 1995, on an increase in supply of 752 rooms.

[258] On October 16, 1996, she prepared a final computer run of her occupancy estimates by month and her penetration by market segment analysis. On this run her occupancy estimates by month were the same as she had projected on July 14, 1996 showing occupancy rates for the Westin Grand for 1999 of 72.1%; for 2000 of 76.7% and for 2001, 2002 and 2003 of 80.0%.

[259] This run also showed the percentage of business that had existed for each of the six competitor hotels in each of the market segments for 1995. For instance, for the Wedgewood Hotel it showed its business as 70% commercial, 5% convention and 25% leisure in 1995. For the Metropolitan Hotel it was 50/30/20 and for the Pan Pacific it was 40/40/20. The average for all six hotels was 36/32/32 for the three segments.

[260] In this run Ms. MacDonald projected an increase in demand for the competitive market that she expected in the three market segments of 34.8% by 1999.

[261] In this run she projected that the number of rooms in the competitive market would increase by 1,298 rooms by 1999, to include the Westin Grand’s 207 rooms.

[262] With increased demand projected of 34.8% by 1999 and increased supply by 1,298 rooms or approximately 60% over the existing supply of 2,192 rooms, she concluded in this October 16, 1996 run that the market wide occupancy for the competitive set would fall from 78.6% in 1995 to 66.6% in 1999, 69.1% in 2000, 71.2% in 2001, 72.6% in 2002, and 74.1% in 2003.

[263] Included in this run as well was the same chart of 1995 occupancy, fair share, market share, and penetration for the six competitor hotels that she had included in her July 14, 1996 memo to Mr. O’Neill.

[264] Using this chart as a guide, she says that she applied her judgment as to where she thought the Westin Grand would fit in as against the six competitors in each of the three market segments.

[265] For 1999 she estimated that the Westin Grand would capture 160% of its fair share of room nights in the commercial market, 75% of its fair share in the convention market, and 100% of its fair share in the leisure market.

[266] She saw that the Metropolitan Hotel had captured 141.7% of its fair share of the commercial market in 1995, and the Wedgewood 224% of its fair share of the commercial market in 1995. She says she took into consideration that the Westin Grand was to be an all suites hotel and she considered that the Metropolitan and it were close comparables so she projected the Westin Grand would get 160% of its fair share of the commercial market in 1999

[267] When she added together the room nights that she projected the Westin Grand would capture over all three market segments in 1999 and compared that to the number of room nights available at the Westin Grand, she projected that the Westin Grand would have an occupancy for 1999 of 72.39% rounded to 72%. With slight variations in the penetration rates for the three segments, she projected occupancy of 76.77% rounded to 77% for 2000 and 79.98% for 2001, rounded to 80%.

[268] The projected overall penetration of the Westin Grand as against the six competitor hotels, taking into account her projected increase in demand and supply, was 108.8% for 1999, 111.2% for 2000 and 112.3% for 2001.

[269] She says she then determined what the percentage of the Westin Grand’s business would be in each market segment in each year and she determined on her numbers that in 1999 the Westin Grand would do 44% of its business in the commercial market, 25% of its business in the convention market, and 31% in the leisure market. The figures were slightly different for 2000 and 2001.

[270] She says that she considered the Westin Grand’s projected market mix as the most important figures for her. She compared these figures to the market mixes that she had for the Wedgewood for 1995 of 70/5/25, and for the Metropolitan for 1995 of 50/30/20, and was satisfied that her figures were reasonable by comparison.

[271] She says that she had an idea already of what the Westin Grand’s market mix should be before she even started her analysis and what she projected was in line with what she thought the hotel could achieve. She says if her calculations had shown a commercial market mix of 70% she would have gone back and adjusted her penetration figures to bring them more in line with what she thought the hotel could achieve.

[272] Following completion of her penetration by market segment analysis, she says she did her occupancy estimates by month. As previously stated she used the same numbers as she had used in the July 14, 1996 memo. She says she only did this projection as a backup to her penetration analysis. While she says she could start with either method and could use the other as a check, as a matter of policy she always starts with her penetration model and follows with her month to month analysis for backup.

[273] She says that if her month by month analysis and her penetration analysis do not support each other, she takes a look at the penetration figures again and may make adjustments. Here the month by month analysis produced occupancy rates of 72.1% for 1999, 76.7% for 2000 and 80% for 2001 – 2003.

[274] Ms. MacDonald was using 1995 segmentation rates for the Metropolitan Hotel of 50/30/20. She agreed under cross-examination that the Metropolitan figures should have been 40/40/20.

[275] When this error in the Metropolitan Hotel segmentation rates for 1995 was brought to her attention at trial, Ms. MacDonald agreed that its commercial penetration rate should have been 109% of its fair share rather than 141.7%. However she was not prepared to agree that knowledge of this change would have lead her to reappraise where she put the Westin Grand’s penetration rate in the commercial segment.

[276] Her response was, “You look at the overall market mix and we were estimating this hotel’s overall commercial demand would represent 44% of its total demand.”

[277] This is a reference to her October 16, 1996 computer run where she had projected the commercial business in 1999 to be 44% for the Westin Grand.

[278] The occupancy level that Ms. MacDonald projected for the Westin Grand in 1999 of 72.39%, rounded to 72%, when compared to the occupancy level she projected for the competitive set of 66.6% for 1999, gave the Westin Grand an overall competitive market penetration rate of 108.8% of its fair share.

[279] Mr. Steven Rushmore is the founder of HVS. Ms. MacDonald says he has written extensively on the methodology involved in preparing income projections for hotels and developed a lot of the methodology she applied. She accepts him as an authoritative source on income projections.

[280] Ms. MacDonald acknowledges that Mr. Rushmore has developed a rule of thumb that a new hotel should not be expected to capture its fair share in the first year. She agrees that this is a frequently observed pattern of build-up but she also points out that Mr. Rushmore allows for exceptions.

[281] She says that in her opinion the Westin Grand was one of those exceptions. In her view it had a great location near a lot of amenities such as the Ford Theatre, the Queen Elizabeth Theatre, the Orpheum Theatre, the Vancouver Public Library, General Motors Place and BC Place, and it was to be a 207 unit all suite hotel that she considered to be attractive to commercial travellers, with a Westin brand. She considered the all suite concept to be a big advantage.

[282] She agrees that her practise was to follow the standards set out in the Uniform Standards of Appraisal Practice published by the American Appraisal Institute, and she says she followed the recommended practise in that standard of keeping in her files evidence of her consideration of all applicable relevant data to support her findings and conclusions.

[283] She agrees that there is nothing in her work file or in her opinion letter to suggest that the feature of being all suite was a relevant issue to her. However she says that does not mean she did not take it into consideration as a big advantage.

[284] She does agree that the Wall Centre already had 149 suites and she was projecting that the Delta Suites would be opening by 1999 at Seymour Street and Hastings Street, with more suites, and it was to be closer to the commercial core than the Westin Grand.

[285] She also allows that the amenities she identified around the Westin Grand are all leisure amenities and not commercial amenities.

[286] She agrees that the Westin Grand would not be in the commercial district but in the entertainment district and that five of her six competitor hotels were closer to the commercial district or in it.

[287] She agrees that the Four Seasons Hotel and Pan Pacific Hotel are five star hotels while the Westin Grand was to be a four star hotel. The Waterfront Hotel is also a four star hotel.

[288] She says she did not look for comparable hotels opening at 160% in their commercial segment in year one, but she says that she had her own experience.

[289] Subsequently in the course of this litigation she says she found only one hotel that opened before 1996 at greater than 100% overall penetration and that was the Waterfront Hotel that opened higher in 1992 but then fell back to less than 100% penetration in its second year.

[290] She says that her database only goes back to the year 2000 and says that is why she has no more examples before 1996. Since 1999 she says she has found only three hotels that have opened at 160% commercial penetration and one was in Dallas, Texas, one in San Diego, California and one in Fort McMurray, Alberta.

[291] She explains that although she projected demand growing by 34%-35% she projected supply growing at a faster rate so that market occupancy in her view was going to decline.

[292] Originally in July 1996 she had projected 852 new competitive rooms would be added to the market by 1999 bringing the total number up to 3,044 rooms. At that time she projected 1999 occupancy for the Westin Grand with 200 rooms at 71.75%.

[293] When she did her computer run on October 11, 1996 she projected only 752 new rooms being added and showed the occupancy rate for the competitive hotels at 71.5% in 1999. She can not recall now why only 752 rooms were being added in that run.

[294] When she did her final computer run five days later on October 16, 1996, she added 1,298 or 1299 new rooms, over 400 more rooms than her original estimate of 852 and over 500 more than her October 11, 1996 estimate of 752. At that time she reduced the occupancy rate for the competitive set of hotels down from 71.5% for 1999 on October 11, 1996 to 66.6% on October 16, 1996.

[295] On her October 16, 1996 run her projected occupancy rate for the Westin Grand remained the same at 72% for 1999.

[296] In response to the question why she continued to project 72% occupancy for the Westin Grand in 1999 when she had lowered the average occupancy rate for the competitive set because of the increase in supply, her response was, “I thought this 207 room hotel, all suite hotel, would open up at 72%. I did.”

Expert Evidence

[297] Expert evidence was given at trial by three qualified hotel valuators. Mr. Kleinschmidt of Price Waterhouse Coopers (“PWC”) gave evidence for the Investors while Mr. Flood gave evidence for HVS and Mr. Rosen gave evidence for OHR. Both Mr. Flood and Mr. Rosen had given evidence before Madam Justice Wedge in Sharbern.

Mr. Kleinschmidt

[298] Mr. Kleinschmidt is the director of Hospitality and Leisure Advisory Services for PWC in Vancouver and leads its hospitality and leisure industry practise. His CV says he has extensive strategic, operational and development experience having held positions with Delta Hotels, Coast Hotels and Western Hospitality Hotels. In his evidence he says his development experience was with Western Hospitality Hotels, his father’s business, and his operational experience was with in line positions. He had no extensive strategic experience with any of the three hotels.

[299] From 1987 to 1991 he was with the hospitality and leisure practise of Panell Kerr Forster (“PKF”) in Vancouver, and in 1992 was a director in PKF’s Hong Kong office and in 1994 managing director of PKF’s Asia/Pacific practise. From 1992 to 1999 he was working in Asia and had no personal experience with the Vancouver hotel market between those years. In 1999 he joined PWC in Vancouver.

[300] He has no property valuation accreditations and is not a member of any professional appraisal organization.

[301] He says he has been a market and financial advisor to many of the world’s leading hotel management and development companies and has completed over 100 market and financial feasibility studies for new hotels and resort developments in Canada, Asia and the Caribbean.

[302] He says that he specialises in the lodging sector and has extensive knowledge of the procedures involved in preparing market and financial projections for new hotel developments.

[303] He is of the opinion that many of the assumptions/analysis for the projections have an absence of supporting market information, contain differences from industry benchmark data, and are unreasonable based on his knowledge of the Vancouver hotel market and experience in the industry.

[304] He considers that the commercial market penetration rates projected for the Westin Grand of 160% in year one increasing to 165% for years two and three have not been adequately substantiated as its commercial penetration rate was higher than the penetration rates for five of the six competitive hotels.

[305] In his view there are several factors not considered that do not support the higher commercial market segment penetration rate than its penetration rate for convention and leisure market segments. Its off-centre location and close proximity to leisure and event demand generators such as the Ford Theatre, BC Place Stadium and GM Place, in his view, put it in a stronger position to attract leisure business and not commercial business.

[306] He says the Westin Grand is not in close proximity to Class A office space and commercial users would be more inclined to use hotels in the core area of downtown Vancouver.

[307] In his opinion the absence of much stronger competitive attributes and its off-centre location would not support higher market penetration rates than other branded hotels in stronger downtown core locations, including the competitive set of hotels, especially in the commercial segment and particularly in the first year of operation.

[308] In his opinion the competitive set should have included comparable off-centre hotels as well as those that were included.

[309] He says he did not consider whether the Westin Grand’s all suite configuration was an advantage. He says that it would not necessarily be an advantage in all cases as in his view it depends on the market.

[310] He considers that the opening year overall market penetration of 108.8% was not reasonable as a new hotel typically achieves less than its fair share in years one and two as it builds business and market awareness. When preparing projections it is typical to assume this type of progression for a new hotel unless it has significant attributes that give it a competitive advantage. The Westin Grand’s penetration rate in his view was inconsistent with this typical situation as documented by Mr. Rushmore in his 1992 guide on hotel valuations.

[311] As an example he points out that the Wall Centre Garden Hotel (now the Sheraton Wall Centre) opened in August 1994 and in 1995 its overall market penetration was only 81.1%.

[312] He considers that the revenue and expense results for the Inn at the Westminster Quay for food and beverage were not good comparisons for the Westin Grand projections as the Inn at Westminster operated in a different market and was a different quality hotel.

[313] He says that the projected rooms expenses for the Westin Grand at 28% of room revenue in year one decreasing to 25.6% in year two and to 24.6% in year three were lower than the market average for full service hotels in 1995 of 30.8% and lower than the competitive hotels of 27.3% to 31.7%, and in his view there was no basis to conclude that the Westin Grand would achieve lower average room expenses after year one.

[314] He says the energy expense projections of 1.95% of revenue dropping to 1.69% by year three were lower than the industry benchmark averages of 2.4%, and lower than the energy expenses of the competitive hotels of 1.69% to 4.8%, with no indication of why this would be.

[315] He says projected property operations and maintenance expenses of 2.96% and 2.97% of revenue in years four and five were lower than industry benchmark data when they should have stabilized at the industry benchmark average for full service hotels of 4.3% of total revenue.

[316] Other criticisms he has of the projections include that in the market segment penetration analysis for the Westin Grand, the comparison was made to the market segment penetrations of the existing competitive hotels in 1995, without projecting those market segment penetration rates of the competitive hotels forward to 1999 and without accounting for how new supply entering the market by 1999 would affect the different market segments.

Mr. Flood

[317] Mr. Flood has been the vice-president of valuation and consulting for CBRE Hotels, since 2006. He is responsible for overseeing all hotel related valuation and consulting activities for CBRE Hotels in Canada.

[318] He has been a member of the Appraisal Institute of Canada since 1976 and received his designation as an accredited appraiser in 1984. He has served on provincial and national professional practice committees and as a senior review grader for the institute. He is also a certified lecturer on valuation issues and uniform standards of professional appraisal practice.

[319] For 25 years he has focussed on the analysis of investment property. While with Colliers International Realty Advisors Inc. between 2001-2006 he was responsible for the management of five offices located across Canada including in Vancouver.

[320] In the last five years he has valued Hilton hotels in Toronto, Montreal and St. John as well as the Delta Chelsea in Toronto and a portfolio of 75 limited service hotels.

[321] He is of the opinion that HVS followed accepted steps and procedures in reviewing the projected operating results for the Westin Grand and he considers that HVS exercised the average degree of skill, care and diligence to be exercised by members of the profession at that time.

[322] In his opinion it met the standard of care of a hotel consultant practising in the latter half of 1996 when it expressed the opinion that the Westin Grand’s annual operating projections were reasonable and achievable.

[323] He also holds the view that given the number of variables to be considered in creating hotel financial projections, two consultants acting reasonably can arrive at different conclusions on occupancy, average room rate and expense levels for a hotel. The range of reasonableness in his view is dependent on the complexity of the assignment and in his experience a reasonable range in conclusions is 5% for less complex types of property and 10% for an established operating hotel or similar.

[324] He considers this assignment to have been very complex involving a yet to be built hotel and a rapidly changing market with many variables.

[325] Based on his view of the complexity of the assignment he says that the opinions expressed by HVS were within the range of a reasonably competent consultant for this type of assignment.

[326] In preparing his report Mr. Flood was under the impression that HVS did no more than review five-year annual operating projections (before debt service) prepared by OHR, as stated in the HVS retainer agreement with the Developer and as stated in the HVS opinion letter of November 8, 1996. He was not aware at that time that HVS had in fact prepared its own occupancy projections and revenue figures, as well as some expense figures.

[327] He says the high market share in the commercial segment of 160% in year one increasing to 165% in years two and three appears to be a result of the Westin Grand’s location in the downtown area, its positioning as a luxury hotel, its all suite configuration, and its affiliation with Westin Hotels.

[328] He is of the belief that Westin Hotels, an internationally recognized hotel chain frequented by business travellers, would direct corporate business to the Westin Grand.

[329] It is his view that the all suite configuration of the hotel would be expected to result in high occupancy figures as his experience is that all-suite hotels typically outperform the market in occupancy.

[330] He considers the all suite configuration of the Westin Grand to be a significant competitive advantage in both the commercial and leisure segments as suites tend to provide large space, divided rooms and increased amenities.

[331] He is of the view that as a recognized luxury branded hotel, the Westin Grand would be expected to compete with the best hotels in the downtown market.

[332] He recognizes that the six competitive hotels are all luxury hotels and proximate to commercial, leisure and conference demand generators.

[333] In his view the Westin Grand, on the easterly edge of the downtown core, was to be built in a rapidly developing area and all seven hotels, although dissimilar in some respects, would be similar enough to allow all to compete for the bulk of their business on an equal basis.

[334] He agrees that the Westin Grand does not have a preferential location but it does have the same location advantage in his view.

[335] He agrees that a 160% commercial penetration rate for the first year is a high rate and was a better rate than all the luxury chain competitor hotels, and he agrees there should be a strong compelling reason for assigning to it a commercial rate of 160% in its first year.

[336] He agrees that if the Westin Grand’s overall penetration rate is dependent on a high penetration rate in one segment, there should be supporting rationale for believing a high penetration rate can be achieved in that one segment.

[337] However, he considers segmentation to be only a way to rationalize the overall penetration of a hotel. He considers segmentation at best to be only an estimate, as he says different hotels track segmentation differently, and it can vary from year to year. He says there is a certain amount of interpretation required in a segmentation analysis.

[338] He considers the overall market penetration to be a more reliable indicator than building up occupancy through segmentation. The starting point in his view is to determine on an overall basis how the hotel will perform versus the market, and then rationalize the result by considering the different segments.

[339] He acknowledges the projected overall market penetration of 108.8% increasing to 111.2% in 2000, to be a strong level of market share, and he recognizes that typically hotels require a period of time to reach stabilized performance. However he views this scenario as only a rule of thumb set by Mr. Rushmore, and he has seen exceptions himself.

[340] He does not consider the Vancouver market in the late 1990s to have been a typical market given high occupancy levels and rapid growth in tourism and air traffic.

[341] He does not consider this to be an unreasonable market share for a new small size all suite hotel with a Westin branding.

[342] Taking into account the Westin branding, its size, location, all suite configuration, the provision for new room supply expected to enter the market and the anticipated increase in room demand, a projected occupancy of 72% in the first year increasing to 77% in the second year appears to him to have been reasonable.

[343] He agrees it was a 60% increase in room supply that led HVS to predicting a drop in the occupancy for the competitive set by 1999, and he agrees that any consideration of the reasonableness of the occupancy figures for the Westin Grand should be done in the context of the occupancy expected for the competitive set.

[344] He also agrees that there should be good strong reasons to bring a new hotel into the market substantially above the level of the competitive set and it should be even more compelling when it is in a period of overbuilding where occupancy decreases in the competitive market.

[345] He says it would be important to him to know the makeup of the new supply assumed between July and October 1996 in assessing the reasonableness of not dropping the Westin Grand occupancy along with the competitive set occupancy in October 1996.

[346] However, he agrees if occupancy is projected at 72% on one view of the market and then a different view of the market is developed with a drop of five points, he would expect a drop in the occupancy projections for the subject property. Whether it would be a drop of five points or not he cannot say but in his view the drop in the market would have some effect on it.

[347] He says some hotels perform better in a downturn in the market than others do, but a reduction in the average occupancy for the competitive set in his view is going to affect the subject property to some degree.

[348] The extent of the effect on the occupancy of the subject property is in his view a matter of professional judgment but to assume no effect he agrees would be unreasonable.

[349] He says he has never done a month-by-month analysis of occupancy rates and he does not think it is all that reliable a method.

[350] In answer to Mr. Kleinschmidt’s criticism that HVS did not project the market segment penetration rates of the competitor hotels forward to 1999 from 1995 in order to do a segment penetration comparison for 1999, also taking into account projected new supply, he says that this was not an industry standard at the time to do that analysis.

[351] In answer to Mr. Kleinschmidt’s criticism of the projections for room expenses that were estimated at 28% of revenue dropping to 24.6% in year three, he says HVS used data for full service hotels across Canada and not all hotels submit their data so the samples have to be taken with a grain of salt.

[352] He also says that comparing industry averages is a flawed practise because higher revenue levels result in lower costs on a percentage basis.

[353] He did not consider operating results for Westin hotels across Canada and does not know if any such data was available.

[354] Food and beverage expenses were also projected on a percentage of department revenue. Mr. Flood notes that the Westin Grand was to contract out the operations of the restaurant and receive only a percentage of the revenue and he does not have any market data to draw comparisons.

[355] He recognizes that energy expenses were projected at significantly less than comparable market indicators. However he observes the Westin Grand was to have limited public areas and based on the information provided to him the hotel was to incorporate energy efficiency resulting in a lower cost.

[356] He also saw that property operating and maintenance expenses were low as compared to market norms but says the newness of the property and limited amount of food and beverage services and meeting space would result in a lower cost.

Mr. Rosen

[357] Mr. Rosen is Chairman and CEO of Horwath Horizons Consultants, a member firm of Horwath International, one of the world’s largest accounting and hospitality consulting firms.

[358] He received his BA in the School of Hotel Restaurant and Institutional Management from Michigan State University in 1973. He started working at the Toronto office of Laventhol and Horwath, an accounting and management consulting firm specializing in the hotel industry, doing market studies and feasibility studies for hotels.

[359] From there he formed his own consulting firm in 1979 doing management consulting and operational services for hotels and restaurants, and in 1980 combined his firm with another firm managing hotels in Ottawa and Halifax where he became responsible for overseeing the operations of the hotels.

[360] In 1984 he rejoined Laventhol and Horwath where his practise was doing market studies, feasibility studies and valuations of hotels and resorts for all the major hotel companies. As part of his responsibilities he says he became familiar with the all suite concept. He was retained by a hotel chain that planned a chain of all suite hotels across the country so he says he studied the market.

[361] In 1992 he joined Delta Hotels and Resorts as Vice President of Marketing and Sales with the responsibility to work with the individual hotels reviewing their marketing plans. This brought him to Vancouver three or four times a year as Delta had hotels in Richmond, Vancouver and Whistler.

[362] In 1995 he formed his own company, Horizon Hospitality Group, a management consulting practice specializing in market and feasibility studies, valuation, strategic marketing and hotel, resort and golf course development and management.

[363] In 1996 he re-launched the Horwath brand in Canada and continued his consulting practice, involving some engagements in Vancouver for Travelodge, Marriott, Delta and CP Hotels.

[364] In 2000 he was elected chairman of Horwath International’s worldwide hospitality consulting practice.

[365] He is a frequent lecturer at universities and a speaker at conferences on tourism development, hotel investment and development, marketing, strategic planning, operational management and customer service.

[366] He is also the author of articles on valuation of hotels and is the primary author and contributing editor of the CCH publication Canadian Hospitality Industry Guide.

[367] He is of the opinion that a consultant acting reasonably would not conclude that the projections were unreasonable based solely on the fact that there is an absence of supporting market information and the projections are different from industry benchmark data. In his view hotels can perform well above and below industry benchmarks.

[368] He says that Mr. Kleinschmidt sets out a step-by-step procedure for conducting a feasibility study without giving any consideration to the instructions given to HVS by the developer and the HVS engagement letter which confirmed that HVS was to provide consulting services in reference to its opinion of the achievability of projections for the hotel which had previously been made by others.

[369] He says a review engagement is not a typical engagement although he says the steps one would take are similar, but not necessarily as detailed as those for a market or feasibility study. Rather the steps taken would be more to test the reasonableness of the assumptions used in preparing the projections.

[370] In his view it is not necessary to document all the steps that are done to determine whether the projections are reasonable and achievable. However, to the extent possible, he agrees all the assumptions should be documented.

[371] In an engagement of the type here in his view the methodology followed by a hotel consultant acting reasonably would include a series of tests to allow him/her to satisfy themselves that the projections were reasonable.

[372] He assumes from the HVS data that HVS had performed the necessary tests to determine the achievability of the projections and he assumes that HVS had independently determined that the projections were achievable based on its analysis of available market information and its informed judgment applied to that information.

[373] In preparing his report Mr. Rosen was also of the misunderstanding that HVS was only reviewing OHR’s projections.

[374] He says Mr. Kleinschmidt did not follow the methodology necessary to determine if the projections were reasonable as he provides no supporting information or analysis of the Vancouver economy or downtown Vancouver hotel market in 1996. Mr. Rosen says Mr. Kleinschmidt criticises the methodology followed by HVS but has not done any analysis himself of the appropriate competitive set, any analysis of the appropriate projected competitive supply and demand, any analysis of market segmentation of the competitive set, any analysis of average rates in the competitive set, and any analysis of potential market penetration of the Westin Grand. He also says Mr. Kleinschmidt has not relied on any relevant industry comparable data to show that the projections of operating expenses were unreasonable.

[375] In his opinion Mr. Kleinschmidt could not reasonably reach the conclusions he did in the absence of supporting market information and solely on the basis that the projections differ from industry benchmarks.

[376] In his view the Westin Grand site was as desirable a location as any other hotel in Vancouver in relation to corporate and leisure demand generators. It was not at any competitive advantage or disadvantage for commercial business in terms of its location.

[377] He agrees most of the competitive set chosen by HVS were better located in relation to the greater percentage of commercial office space, but to him that did not mean the Westin Grand was not as well located in relation to commercial demand generators.

[378] While he agrees the Westin Grand site was not in the heart of the downtown core in his view it did not have to be as all of its business did not necessarily have to come from that core. In his view it was still close to a number of office buildings that would likely provide a good portion of its commercial business.

[379] The Westin Grand was to be a suite product which he considers would give it a significant competitive advantage. It was to have limited meeting space and limited food and beverage facilities and was going to cater primarily to the corporate market.

[380] It was also to be branded as a Westin hotel, another significant competitive advantage in his view.

[381] In his view the fact it was a Westin hotel and an all suite hotel indicated to him that the hotel would out perform the market in the corporate segment.

[382] He says he has not been provided with any facts or assumptions on how HVS arrived at a 160% penetration rate for the commercial segment and he agrees with Mr. Kleinschmidt that it was not adequately substantiated. However he says Mr. Kleinschmidt provides no analysis of what he believes would have been a reasonable penetration rate in the commercial segment.

[383] In his opinion this level of penetration in the commercial segment was still reasonable because:

a) The Vancouver hotel market was achieving very high occupancy levels and there were strong indicators that this would continue for the foreseeable future. He says there were no negative factors to indicate that it would not continue to be a strong economic market. He does not consider expected overbuilding to necessarily have been negative as in his view it takes time to absorb new supply and an occupancy in 1999 that continued in the high 60%s was in his view still a very healthy economy. He agrees this reason alone however does not give the Westin Grand any competitive advantage over the other hotels.

b) Westin Hotels are in the top tier for business travellers. Again, he agrees all the competitive hotels are in the top tier.

c) The Westin Grand would be one of three higher end properties in Vancouver featuring suites.

d) The hotel was proximate to a number of commercial demand generators.

[384] In his view no one factor might stand out for the Westin but considering all factors it had a comparative advantage in the commercial marketplace.

[385] Mr. Rosen did not do his own independent assessment of the penetration rate for the Westin Grand in the commercial segment or any segment either. He says he took the HVS segmentation rates as given and did his tests to see if they were reasonable.

[386] He says that given the strength and preference for the Westin brand in Canada, its reservation system and international sales network, the size of the Westin Grand and its all suite product, its location and the buoyancy of the Vancouver hotel market at the time, in his view a hotel consultant acting reasonably would have concluded the hotel would achieve very high penetration levels within the commercial segment, and it was not unreasonable to project it would achieve higher penetration levels in the commercial segment than the Metropolitan Hotel.

[387] He was made aware of the change in penetration rates for the Metropolitan Hotel in the commercial segment but he says he would have expected that the Westin Grand would do significantly better than the Metropolitan. He would have considered that it would compete at a level close to the Wedgewood for business travellers.

[388] He does not agree that with the adjustment to the Metropolitan penetration rate in the commercial segment that a competent consultant would have gone back and revisited the penetration rate given for the Westin Grand, because at the end of the day, in his view, the issue is whether the projected occupancy rate of 72% for the first year was reasonable.

[389] He does not think that an overall market penetration of 108.8% in year one was unreasonable. In his view there is no hard and fast rule that a hotel has to ramp up over time. While he says it is typical that hotels do not achieve their fair share of the market or better in the first year, hotels that do exceed their fair share in the first year tend to be distinctly different.

[390] He says in 1992 Cambridge Suites in Toronto opened at 130% of its fair share.

[391] He agrees this was unusual, but there was no reason in his opinion to think it could not happen in Vancouver given the market at that time and where it was going and given the hotel product.

[392] He does not think the supply projected forward to 1999 would alter the customer mix for the hotel as in his view the new supply would impact the whole market and not just the Westin Grand.

[393] He agrees that a hotel consultant reporting on occupancy projections for the hotel would also be expected to report on the occupancy projections for the market as well.

[394] He does not think the operating data for the Westin Bayshore would have been comparable to the Westin Grand. However he did not see any of this data or any data for any other Westin hotel.

[395] He considers that both Mr. Kleinschmidt and HVS should have used all suite statistics for the revenue and expense projections. In his view full service hotels were not a relevant industry comparable so HVS did not rely on relevant industry data.

[396] Nevertheless in his view her numbers were much in line with all suite benchmarks.

[397] PKF reports for 1995 and 1996 for suite hotels showed room expenses ranging from 26.4% to 27.7% of room revenue.

[398] In his view rooms expenses as a percentage of room revenue decline as room revenues increase.

[399] In his experience room expenses could range between 20% and 30% of room revenue and so the rooms expense projected here was within that range and in his view reasonable.

[400] He also considers the projection for energy costs to have been reasonable and achievable in relation to all suite hotels and he is of the view that over the entire projection period a reasonable consultant would not consider this to be a material cost to consider in any event.

[401] He considers the ultimate test to be whether the projections were reasonable. How HVS got there in his view is not important. He agrees that reasonable projections could be obtained by throwing a dart at a dart board. The test, in his view, is whether the projection numbers made sense. In his view Ms. McDonald had reasonable projections and she had good supporting data to back up her conclusions.

[402] As his own tests to determine the reasonableness of the projections he expanded the competitive set to include four other full service hotels in one scenario and then two full service hotels in a second scenario, increased demand from 1996 to 1999 at different rates than HVS had, which he considered more reasonable, and added the HVS projected new supply, which he considered reasonable, but introduced it at a staggered rate over the projection period 1999 – 2003 in one scenario and then added all the supply in 1999, as Ms. McDonald had assumed, in another scenario.

[403] With four other hotels added to the competitive set, and all new supply added in 1999 as Ms. McDonald had assumed, he showed market occupancy at 67.0% instead of 66.6% that Ms. McDonald had projected, and he showed the Westin Grand penetration rate at only 107.6% instead of 108.8%, assuming the HVS occupancy rate of 72.1%.

[404] With four other competitive hotels added and the new supply staggered over the period 1999 – 2003 his market occupancy for 1999 became 69.6% and the Westin Grand penetration rate 103.7%, assuming 72.1% occupancy.

[405] With only two other hotels added to the competitive set and all the supply added in 1999, his market occupancy dropped to 63.7% and the Westin Grand’s penetration, again assuming 72.1% occupancy, became 113.2%.

[406] With two other hotels added to the competitive set and new supply staggered over the projection period, his market occupancy became 69.6% and the Westin Grand’s penetration rate, at 72.1% occupancy, became 103.6%.

[407] Mr. Rosen did not adjust the Westin Grand occupancy rates for 1999 – 2003 as HVS had projected, in any of his scenarios, as he considered those occupancy rates to be reasonable.

[408] He says the purpose of his scenarios was to test the HVS occupancy rates, which he had already concluded to be reasonable, by comparing them to where he thought, on his own knowledge of the market in 1996, and on his own analysis, the competitive market occupancy rates would be in the projection period. He says he could then see where the Westin Grand occupancy rates projected by HVS ended up by comparison and determine whether he considered the differences to be reasonable.

[409] In his scenarios the Westin Grand occupancy rates all ended up still being above the market occupancy rates, but to different degrees. He considers the differences to all be reasonable.

[410] When asked what his threshold of reasonableness was Mr. Rosen said it could have been a penetration rate of 120%, he did not know, it was hard to say. He says he was only testing whether the HVS occupancy rates were reasonable and these tests suggested to him that they were reasonable.

[411] When asked how all this was of assistance to the court in determining the reasonableness of the assumptions Ms. McDonald used in 1996, he again says at the end of the day what is important is whether the 72% occupancy was reasonable. She may have a different way of getting there in his view, a different approach than how he gets there, but in his view the test is whether her occupancy was reasonable against the market.

[412] Mr. Rosen says that in using the 1995 benchmark data for revenues and operating expenses for all suite hotels that he considers HVS should have used for comparison purposes, and adjusting some of the all suite expenses to levels he thought were more appropriate for the Westin Grand, and adjusting the 1995 average room rates for the all suite hotels to the 1995 base rates for full service hotels, and then comparing those figures to the 1999 projections, he determined that the operating income on an all suite adjusted basis was 50.2% of total revenue, before deduction for management and franchise fees, compared to 52.2% in the projections. This also satisfied him that the projections were reasonable when compared to the benchmark data.

[413] Finally he did a comparison between his total revenue figures and operating income figures as he determined them to be on his adjusted all suite hotel data, and the projection figures for both those items, and concluded that the variance to the projection figures was only 2% in year one to 4.7% in year three with an average variance over the five year projection period of only 1.7%. From this he also concluded the projections were reasonable.

Submissions on the expert evidence

The Investors

[414] Investors counsel submits that the opinions of Mr. Kleinschmidt should be accepted as his opinions are supported in many respects by the other evidence at trial.

[415] It is submitted that his opinion that the occupancy projections were unreasonable is supported by the evidence of Ms. McDonald herself that she reduced the market occupancy projections by five points without reducing the Westin Grand occupancy projections, when she added new supply between July and October 1996.

[416] Reliance is placed on the evidence of Mr. Flood when he says it was unreasonable not to conclude that the increase in supply would have some effect on reducing the Westin Grand’s occupancy projections.

[417] Reliance is also placed on Mr. Flood’s opinion that the locations of the Westin Grand and the competitive hotels were similar enough to allow the hotels to compete for the bulk of their business only on an equal basis.

[418] It is further submitted that the evidence of Mr. R. O’Neill that he projected the Westin Grand as opening below its fair share and not above, albeit on a different set of competitive hotels, is also support for the unreasonableness of the occupancy projections by HVS.

[419] Support is also said to exist for the unreasonableness of the projections in the fact that when OHR did its business plan in 1998 it perceived the Westin Grand as not having a good location for the commercial district market and at that time projected competitive set occupancy rates at 67.6% in 1999, 68.18% in 2000 and 64.75% in 2001, with penetration by the Westin hotel opening at 97.6% in 1999, 100.5% in 2000 and 100.69% in 2001.

[420] Reliance is also placed on the experience of other major hotels that opened before 1996 at less than their fair market share.

[421] On the expense side the submission is that a rooms department expense at 28% for year one, stabilizing at 24.6% in year three, was unreasonable by comparison to other Canadian Westin hotel statistics that showed the stabilized rate at above 28%.

[422] It is submitted that Mr. Kleinschmidt’s opinion that property operations and maintenance expenses, while discounted appropriately in years 1 – 3, should return to normal at industry benchmark levels thereafter, is supported by Ms. McDonald’s own practise when reporting later on the Opus hotel, and is also supported by the fact that in her original draft opinion on the Westin Grand she had said that warranties were commonly in effect for three years, but then changed that in her final opinion to say they were for “initial years”, at the request of the Developer, thereby departing from her normal practise.

[423] Counsel submits that the opinions of Mr. Flood as to the reasonableness of the projections should be discounted when he was not aware of Ms. McDonald’s error on the commercial segment penetration for the Metropolitan Hotel and was not aware of the increase in supply that HVS assumed between July and October 1996 without any adjustment to the Westin Grand occupancy rates.

[424] It is submitted that on Mr. Flood’s own evidence no competitive advantage was demonstrated for the Westin Grand over the competitive set in the commercial segment and it was only when he was made aware of the error on the Metropolitan commercial segment penetration rate and allowed that it could possibly militate in favour of adjusting the Westin Grand’s commercial segment penetration rate that he resiled from any reliance on segmentation as being too subjective and said he relied only on overall penetration as more important.

[425] It is submitted that at the same time Mr. Flood agreed that in deciding whether there were reasons for the Westin Grand to perform better than the market one did have to consider the relative performance in the different segments.

[426] It is submitted that although Mr. Flood identified the Westin Grand’s all suite configuration as one factor for its high market share in the commercial segment, he did not consider any all suite data from Vancouver.

[427] It is also submitted that Mr. Flood never had the available information from OHR on other Westin hotels in Canada and never considered this on the issue of market share, penetration or room expenses.

[428] It is pointed out that Mr. Flood did not offer any opinion on Mr. Kleinschmidt’s view that property operations and maintenance expenses should only have been considered lower in the first three years and not thereafter.

[429] Counsel submits that the opinions of Mr. Rosen should also be rejected.

[430] It is submitted that Mr. Rosen was entirely focussed on the conclusions for occupancy, penetration and expenses and not on the methodology and reasons applied to these conclusions, and it did not matter to him how HVS arrived at its conclusions as long as the conclusions met his standard of reasonableness.

[431] Mr. Rosen was critical of Ms. McDonald for not using the all suite data but when he compared the all suite data he still said that her numbers were reasonable and somehow concluded that she had employed appropriate and sufficient analytical procedures. It is submitted that this cannot be and should not be accepted.

[432] It is submitted that a prospective investor relies on the author of projections to have special skills and knowledge and bring those to bear on the conclusions using reasonable care. If told that the projections are nothing more than a lucky guess it is submitted that there would be no reliance by a reasonable investor.

[433] Mr. Rosen, like Mr. Flood, was also under the false impression that HVS was only doing a review of projections prepared by OHR and was not doing its own projections, and it is submitted that this must colour both their opinions.

[434] Mr. Rosen initially knew nothing about the Metropolitan data error in HVS formulating its commercial segmentation rate for the Westin Grand and yet was still able to opine that a 160% commercial penetration for the Westin Grand was reasonable. It is submitted that this should not be accepted.

[435] Mr. Rosen said the error in the Metropolitan commercial segment penetration would not lead a consultant such as HVS to revisit its positioning of the Westin Grand as the Metropolitan still had 80% occupancy in 1995.

[436] It is submitted that this answer ignores the whole purpose of market segmentation, which is to focus on the attributes of a hotel as against the competitors.

[437] It is submitted that Mr. Rosen could not single out one factor that gave the Westin Grand an advantage in the commercial segment and it is submitted that the sum cannot be any greater than its parts.

[438] It is submitted that Mr. Rosen has unfairly criticised Mr. Kleinschmidt’s opinions saying that they were formed in the absence of supporting market information and solely on the basis of the projections differing from industry benchmark data. He would not agree that Mr. Kleinschmidt provided rationale and data for his opinions, and he took the position that they amounted to no rationale at all with no supporting information. It is submitted that this is not a fair assessment of the evidence of Mr. Kleinschmidt.

[439] Mr. Rosen criticizes Mr. Kleinschmidt for not doing his own market penetration for the Westin Grand and it is submitted that Mr. Rosen and Mr. Flood have not done any more for their own opinions.

[440] While Mr. Rosen prepared alternative scenarios based on his views of the competitive market occupancy rates in comparison to the Westin Grand occupancy rates, it is submitted he never conducted his own independent analysis of what the Westin Grand occupancy rates should have been. He simply concluded that the HVS occupancy rates were reasonable.

[441] It is submitted that this does not assist the court in determining whether HVS acted reasonably in what it did but introduces new considerations postulated by Mr. Rosen that would require a new trial as to their reasonableness.

[442] It is submitted that no reasonable conclusion can be reached on Mr. Rosen’s alternative scenarios without full evidence on why he came to the conclusions he did.

[443] Mr. Rosen was not given and did not consider any Westin hotel data. While he gave a range for rooms department expenses of 20% - 30%, he also said that typically rooms department expenses for a hotel like the Westin Grand would be in the 26% - 29% range.

[444] Mr. Rosen said the data from the Westin Bayshore was not directly comparable because of its size and amount of public space and staffing levels. It is submitted that this cannot be so when the Westin Bayshore is a hotel of the same brand subject to the same standards. Even Ms. McDonald said the information would have been relevant for consideration.

[445] It is submitted that in analyzing operating costs Mr. Rosen selected all suite hotel data despite the difference between the average room rates for these hotels of $83 in 1995 compared to the competitive set for the Westin Grand in 1995 of $148.

[446] For property operations and maintenance expenses and energy costs Mr. Rosen used actual inflation factors after 1996 to adjust his benchmark data forward, rather than the inflation factors HVS assumed in 1996. Accordingly it is submitted that this analysis is not a useful test on the assumptions HVS had to make in 1996.

[447] Using all suite data required Mr. Rosen to make adjustments to room rates and operating costs because these all suite hotels were in a different rate class from the Westin Grand and its competitors. He would not agree that statistics for full service hotels would be more useful as he did not consider the Westin Grand to be a full service hotel.

[448] At the same time Mr. Rosen agreed with the comments of Mr. Rushmore in his 2001 edition of Hotels and Motels - Valuation and Market Studies where Mr. Rushmore said that in evaluating several financial statements from other properties the appraiser should first look for income and expense data from hotels that are similar in terms of average room rates and generally hotel operating data should not be compared unless the properties are either in the same class or no more than one class away.

[449] Counsel points out that Mr. Flood said that in the early 1990s there were not a lot of all suite hotels across Canada and some were better quality while some were mid-market hotels.

[450] He also points out that Mr. Flood agreed that if all suite average daily rates were substantially less it might indicate that they were not a very good comparable set.

[451] Mr. Flood agreed the goal was to pick as close a comparable as possible to reduce the subjectivity of any adjustment to be made.

[452] It is submitted that Mr. Rosen’s evidence of adjusting all suite data should be rejected as the all suite room rates are entirely different than the room rates projected, which is contrary to the advice of Mr. Rushmore with which Mr. Rosen agreed.

[453] It is submitted that all Mr. Rosen did was to make arbitrary adjustments to the all suite data.

HVS

[454] Counsel for HVS submits that Mr. Kleinschmidt’s opinions should be given little weight because of his lack of involvement in and knowledge of the Vancouver hotel market in the period 1992 – 1999 when he was out of the country.

[455] It is submitted that the opinions of Mr. Flood and Mr. Rosen should be accepted over the opinions of Mr. Kleinschmidt as they had more actual experience in Canada and British Columbia in the period 1996 to 1999.

[456] It is submitted that Mr. Rosen’s opinion should be accepted that the location for the Westin Grand was a great site in relation to demand generated for commercial as well as leisure business and Mr. Kleinschmidt agreed that while it was in an off-centre location it was within walking distance of the core of downtown.

[457] It is submitted that Mr. Flood’s opinion that an all suite hotel typically outperforms the competitive market for occupancy and daily rate should be accepted. Mr. Kleinschmidt did not consider the importance of the Westin Grand being an all suite hotel and did not assess it on that basis, although he did agree that it could have advantages in certain markets.

[458] Although Mr. Kleinschmidt considered that the commercial market penetration rate of 160% had not been adequately substantiated, he also agreed that assigning a penetration rate is subjective and judgment based and Mr. Flood said segmentation is only an estimate with a certain amount of subjective interpretation involved and it depends on how hotels track it and it can vary.

[459] It is submitted that Mr. Flood’s opinion should be accepted that the starting point is how well the hotel would perform against the market on an overall basis which he considers to be a more reliable indicator than building occupancy through segmentation.

[460] It is also submitted that Mr. Rosen’s opinion supporting the commercial penetration rate for the Westin Grand should also be accepted.

[461] While Mr. Kleinschmidt said that the overall projected penetration of the Westin Grand at 108.8% was contrary to the rule of thumb of a new hotel entering the market, as Mr. Rushmore described in his book, Mr. Kleinschmidt’s example of the Wall Garden Centre that opened up below its fair market share it is submitted is not comparable to the Westin Grand because of its size and large meeting space and it was unbranded and was not an all suite hotel.

[462] In addition Mr. Kleinschmidt acknowledged that he has seen hotels open up at more than their fair market share.

[463] It is submitted that the opinions of Mr. Rosen and Mr. Flood that the overall projected market penetration was reasonable based on the Westin branding, its location, and it configuration as an all suite hotel, should be accepted as should Ms. McDonald’s opinion to the same affect.

[464] Although Mr. Kleinschmidt said that as new supply enters the market in the future consultants should make adjustments to the segment penetration rates of the competitive hotels if market segmentation is expected to change, he also agreed that finding out a competitive hotel’s future plans on market mix is difficult to obtain as it is strategic in nature.

[465] It is submitted that Ms. McDonald’s evidence supported by Mr. Flood and Mr. Rosen that this was not a practice followed in 1996 should be accepted.

[466] Although Mr. Kleinschmidt said that HVS should have obtained other Westin Hotel data for expense items he did not review any data himself and could not say what difference it would have made.

[467] It is submitted that Mr. Rosen’s evidence should be accepted that on the basis of a dollar cost per room analysis the Westin Grand projections for property operations and maintenance expenses already proposed a higher expense than existed for all suite comparables, and they should therefore be accepted over the opinions of Mr. Kleinschmidt, for years four and five of the projection.

[468] It is submitted that while Mr. Kleinschmidt said the energy expense projections were lower than industry benchmark averages, in fact they were all still within the range of the comparable hotels that HVS considered for the projections.

[469] In addition Mr. Rosen considered the energy expenses on a dollar cost per room basis to be reasonable and it is submitted that this should be accepted as well.

[470] It is submitted that Mr. Kleinschmidt agreed that when rooms revenues are projected to increase greater than rooms expenses the percentage related to rooms expenses will be lower.

OHR

[471] Counsel for OHR submits as well that Mr. Kleinschmidt had insufficient personal experience, expertise and knowledge of the downtown Vancouver hotel market in the relevant period to attach any weight to his opinions.

[472] It is pointed out that he did no work in the Vancouver market in the period between 1991 and 1999. He said he did not keep abreast of the Vancouver hotel market during that time and he agreed that Ms. McDonald would have had more knowledge of the hotel market conditions during this period than he did. He acknowledged that when he returned to Vancouver in 1999 he had to re-familiarize himself with the Vancouver hotel market.

[473] It is also submitted that while Mr. Kleinschmidt criticized Ms. McDonald’s methodology in her analysis he never did his own analysis of the areas of his criticisms in order to determine what he thought her projections should have been.

[474] It is submitted that only with this evidence can it be determined whether HVS’s projections were reasonable as being within the range of reasonableness. It is submitted that two consultants can reach conclusions both within the range of reasonableness without either being unreasonable.

[475] It is submitted that the investors are asking the court to infer that Mr. Kleinschmidt is saying that the projections were outside the range of reasonableness without indicating what is his range of reasonableness.

[476] It is submitted that at most Mr. Kleinschmidt’s opinions can only be relied upon for concluding that Ms. McDonald’s methodology was flawed, but they cannot be relied upon for determining that the projections themselves were unreasonable when he carried out no analysis to determine whether any flaws in Ms. McDonald’s methodology had any impact on the projections at all to take them outside the range of reasonableness.

[477] It is submitted that all Mr. Rosen’s reasons used for determining the reasonableness of the 160% projection segmentation penetration rate must be considered together and not in isolation.

[478] It is submitted that he used benchmark data for all suite hotels as a comparison because the Westin Grand was to be an all suite hotel, and after making adjustments he considered necessary he arrived at the conclusion that each line item in the projections was reasonable and achievable.

[479] It is submitted he projected his own operating results and determined that they were only an average of 1.7% lower over the five year projection period than the HVS projections

[480] It is submitted Mr. Rosen’s alternative projections are reliable and are not manufactured results. It is submitted his adjustments were made based on the evidence together with his judgment and experience in the industry with respect to an all suite hotel.

[481] It is submitted that different experts may use different methods and different models but it is whether their opinions fall within a reasonable range that matters.

The Developers

[482] The Developers totally support the submissions of HVS and OHR that the opinions of Mr. Flood and Mr. Rosen should be accepted over the opinions of Mr. Kleinschmidt.

Investors Reply

[483] In reply to defence submissions on the weight to be given to Mr. Kleinschmidt’s opinions, counsel points out that HVS did not present any reasonable range of occupancy projections in its opinion letter but gave specific projections and given that a small change to the projections could have a major effect on the rate of return to an investor, it is submitted that the specific projections were important.

[484] It is submitted that a reasonable range of occupancy projections does not answer the point that the projections as stated were impliedly represented to have been determined using reasonable care and skill.

[485] Even if a reasonable range of projections is a relevant consideration, which is denied, it is submitted there is no evidence from any expert where the range would begin or end.

[486] It is submitted that if a reasonable range of projections is a relevant consideration, which is denied, then Mr. Kleinschmidt must be assumed to have determined in his opinions that the projections fell outside any reasonable range.

[487] It is submitted that Mr. Rosen’s alternative projections should be viewed with suspicion as being retrospective. In addition his alternative projections he submitted were not purely independent as he used some of the HVS assumptions, like occupancy levels, as his starting points.

Discussion and Analysis of the Reasonableness of the Occupancy Projections

[488] I have some difficulty in determining from Ms. MacDonald’s evidence exactly how she went about deciding that for 1999 the projected occupancy rate for the Westin Grand would be 72%, it commercial business would constitute 44% of its overall business, and its overall penetration into the competitive hotel market would be 108.8%. I have the same uncertainty as to how she decided the projections for at least 2000 and 2001.

[489] In her opinion letter of November 8, 1996 on behalf of HVS, Ms. MacDonald says on p. 1 that “the proposed 207 suite hotel’s occupancy is estimated at 72% in its first year of operation, increasing to 80% by its third year of operation” and “we believe this is reasonable in light of the strength of the downtown Vancouver hotel market, and our review of hotel occupancy levels and average room rates currently being achieved.

[490] Following that on p. 2 of her letter she says, “in order to determine if the hotel’s projected occupancy levels and average room rates were reasonable we undertook …”, and thereafter advises of her month by month occupancy analysis and supply and demand analysis.

[491] After doing her supply and demand analysis she says:

However, based on our assumptions of growth in room demand and the future competitive rooms supply, as well as our knowledge of Westin Hotels and Resorts and their outstanding performance in other hotel markets, we believe the proposed occupancies and average room rates to be achievable.

[492] In her evidence at trial when asked why she did not lower the 1999 occupancy projection for the Westin Grand with the addition of new supply in October 1996, when she lowered the occupancy projection for the competitive set, her response was that she thought the Westin Grand would open at 72%.

[493] In her evidence at trial she also said she already had an idea of what the Westin Grand’s market mix should be before she did her segment penetration analysis and her projection of 44% commercial business for the Westin Grand was in line with what she expected.

[494] She said that if her analysis had produced a projection of commercial business of 70% she would have gone back and adjusted her segmentation figures to bring them more in line with what she thought the hotel could achieve.

[495] When she was asked if the change in the Metropolitan Hotel commercial penetration rate from 141.7% to 109% would have caused her to reappraise where she put the Westin Grand’s commercial penetration rate by comparison, her response was to simply say that she looked at the overall market mix and she estimated the hotel’s commercial demand would represent 44% of its business.

[496] She also said in her evidence that she considered the Westin Grand should open at better than its fair share because of its proximity to a number of leisure demand generators, its all suite makeup which she considered to be more attractive to commercial travellers and its branding as a Westin Hotel.

[497] At the same time, at trial she spent a considerable amount of time in direct examination talking about her segment penetration analysis and how she arrived at her projections using that analysis, suggesting that it might have been the primary source for her occupancy projections.

[498] It may be that Ms. MacDonald had some idea before she did her penetration analysis of where she thought the Westin Grand would start out in 1999, but I conclude she needed to do her penetration analysis as her primary test to determine if her original ideas were reasonable.

[499] Mr. Flood says the starting point is to determine overall how the hotel will perform against the market, but then to rationalize the result by considering the different segments, although he personally does not use the segmentation analysis.

[500] Mr. Rosen doesn’t believe it matters how the final occupancy figures are arrived at as long as they are reasonable, but also says a hotel consultant acting reasonably would include a series of tests to allow him/her to satisfy themselves that the projections are reasonable. He says he assumes that HVS performed those necessary tests.

[501] I conclude that the penetration analysis was a necessary step for Ms. MacDonald to determine the occupancy rates. Absent an appropriate test or tests of her initial conclusions, as Mr. Flood says there would be no rationalization of her results.

[502] Mr. Flood and Mr. Rosen say the occupancy projections and the overall penetration rates were reasonable as being within the range of reasonableness. They do not say what that range is nor where it begins and ends. It is unknown on their evidence whether they believe the projections are barely in the range or well into the range or whether their ranges are even the same. Sharbern was a case all about reasonable ranges. This case is not in my view.

[503] I reject the suggestion that a range of reasonableness is relevant to the issue of the reasonableness of the projections here. Ms. MacDonald did not give a range of reasonableness in her opinion letter. She gave specific numbers for occupancy as reasonable projections starting with 72% in the first year and increasing to 80% by the third year. As she said, those numbers played a large part in determining rooms revenue figures that were to make up 85% - 87% of the hotel’s projected revenues which in turn would be expected to have a direct impact on the net returns.

[504] If the reasonable occupancy rate for 1999 should have been less than 72%, and less for the following years, that would have reduced the rooms revenues and reduced the net returns to the Investors, if all other numbers in the financial projections remained the same.

[505] In my view what has to be determined is whether the occupancy projections she gave were reasonable.

[506] Mr. Flood and Mr. Rosen support the 1999 occupancy rate as being higher than the competition on the basis that they consider its location to be as good for commercial business as the competitors’ locations, it was to be an all suite hotel which they view as a significant asset, and it was to be Westin branded, another significant asset to them. Mr. Rosen agrees, however, that Westin Hotels are not known for all suite hotels.

[507] At the same time Mr. Rosen says that Ms. MacDonald should have used all suite statistics for her comparisons and not full service hotel statistics and yet says she was still being reasonable once he adjusts the all suite statistics. I agree with Investors’ counsel that this is not a helpful analysis of the issue of reasonableness when Mr. Rosen also agrees with Mr. Rushmore’s opinion that hotel operating data should not be compared unless the properties are either in the same class or no more than one class apart.

[508] It is true that in her evidence Ms. MacDonald does refer to the hotel’s all suite makeup and Westin branding as reasons to consider that it should open with an overall penetration rate of more than 100%.

[509] I observe, however, that while Ms. MacDonald mentioned in her opinion letter that it was a suite hotel she only mentioned Westin Hotels and its outstanding performance in other hotel markets as a basis for believing the proposed occupancies and average room rates were achievable and made no reference at all to its all suite makeup as being of any particular significance to her.

[510] Ms. MacDonald did not use all suite data for her comparisons, she made no mention of the all suite feature in her working papers, and I am unable to accept that she considered the all suite makeup to be of any particular significance to her.

[511] Mr. Kleinschmidt says an all suite makeup is not an advantage in all cases and it depends on the market. I accept this comment.

[512] He says the commercial segment penetration rates for the Westin Grand of 160% in year one and 165% in years 2 and 3 have not been adequately substantiated. I accept this opinion as well.

[513] Mr. Rosen agrees with this criticism of the commercial market penetration rates not being adequately substantiated, but in his view that level of penetration was still reasonable in light of what he considered to be a strong economy, the hotel’s all suite makeup and its Westin branding, as well as it proximity to commercial demand generators. When questioned on the strength of the economy expected at that time and the over supply expected he says that the over supply would not necessarily be negative because it takes time to absorb new supply.

[514] In my view this does not address the fact that Ms. MacDonald brought all the new competitive supply into the market for the first year of the projection period, to fully affect the market immediately.

[515] Even when Mr. Rosen was informed of the change in the Metropolitan commercial market penetration rate he says he expected that the Westin Grand would do significantly better than the Metropolitan Hotel.

[516] Mr. Flood says a 160% commercial penetration rate is a high rate and a better rate than all the luxury chain competitor hotels, and there should be a good strong compelling reason for assigning to it a commercial rate of 160% in the first year. This makes complete sense to me and I accept this.

[517] He also agrees that if the Westin Grand’s overall penetration rate is dependent on a high penetration rate in one segment, there should be supporting rationale for that high rate. Again that is a reasonable view that I accept.

[518] Although Mr. Flood also says that segmentation is at best only an estimate, as previously stated he does consider it as a way to rationalize the overall penetration of a hotel.

[519] Mr. Kleinschmidt says the hotel’s off-centre location and close proximity to leisure and event demand generators puts it in a stronger position to attract leisure business and not commercial business. I accept this opinion.

[520] In his opinion its commercial penetration rate would not be expected to be higher than the penetration rate for hotels that have a first tier location, particularly in the first year of operation. Again I accept this opinion.

[521] He does not think its projected overall penetration rate of 108.8% in the first year is reasonable on the basis that a new hotel typically achieves less than its fair share in years one and two as it builds business and market awareness. He points out that the first year penetration rate is inconsistent with this typical situation as documented by Mr. Rushmore.

[522] I believe Mr. Kleinschmidt is saying that the Westin Grand in his opinion would be more likely to follow the traditional path of build up of business and I accept this opinion.

[523] Neither Mr. Flood nor Mr. Rosen has done his own independent analysis of what he thinks should have been the occupancy projection for the Westin Grand. Both have simply determined that the projection of 72% for 1999 is reasonable as being in the reasonable range.

[524] I believe the issue of whether a 72% occupancy projection and a 108.8% overall penetration, were reasonable projections and whether the following years occupancy rates and penetrations were reasonable, can for the most part be determined by analyzing Ms. MacDonald’s evidence on how she arrived at those numbers.

[525] On July 14, 1996 Ms. MacDonald sent to Mr. Robert O’Neill her occupancy and average daily rate estimates by month, as well as her penetration by market segment analysis.

[526] Her occupancy estimates by month showed projected occupancy rates of 72.1% for 1999, 76.7% for 2000 and 80% for 2001 – 2003.

[527] These same occupancy estimates by month were attached to her opinion letter of November 8, 1996, so they did not change in the period of time from July 14, 1996 to November 8, 1996.

[528] A page of her market segment analysis sent on July 14, 1996 also showed projected occupancies for the Westin Grand.

[529] This page showed occupancy for the Westin Grand at 71.75% rounded to 72% for 1999, with overall penetration at 100%, meaning that the Westin Grand was not expected at that time to get overall more than its fair share of the competitive hotel business in 1999. New room supply was projected at that time at 852 rooms.

[530] It appears however that this 72% occupancy was based upon the assumption of a 200 room hotel as were the occupancy rates for 2000 and 2001. At trial Ms. McDonald agreed that for 207 rooms, the size of the Westin Grand, the occupancy projections on July 14, 1996 were actually 69.3% for 1999, 74.2% for 2000 and 77.8% for 2001.

[531] After July 14, 1996 she continued to use the July 14, 1996 occupancy projections even though they had originally been based on 200 rooms. While 72%, 76.7% and 80% occupancies were also shown in her month-by-month analysis, she says she only used this analysis as a backup to her penetration analysis.

[532] On October 11, 1996, Ms. McDonald did another penetration analysis and at that time showed the competitive hotel occupancies for 1999 at 71.5% on the basis of 752 new competitive rooms being added. At trial she could not say why she added only 752 rooms on October 11, 1996 when she had added 852 new hotel rooms on July 14, 1996. Nevertheless at that time the competitive set occupancy rates were almost equal for 1999 to the Westin Grand occupancy rate.

[533] By October 16, 1996, five days later, when she did her final penetration by market segment analysis, she added in a projection of 1298 or 1299 new competitive rooms, instead of 752 or 852 rooms, with the result that she dropped her projected occupancy rates for the competitive set to 66.6% while the Westin Grand projected occupancy remained at 72% for 1999.

[534] Ms. MacDonald’s response to the implied suggestion that this was inappropriate was to say that she thought the hotel would open at 72% when she had the average of the competitive set at 71.5% and would open at 72% when her average for the competitive set was at 66.6% with the additional supply of rooms. However her original occupancy rate in her penetration analysis for 1999 had really only been 69.3% for 207 rooms and not 72%.

[535] It is my conclusion that Ms. MacDonald was determined to maintain her occupancy rates from July 14, 1996, regardless of any increase in supply or any change that should be made in the segment penetration rates for the Westin Grand. She was going to adjust matters as needed to come out to her original occupancy rates even though they appear to have been based on a 200 room hotel.

[536] Mr. Flood says that if occupancy is projected at 72% on one view of the market and then a different view of the market is developed with a drop of five points, he would expect a drop in the occupancy projections for the subject property as well. He cannot say how far it should drop but a reduction in the average occupancy for the competitive set in his view is going to affect the subject property to some degree and to assume no affect would be unreasonable.

[537] I accept Mr. Flood’s opinion in this regard. Apart from his opinion in my view it is a matter of common sense if the new supply is expected to affect the market as a whole, as Ms. MacDonald assumed.

[538] Ms. MacDonald was always comparing the Westin Grand to a competitive set of the same six hotels. She chose these hotels because they were expected by her to offer the stiffest competition. To develop an occupancy projection for the Westin Grand of 72% for 1999, erroneously on 200 rooms, and then to compare it as equal to the competitive set’s average occupancy on July 14, 1996 and as relatively equal on October 11, 1996, and then to add over 400 new rooms by October 16, 1996, rooms that Ms. MacDonald said would affect the whole competitive market equally and not selectively, and then to assign all the effect of those new rooms to the competitive hotels and none of it to the Westin Grand, is in my view completely unreasonable and negligent.

[539] In my view it is no answer for Ms. MacDonald to rely upon her conclusion of 72% occupancy for 1999, without her being able to support that through a rational analysis so that her rationale can be tested, particularly where it was stated erroneously on July 14, 1996 when it should have been 69.3% for 207 rooms.

[540] Here Ms. MacDonald says her additional rationale beyond her penetration analysis was the location of the hotel, its all suite configuration and its Westin branding.

[541] However, this rationale only put the Westin Grand relatively even with the competitive hotels, on October 11, 1996 only five days before she reached her final conclusions on October 16, 1996.

[542] In my view Ms. MacDonald has not offered any rationale for keeping the Westin Grand at 72% for 1999, when the competitive supply was projected to increase to 1,299 rooms, and has offered no rationale for only reducing the occupancy projection of the competitive set. Her stated rationale was that she thought the Westin Grand would open at 72%. In my view that is not a satisfactory explanation.

[543] It is also no answer in my view for Ms. MacDonald to say that the change in the Metropolitan Hotel commercial rate from 141.7% down to 109% for 1995, a change she agreed with, for a hotel she considered a close competitor to the Westin Grand, was irrelevant because she projected the Westin Grand’s commercial business at 44% of its total business.

[544] If this was her initial opinion, her test for this 44% projection for commercial business was the same penetration analysis that produced the 141.7% commercial penetration rate for the Metropolitan Hotel. If that rate was supposed to be lower, as she agreed it should have been, then the 44% projection for commercial business should have been lower. This would not have necessitated any change to any other segment for the Westin Grand.

[545] If the commercial penetration rate had been less than 160%, the total number of occupied rooms in the Westin Grand projected for all three segments for 1999 would have been less and its overall occupancy determined by that method would have been reduced. In my view this should have been the result.

[546] At trial Ms. MacDonald says that no matter which way the segments are changed, total occupancy does not change. She says if the commercial segment penetration rate is decreased there would be a corresponding shift in the other market segment rates. I reject this as a necessary consequence. A decrease in the commercial segment penetration rate for the Westin Grand would not create any corresponding shift in the other market segment rates because they are determined separately and independently depending on the demand in those segments.

[547] I realize that there was a lot of overall judgment that Ms. MacDonald used in her penetration analysis in determining where to place the Westin Grand against the competitor hotels in the different market segments, and what growth in demand and supply to assume before 1999. Assuming that she initially projected 72% occupancy somehow apart from her penetration analysis, she says she confirmed that figure from her penetration analysis even though her penetration analysis on July 14, 1996 indicated a 69.3% occupancy for 207 rooms for 1999. If her penetration analysis was her test and it had to be corrected because of the Metropolitan issue, it is not logical in my view for a professional consultant to simply deny what her test tells her, without good reason, and to stay with her general view.

[548] In my view her explanation for considering the change in the Metropolitan commercial rate to be irrelevant is unacceptable.

[549] The purpose of the segmentation analysis either as a primary way to determine occupancy or as a backup, is to operate as independently as possible in order to provide an independent assessment of the issue. If this is not the proper purpose of a test then I am unable to understand its utility.

[550] I have a similar problem with Ms. MacDonald’s month by month analysis which she says was a backup to her penetration analysis.

[551] In her evidence she explains that for her month by month analysis she looked at the monthly information from all the hotels she had information on, for 1995, and made a judgment where she saw the Westin Grand performing in 1999, and beyond.

[552] Counsel for HVS says in submissions that the purpose of the month by month analysis was not to derive any overall projection of occupancy but rather to take the projected occupancy from the segmentation analysis and break it down in accordance with the seasonal pattern of the market.

[553] If this is so, then I do not see it as much of a backup at all. In any event this was not evidence given by Ms. MacDonald who described it as a back up to her penetration analysis.

[554] Mr. Flood says he doesn’t use a month by month analysis as he doesn’t consider it reliable. I question it myself as it appears to be purely subjective without any reliable rationale behind it.

[555] In my view the occupancy projection for 1999 of 72% was not a reasonable conclusion and was not formulated using reasonable care and skill. HVS through Ms. MacDonald, in my view, was in breach of its duty of care to the Investors in projecting that figure and breached the standard of reasonable care and skill. It was negligent in doing so.

[556] Ms. MacDonald’s occupancy projections for 76.7% for the second year and 80% for the third year of operation in my view were also unreasonable and negligent because they were also initially based on 200 rooms and were also not reduced when the supply of over 400 rooms was added between October 11, 1996 and October 16, 1996.

[557] I am unable to conclude what the projected occupancies for the Westin Grand should have been as corrected for 207 rooms and with some additional room supply affecting it as well. I do know that they should have been lower projected rates. In my view the HVS projections of occupancy meet the test of a gross overvaluation not satisfactorily explained and outside any range of reasonableness even if that is a standard that has any applicability.

[558] Mr. Kleinschmidt may not have had practical experience in the Vancouver market in the 1990s and he may not have done his own projections for the Westin Grand either but in my view he did know enough about the Vancouver market to say that the Westin Grand was in an off-centre location, closer to leisure and demand generators, putting it in a stronger position to attract leisure business and not commercial business, and it would not be expected to have a commercial rate higher than the competitor hotels particularly in the first year of operation.

[559] In the November 1998 Business Plan OHR, who had experience in doing hotel evaluations, said that a strength for the Westin Grand was its location in the downtown entertainment district and a weakness was that it was not in a number one location for the financial district market and the threat was in its ability to penetrate the financial district market. Even though this was an opinion expressed in 1998, the location of the Westin Grand remained the same between 1996 and 1998 and these opinions support Mr. Kleinschmidt’s opinions in this regard.

[560] I accept these opinions over the opinions of Mr. Flood and Mr. Rosen and of course the opinion of Ms. MacDonald.

[561] I also accept the opinion of Mr. Kleinschmidt that an overall market penetration rate of 108.8% in year one was not reasonable as a new hotel typically achieves less than its fair share in years one and two as it builds business and market awareness. I conclude that this is Mr. Kleinschmidt’s opinion of the Westin Grand and I accept this opinion as well.

[562] On all the evidence of location, quality of hotel, branding and all suite nature, I am not satisfied there was any discernable advantage for the Westin Grand over the six competitor hotels and I reject the opinions of Mr. Flood, Mr. Rosen and Ms. MacDonald to the contrary.

[563] In conclusion I find that HVS was negligent in giving its opinion in its letter of November 8, 1996 that the annual operating projections for the initial five years were reasonable and achievable when its projected occupancy levels that played a large part in determining projected revenues were negligently overstated.

[564] I also hold that as the Developer and OHR by s. 1.4 of the Disclosure Statement and the wording in the Auditors’ Report and Notes represented that the Projection and assumptions and hypotheses were objectively reasonable, that these constituted negligent misrepresentations as well when the assumption of occupancy rates set out at Note 2(a) was not objectively reasonable and the Projection was not therefore objectively reasonable, and when the Developer and OHR had represented that they were objectively reasonable.

Consistency between Penetration Analysis and Month by Month Analysis

[565] Investors’ counsel submits that the month by month analysis of occupancy rates Ms. MacDonald did and her penetration analysis of occupancy rates in fact do not confirm each other as the month by month analysis that yielded 72.1% occupancy for 1999 had been developed by selecting monthly occupancies for the Westin Grand for 1995 against 1995 data for the competitive set where the average occupancy was 78.6%, reflecting a view of the Westin Grand as underperforming the average for the competitive set.

[566] Investors’ counsel points to Mr. Flood’s evidence again that in his view they are two different things and that what should have been done was the 1995 month by month data should have been adjusted to 1999 and then the comparison done at that time.

[567] As I understand Ms. MacDonald’s evidence, however, she assessed the month by month occupancy rates for 1999, in her own mind, and was not assessing the Westin Grand monthly rates for 1995. It was her opinion, using the month by month analysis, that these were the monthly occupancy rates for the Westin Grand that she thought would be achieved in 1999.

[568] I see no breach of any duty of reasonable care and skill on the part of HVS in this regard in developing these month by month occupancy projections. I have already commented on the overall utility of the month by month analysis as a backup to the penetration analysis in any event.

1995 Segment Penetration Rates used for 1999

[569] The Investors allege that Ms. MacDonald should not have used 1995 segment penetration rates for the six competitor hotels to compare against her projected 1999 segment penetration rates for the Westin Grand. Instead they say she should have taken into account changes reasonably anticipated to the segment penetration rates for the six competitor hotels through to 1999, and should also have taken into account the reasonable effect that the 1299 additional rooms that she projected would have on the individual segment penetration rates, in developing her segment penetration rates for the Westin Grand for 1999.

[570] This is the opinion that Mr. Kleinschmidt expresses in his report and at trial.

[571] Investors’ counsel points out that while the expert hotel valuator for OHR, Mr. Rosen, says that “the new supply coming on line would not alter the market mix for the hotel. The impact of the new supply would affect the whole market, not just the hotel”, he also describes in his report procedures for developing occupancy projections for market study reports to include analysis of “the impact of new supply on this specific property’s potential to attract demand from each market segment”.

[572] Ms. MacDonald says in her evidence that in 1996 HVS did not project how each competitive hotel would do in its segments in the future, nor project how future supply would fit into each segment. All HVS projected was a change to the overall market through supply and demand and how the subject hotel would be expected to do in that market.

[573] She explains that she did not project any market segment changes for the competitive set because it would have been very unreliable. Around the year 2000 HVS did have programs for projecting the competitive hotels segment rates forward, but then realized that what it was doing was projecting every hotel’s occupancy into the future. That was considered unreliable because HVS did not have enough information as to the marketing plans or business plans of those hotels or their management makeup. HVS did not consider it part of their mandate to do this and they did not include it in their reports dealing with projected occupancies of their subject hotel.

[574] In cross-examination Ms MacDonald acknowledges that Mr. Rushmore had said in a 1992 text that this should be done. However, she says that while HVS had a program that did this in 1992, by 1996 it had the penetration program that did not do this.

[575] Counsel for HVS points out that Mr. Flood says that changing segmentation rates in the competitive market on an ongoing forward basis was not done in 1996 and he was not aware of any consultants doing it. Even Mr. Kleinschmidt says in his evidence that obtaining a competitive hotel’s future plans respecting what market mix to target is often difficult to obtain because it is strategic in nature.

[576] On this issue I accept the evidence of Ms. MacDonald and Mr. Flood that projecting market segment changes forward for the competitive set and projecting the effect of additional supply on each segment was not generally done in 1996 and I conclude it was not unreasonable for Ms. MacDonald to have proceeded as she did without regard to those considerations.

Missing Information in the HVS Opinion Letter

[577] The HVS opinion letter of November 8, 1996 informs the reader that it has completed a room night analysis taking into consideration future growth in room night demand as well as future growth in competitive room supply.

[578] Future competitive room supply is projected as increasing by 60% or 1299 additional guest rooms. No percentage is giving in the letter for the projected increase in room night demand. Ms. MacDonald had projected that increase to be 34.8%.

[579] The opinion letter also informs the reader that the projected occupancy rate for the Westin Grand in its first year of operation is estimated at 72% increasing to 80% by its third year.

[580] The opinion letter does not give any information to the investors on projected occupancy rates for the competitive set. Ms. MacDonald had projected those rates at 66.6% for 1999 increasing to 71.2% by 2001.

[581] Investors’ counsel says that disclosure that demand was expected to only grow at 34.8% when supply was expected to grow by 60% would have alerted the Investors to the prospect of a significant change in the market from the levels for 1995. He submits this was selective disclosure amounting to only a half truth at best and made the HVS opinion letter misleading.

[582] He also points to the evidence of Mr. Flood and Mr. Rosen that reporting on projected market occupancy levels is relevant and material information.

[583] In his evidence Mr. Flood agrees it would be good practice to report on the drop in the competitive set occupancy as this would be an important background fact in considering the performance of the subject property to the extent it affects the performance of the subject property.

[584] At one point in his evidence Mr. Rosen says that he would report on the expected market occupancy in the projection period but at another point only says that he probably would.

[585] Investors’ counsel relies upon a decision of the Alberta Court of Appeal in Xerox Exploration Ltd. v. Petro-Canada, 2005, 256 D.L.R. (4^th) 218 where the court found Petro-Canada liable for making a misrepresentation by failing to disclose the full truth about its drilling efforts once it had raised the issue.

[586] In the course of the judgment at ¶57 the court cited Professor Waddam’s The Law of Contract 4^th Edition where he said that:

An incomplete statement may be as misleading as a false one, and such half truths have frequently been treated as legally significant misrepresentations. Almost always something is said to induce the transaction and it is open to the court to hold the concealment of the material facts can, when taken with general statements, true in themselves but incomplete, turn those statements into misrepresentations.

[587] HVS was retained by the Developers to review and comment on the annual operating projections prepared by OHR for the Westin Grand.

[588] This retainer does not define all that HVS in fact did, but that is what the potential investors were told was its retainer in the HVS opinion letter of November 8, 1996.

[589] The opinion letter does not indicate to the potential investors that HVS will also be reviewing and commenting on projections for the competitive set and HVS does not purport to do that by its letter.

[590] I do not consider the statement in the letter about the occupancy projections for the Westin Grand to be at all misleading and incomplete in the context of the representation that this was a review engagement only of the projections prepared by OHR.

[591] The statements made as to future room supply are also complete in themselves, in my view, and they would not mislead the potential investors into believing something more optimistic than what was actually written.

[592] The investors were told that the Westin Grand was expected to be competitive with six other hotels that had an overall average occupancy for 1995 of 78.6%. They were told that the competitive room supply was expected to increase by 60% and they were told that the Westin Grand had an estimated occupancy rate of 72% in its first year of operation. From these facts alone they could easily conclude that the entire market, including the Westin Grand, was expected to come down by 1999 and from that could easily conclude that supply was likely going to exceed demand as one of the reasons.

[593] I do not consider the disclosure of projected future competitive room supply without disclosure of projected room night demand to be an incomplete statement and misleading.

Failure to ensure the exchange of relevant information between OHR and HVS and collaborate on the projections

[594] The Investors allege that OHR and HVS failed to fully collaborate on the Projections and exchange relevant information and both were negligent in that regard. Specifically it is said both were negligent in not taking into account that OHR originally suggested that there should be a “ramp up” over an initial period of time to recognize the start-up nature of the Westin Grand when its occupancy rates would not equal the occupancy rates of the competitor hotels.

[595] The Investors say that the Developer was also a collaborator on the Projections as well, and was aware of initial differences between OHR and HVS, but did nothing to understand nor analyze the Projections in order to be able to critically assess the assumptions underlying it.

[596] In June 1996 Mr. Robert O’Neill of OHR sent to Ms MacDonald his projections. His cover fax to Mr. Evans of the Developer advising of this said that “attached was presented to Betsy MacDonald of HVS today. She likes the numbers”.

[597] The attached included a page of occupancy projections for Mr. O’Neill’s competitive set of four hotels of 78.6% for 1999, 79% for 2000, 79.4% for 2001, 79.8% for 2002 and 80.2% for 2003.

[598] Another page of his projections showed occupancy projections for the Westin Grand of 76.6% for 1999, 79% for 2000, 79.4% or 2001, 79.8% for 2002 and 80.2% for 2003. Accordingly he was suggesting a “ramp up” for only the first year based upon his competitive set.

[599] Ms. MacDonald says she did not receive the page of competitive hotel occupancy rates from OHR. She proceeded ahead on her own and did her consideration and formulation of the expected occupancy rates for the Westin Grand against her expected occupancy rates for her competitive set of six hotels.

[600] The Investors say that OHR withheld this information from HVS that it expected that it would take the first year, 1999, for the Westin Grand to achieve parity with the competition, and that HVS never asked for this information from OHR even though Ms MacDonald says it was relevant information and she should have had it.

[601] The Investors say that when Ms MacDonald replied to Mr. O’Neill’s projection figures with projections of her own, saying that his occupancy figures for the Westin Grand were too high in the first two years mainly due to the competition expected to enter the market during the same time period, and stating that she would try to reach him, Mr. O’Neill never reviewed her projections and never claimed to recognize that she was being more aggressive in her market penetration for the Westin Grand than he was.

[602] The Investors seek an inference from the court that disclosure to HVS of the more conservative approach of OHR to the issue of market penetration would have resulted in a downward influence on the HVS occupancy projections for the Westin Grand.

[603] OHR was also in possession of information on operating expenses at other Westin Hotels in Canada that Mr. Robert O’Neill did not provide to Ms. MacDonald. He says that he did not consider this information relevant. Ms. MacDonald says in her evidence that it was relevant information that she did not have and did not know was available but also did not ask for.

[604] It is my conclusion that the entire onus and responsibility for obtaining and considering relevant information on the projections rested with Ms. MacDonald of HVS.

[605] This was not a true review engagement for HVS. It was a mischaracterization for Ms. MacDonald to say in her opinion letter of November 8, 1996 that she had only reviewed the annual operating projections prepared by OHR. She may have originally been retained to do only that but the fact is that in the vital area of the projections for the occupancy and average daily rates for the Westin Grand she was not only reviewing and commenting on the projections prepared by OHR. She was preparing her own occupancy and average daily rate projections from her own sources of information and on her own assessment and was not collaborating on occupancy rates with OHR at all, although OHR ultimately accepted her projections. They did collaborate on the average daily rate projections that are not attacked by the Investors.

[606] In her evidence Ms MacDonald explains the different types of valuation reports that can be issued.

[607] She describes a review engagement as one of the smallest and least expensive, a limited scope report involving opining on someone else’s numbers.

[608] The next type of report of more significance is an occupancy and average daily rate letter of 20-30 pages, which includes a site description, an area review, a description of the improvements, an indication of who is considered the competition, a projection of future supply and demand and a projection of occupancy and average room rate.

[609] The next type of report of more significance is a market demand study which has everything that the occupancy and average room rate letter has, but in more detail – like 60 pages, and includes a ten year forecast.

[610] Finally there is an economic feasibility study that is more detail again taking the ten year forecast to a discounted cash flow and present value.

[611] Following that are appraisal reports which can be restricted letters of value, a summary appraisal report or a full narrative appraisal report.

[612] In cross-examination by counsel for OHR, it was suggested to Ms MacDonald that she had not opined on OHR’s projection at all but on a projection of November 1, 1996 which contained a number of her own modifications and it was suggested it would be fairer to say that she had reviewed the projections of OHR and adjusted them where considered appropriate. Ms MacDonald agreed to all of this.

[613] Counsel for the Investors went further with Ms MacDonald in cross-examination. He pointed out to her that she had projected demand and supply and occupancy and average room rates as in an occupancy and average room rate letter she spoke of, and she agreed to that as well.

[614] It was also suggested that she had done a ten year forecast here, part of a market study report, and a valuation of the project, part of a feasibility study, and she agreed with that as well.

[615] Finally she agreed that while she was only retained for a review engagement that is not all she actually did.

[616] In his evidence at trial Mr. Flood said that what HVS omitted to do if it had been preparing its own feasibility study or market study was in the reporting. It appeared to him that HVS had taken the necessary steps to develop a pro forma for the hotel because there was information on supply and demand, occupancy and average daily rate, and other revenues and operating expenses. What was missing was the reporting of the analysis.

[617] I am not sure what kind of report I should call HVS’s opinion letter. It appears to me to be an abbreviated occupancy and average room rate report. Perhaps it also is an abbreviated market study report.

[618] What I am sure of is that it is not a typical review engagement report, by far.

[619] If more collaboration with OHR was being sought, in my view it was up to Ms MacDonald to seek that collaboration.

[620] If Ms MacDonald wanted to hear OHR’s view of projected competitive occupancy rates through the five years it was up to her to seek that information from OHR.

[621] As it was, Mr. Robert O’Neill’s “ramp-up” of the projections for the Westin Grand was only with respect to the first year, 1999. Thereafter he had the Westin Grand even with his four competitor hotels.

[622] I reject any inference that Ms MacDonald’s opinion would necessarily have been any different with OHR’s projections at hand.

[623] My conclusion is the same with respect to the information that OHR had with respect to the performance in other Westin Hotels in Canada. If Ms MacDonald wanted this information, it was for her to obtain either from OHR or otherwise, if she was interested in having it. She made no attempt to do so.

[624] I conclude from Ms MacDonald’s evidence that she accepts responsibility for sourcing the information necessary for her opinion and does not seek to impose any of this responsibility on OHR.

[625] I also reject any suggestion that the Developer was collaborating on the Projections with HVS and OHR. In my assessment of all the evidence the Developer was relying entirely on OHR and HVS for the financial projections and they knew that and accepted that.

[626] While this is factually what happened, based on the evidence, it does not affect the representation that the Developer and OHR made to the Investors in s. 1.4 of the Disclosure Statement and in the Notes.

Projections of Expenses

a) Rooms Expenses

[627] On July 24, 1996 Ms. MacDonald had estimated rooms expenses at 29% for year one, 27.5% for year two and 25% for years 3 – 5.

[628] The final Projections set rooms expenses at 28% of room revenue for 1999, 25.6% for 2000 and 24.6% for 2001 - 2003.

[629] Ms. MacDonald says the reduction to 28% in 1999 was as a result of discussions with Mr. Rob O’Neill of OHR of efficiencies he thought he could achieve based on his experience, including his experience at the Inn at Westminster Quay.

[630] She says the average room rate in 1999 dollars was going to be 40 – 50% higher than for 1995 and a lower percentage room expense would be considered reasonable.

[631] She says for succeeding years after 1999 she used a fixed/variable program that automatically calculates the rate based on occupied room nights and room revenue.

[632] In the opinion letter of November 8, 1996 she says that the projected departmental expenses, which would include rooms expenses, are consistent with industry averages and similar to actual results achieved by other hotels operated by Innventures with exceptions for energy expenses and property operations and maintenance expenses.

[633] Mr. Kleinschmidt says that the rooms expenses stabilizing at 24.6% in year three is a lower figure than the market average for full service hotels in 1995 of 30.8% and lower than for the competitive hotels of 27.3% - 31.7%, without any rationale. He considers the Inn at Westminster Quay not to be a good comparison as it functions in a different market location and is a different quality hotel.

[634] He also says the weighted average for Canadian Westin Hotels was 29.4%.

[635] Mr. Flood says that not all full service hotels across Canada submit their data so statistics from those hotels must be taken with a grain of salt.

[636] In his view comparing industry averages is a flawed practice because higher revenues result in a lower cost on a percentage basis. In his view costs should be considered on a dollar cost per room basis.

[637] Mr. Rosen also says that room expenses as a percentage of revenue would decline as rooms revenues increase. He says that considering room expenses as a percentage of room revenue is misleading because costs vary with occupancy. In his view a better comparison is costs per occupied room and he is of the view that rooms expenses could range from 20% - 30% of room revenue.

[638] He also does not consider data from the Westin Bayshore to be comparable because of its size and amount of public space and staffing levels.

[639] I accept the opinions that as room revenue goes up the percentage applicable to rooms expenses will likely go down and that there can be quite a wide variation in the percentage applied to rooms expenses depending upon the level of rooms revenue.

[640] I do not find the projections of rooms expenses proven to be unreasonable.

b) Energy Expenses

[641] The final Projections estimated energy expenses at 1.95% of total revenue for year one, 1.76% for year two and 1.69% for years 3 – 5.

[642] Mr. Kleinschmidt says the benchmark average for hotels is 2.4% and the actual energy expenses for the competitor hotels were 1.69% to 4.8%.

[643] In the HVS opinion letter Ms. MacDonald says that energy expenses for all ages and locations of hotels in the Price Waterhouse and PKF Consulting National Surveys range from 3.8% - 4.6% of total revenues. She says “assuming that the Westin Grand is a ‘state of the art’ facility with advanced and monitored energy systems, the projected energy expenses may be achievable.” (Underlining added.)

[644] In her evidence Ms. MacDonald says she looked at the ratio as a percentage per available room and per occupied room based on a conference with the Developers that they were going to have a state of the art facility and energy expenses were going to be lower than national averages.

[645] She says that she has in fact seen new hotels with lower than national averages for energy and she only said in her letter that it could possibly be achievable.

[646] Mr. Flood says that as the Westin Grand was to have limited public areas and was to incorporate energy efficiency, this would result in a lower cost.

[647] Mr. Rosen says that these projected figures were reasonable and achievable in relation to all suite hotels but that over the projection period this is not a material issue in any event.

[648] In my view, in the HVS opinion letter Ms. MacDonald did not give any opinion that could be reasonably relied upon as to the level of energy expenses projected. She indicated that they were lower than national surveys. She only said that assuming the hotel is a state of the art facility they may be achievable. I have no evidence that the assumption of a state-of-the-art facility, is not correct.

[649] In my view she did not exercise any lack or reasonable care in considering the issue and stating what she did state in the HVS opinion letter.

[650] In any event the range she gave was still within the range for the competitive hotels.

c) Property Operations and Maintenance Expenses

[651] In the final Projections these expenses were set at 2.45% of total revenue for year one, 3.07% for year two, 2.97% for year three, 2.96% for year four and 2.97% for year five.

[652] Mr. Kleinschmidt says that the figures for the first two years are acceptable but the figures for years three to five of 2.96 and 2.97% are lower than industry benchmarks for full service hotels of 4.3% of total revenue.

[653] The HVS opinion letter says that the projected property operations and maintenance expenses are low when compared to the national averages for other hotel properties. It says it is important to note that during a new hotel’s initial years of operation there are commonly warranties in effect that lower this expense and in addition this hotel operation will not include the expense of operating and maintaining the food and beverage facilities and parking facilities which would increase this expense category.

[654] In her evidence Ms. MacDonald says that based on discussions she had with Mr. Ian MacAulay of Innventures (OHR) she took a deduction for the first five years for warranties in effect.

[655] She agrees her common practice was to use a three year reduction but Mr. MacAulay said it could be five years. Since she didn’t have any reason to disbelieve him she accepted it.

[656] Mr. Flood says the limited amount of food and beverage expenses and meeting space expenses would result in a lower cost and costs should be considered on a dollar cost per room basis.

[657] I have no evidence that in 1996 warranties could not have been considered as in effect for five years and be lower for this hotel as it would exclude the expense of operating and maintaining the food and beverage facilities and parking facilities.

[658] I am unable to say that Ms. MacDonald did not exercise reasonable care and skill in coming to these projections.

Disclosure Declarations in 1996

[659] The Developers and the partners’ directors signed a Declaration as part of the Disclosure Statement that “the foregoing declarations (meaning the contents of the Disclosure Statement), constitute full, true and plain disclosure of all material facts relating to the Development … as required by the Real Estate Act …”

[660] In addition the directors of the partners signed separate Declarations that the Disclosure Statement “contains no untrue statement of material fact, and does not omit to state a material fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made, and every matter of fact stated in the Disclosure Statement is true.”

[661] The Investors say there was no full, true and plain disclosure of all material facts in the Disclosure Statement because, again, there was no disclosure in the HVS opinion letter of the future occupancy rates HVS projected for the competitive market in the projection period of 1999 to 2003 and there was no disclosure of 34.8% as the projected hotel room demand growth from 1996 to 1999 to go along with the disclosed 60% projected hotel room supply growth in the same time period. The Investors say the disclosure of the 60% projected hotel room supply growth was only a half truth and was misleading, without the disclosure of the material fact that the projected hotel room demand growth was only 34.8%.

[662] The occupancy rates for the projected competitive market in 1999 to 2003 and the projected room demand growth are both projections for the future.

[663] The issue is whether these projections were “facts” for the purpose of the Declarations of material fact.

[664] I do not consider that the projections for the competitive hotel market occupancy rates in 1999 – 2003 nor projections for the increase in room night demand in the competitive hotel market for 1996 – 1999, constitute facts of which the Declarations speak. They are forecasts.

[665] The Declarations deal with matters of existing facts or existing plans of the development and not with matters of projection or forecast only.

[666] In my view there was no failure to disclose this information by the Declarations.

1999 Alleged False Representations

[667] The Investors claim that the Developers and directors made false representations in their Declarations to the Second Amendment to the Disclosure Statement, dated March 19, 1999.

[668] The Investors also claim that the Developers as well as OHR breached common law duties owed to them to correct original express and implied representations through the original Disclosure Statement, about the 1996 projections, that they knew were no longer true as of the Second Amendment.

[669] The Investors make a separate claim as well that a false representation was made by the Developers and OHR Grand in attaching as Schedule D to the HMA signed at closing the Operating Plan and Budget for 1999 that was included in the original Disclosure Statement, when it was no longer the true budget prepared for 1999.

The Second Amendment

[670] A Second Amendment was made to the Disclosure Statement on March 19, 1999.

[671] The Developer and the directors of its partners made the same declaration as they had in 1996, but updated to March 22, 1999, that:

The foregoing declarations constitute full, true and plain disclosure of all material facts relating to the Development referred to above, proposed to be sold, as required by the Real Estate Act of the Province of British Columbia, as of the 22^nd day of March 1999.

[672] A similar Director’s Declaration to 1996 was also included and signed by Mr. Evans as a director of two of the partners and Mr. Norman Cressey as director of the third partner. It stated:

That the Original Disclosure Statement, as amended by the Amendment to Disclosure Statement, contains no untrue statement of a material fact, and does not omit to state a material fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made, and that every matter of fact stated in the Original Disclosure Statement, as amended by the said Amended to Disclosure Statement, is true.

[673] The Investors say that these declarations were false representations because it was not disclosed as material facts by the Second Amendment:

a) that the Developer and/or OHR no longer had any honest or reasonable belief that the assumptions and hypotheses upon which the projections were originally based were still reasonable and reflected circumstances that were likely to exist.

b) that there were other undisclosed material facts that would or might prevent the projections from being realized or seriously undermine the accuracy of the projections.

c) that property taxes would no longer be based on residential rates in year one.

Who benefits from the Second Amendment

[674] The first issue to determine is which Investors can benefit from any deficiency in the Second Amendment

[675] Investors’ counsel advises that by the end of 1996 there were Sale Agreements in place for all of the units although some units were later assigned to other purchasers leading up to closing. A few sales collapsed and those units were remarketed by the Developers to and beyond April 1999.

[676] An amendment to a Disclosure statement becomes part of the original Disclosure Statement. It is not a new Disclosure statement.

[677] If an amendment is required before a binding Sale Agreement is entered into by an investor, in my view it must be delivered along with the Disclosure Statement.

[678] I conclude that Pirog v. Carnarvon, [1990] B.C.J. 2916 and Beaton v. Pygrom (1991), 56 B.C.L.R. (2d) 18, only stand for the proposition that an investor who received a Disclosure statement and then entered into a binding contract of purchase and sale does not obtain any new right of rescission upon filing of a subsequent amendment to the Disclosure statement.

[679] In my view it would defeat the whole purpose of a required amendment if it did not become part of the original Disclosure statement for the purpose of delivering to a potential investor prior to the execution of a binding agreement of sale.

[680] Section 56 of the Real Estate Act says that ss. 50, 53, 54 and 55 apply to the amendment. Section 59 is not mentioned. Does this mean that s. 59 does not apply to an amendment to give investors their statutory cause of action set out in s. 59, for any amendment to the disclosure statement delivered to them before they execute their Sale Agreement?

[681] In Pirog, Boyd J. pointed out that s. 56 did not provide that s. 63 dealing with rescission applied. She said that there was nothing in the statute that specifically provided a right of rescission on receipt of an amended Disclosure statement and if such a statutory right of rescission applied than s. 56 would have provided that s. 63 applied as well.

[682] In Beaton, Spencer J. was urged not to follow Pirog but he said that decision was supported “by careful reasoning based upon a strict construction of the statutory language in a way that interferes as little as possible with the contract between the parties, and to rely upon the rule of construction that where a statute expressly includes one matter but makes no mention of another, that other was deliberately excluded.”

[683] This is known as the “implied exclusion rule”. Investors’ counsel submits that this is only a presumptive rule of construction and can be rebutted by evidence that the consequences would defeat the overall object of the statute, would be manifestly absurd, and would result in an injustice.

[684] I agree with Investors’ counsel that the implied exclusion rule should not apply here in these circumstances. I can see no logical reason why reliance on s. 59 would be denied to purchasers who entered into binding Sale Agreements after receipt of an amendment that must be delivered to them before they contract. In my view that would be a complete injustice.

[685] Both Pirog and Beaton concerned circumstances where the amendment was made after the Sale Agreements were entered into and the claimants were claiming new rescission rights following the amendment.

[686] Here the circumstances are that some investors may not have entered into their Sale Agreements until after the Second Amendment.

[687] Spencer J. in Beaton said that Pirog appeared to be a decision rendered nisi prius, although he considered the decision to be binding upon him.

[688] Here I consider that to apply the implied exclusion rule would deny to purchasers following the Second Amendment statutory rights that had been available to purchasers who contracted before the Second Amendment, thereby creating two classes of purchasers. This cannot be the result in my view.

[689] I conclude that the implied exclusion rule is not to be applied to s. 56 to deny purchasers who contracted by Sale Agreements for the first time following amendments, their statutory rights available under s. 59 and s. 63 of the Real Estate Act.

[690] I doubt if that would include any purchasers after any amendments who took assignments of Sale Agreements entered into before the amendments, although I have not received specific submissions on this issue.

[691] Investors’ counsel also submits, as I understand it, that if there is no material false statement in the original Disclosure Statement but thereafter a failure to amend it to disclose new material facts, the Business Plan for instance, then even the 1996 investors who entered into binding Sale Agreements prior to any amendment should also be able to rely upon s. 59 rights for any failure of disclosure in the later amendment.

[692] I reject this submission. Any investors who contracted by binding Sale Agreement prior to any amendments are not entitled to rely for any statutory rights on any duty to amend for any changes thereafter. Their statutory rights are crystallized at the time they signed their binding Sale Agreements.

Alleged non-disclosure

[693] The allegation of non-disclosure in the Second Amendment that the Developer and/or OHR no longer had any honest or reasonable belief that the assumptions and hypotheses on which the projection had been based were still reasonable, is based on the original representation in that regard made in s. 1.4 of the Disclosure Act that said:

The Projection has been prepared based on assumptions and hypotheses which reflect the course of action planned by the Developer and O’Neill for the period covered by the Projection given the judgment of the management committee of the Developer and management of O’Neill as of November 8, 1996, as to the most probable set of economic conditions

and

[694] It is alleged that these representations were no longer true and had to be corrected by the Second Amendment because of the existence of the information in the HVS Opus report and the information in the Business Plan in November 1998 that included budgets for 1999 and 2000.

[695] The allegation of non-disclosure of other material facts that would or might prevent the projections from being realised or seriously undermine the accuracy of the projection is again related to the existence of the Opus report and the Business Plan.

[696] The allegation of non-disclosure that property taxes would no longer be assessed at residential rates in year one, is based upon the allegation that the statements to that effect in the Notes were known by the Developer to be no longer true by the time of the Second Amendment and were required to be corrected.

[697] The obligation to file an amendment to a Disclosure Statement is set out in s. 56 (s. 73) of the Real Estate Act as follows:

If a change occurs with regard to any of the matters set out in any prospectus

(a) that would have the effect of rendering a statement in the prospectus false or misleading; or

(b) that brings into being a fact or proposal which should have been disclosed in the prospectus if the fact or proposal had existed at the time of the filing,

(c) the developer shall immediately notify the superintendent in writing and shall file an amendment to the prospectus or a new prospectus as the superintendent may direct. Sections 50, 53, 54, and 55 apply to the amendment or new prospectus.

[698] The essentials of s. 56 are that it covers:

· a change to any matters in the prospectus

· that would have the effect of rendering a statement in the prospectus false or misleading; or

· that brings into being a fact or proposal that should have been disclosed in the prospectus if the fact or proposal had existed at the time of filing.

[699] A “matter” must cover anything in the Disclosure Statement.

[700] The Canadian Oxford Dictionary, 1998 includes the following relevant definitions:

“statement” – (1) the act or an instance of stating or being stated; expression of words; (2) a thing stated, a declaration.

“false” – not according with fact; wrong, incorrect.

“misleading” – giving the wrong idea or impression.

“fact” – (1) a thing that is known to have occurred, to exist, or to be true; (2) a thing that is believed or claimed to be true; (3) a piece of evidence, an item of verified information, or events and circumstances as distinct from their interpretation; (4) truth, reality; (5) a thing assumed as the basis for argument or inference.

“proposal” – (1) the act or an instance of proposing something; a course of action etc. so proposed; a written document outlining a proposed undertaking; (2) an offer of marriage.

[701] The Investors say that the statement in the Disclosure Statement that was rendered false by the Business Plan was the belief of the Developers and OHR in the Projection and the assumptions and hypotheses as set out in s. 1.4 of the Disclosure Statement, and this change in belief was required to be covered in the Second Amendment by s. 56(a).

[702] The Developers and OHR point out that the statement of belief in s. 1.4 is restricted to a time period as of November 8, 1996 and the preparation of the Projection.

[703] The Investors say that these beliefs of the Developers and OHR were brought forward by the Second Amendment through the Developer’s Declaration that says “there is full disclosure of all material facts relating to the development … as of the 22^nd day of March 1999.”

[704] In my view the statements of belief in s. 1.4 of the Disclosure Statement have not been rendered false or misleading by any change in beliefs thereafter as the statements in s. 1.4 relate to the time period as of November 8, 1996 and were not brought forward by the Second Amendment. What was brought forward was the entire statement of belief as of November 8, 1996 and not merely the statements without the stated time period.

[705] Accordingly, even if there was a change in the beliefs of the Developers and OHR by the Business Plan or otherwise after November 8, 1996, those changes of beliefs did not render the statements of belief in s. 1.4 false or misleading in order to require any amendment for that reason under s. 56(a) of the Real Estate Act.

[706] Apart from the statements in s. 1.4 that were restricted to the time period as of November 8, 1996, the Investors were also cautioned that the assumptions and hypotheses may prove to be incorrect. The Auditors’ Report on Financial Projection informed the potential investors that the projection was based on assumptions regarding future events, that actual results will vary from the information presented even if the hypotheses occur, and that the variations may be material. The Notes to Financial Projection told the potential investors that “the assumptions disclosed herein are those that management believes are significant to the projection. The assumptions are inherently subject to uncertainty and variations depending on evolving events and circumstances occurring subsequent to the date of this projection.” (Underlining added.) The notes also stated “Management does not intend to update this projection subsequent to issue.”

[707] Section 6.8 of the Disclosure Statement also sets out risk factors for the Investors to consider such as the risk of investing in real estate generally, an absence of any operating history for the hotel, the location of the hotel and the competitiveness of operating a hotel.

[708] A change did occur by 1998 with regard to the matter of expected property taxes when the policies of the B.C. Assessment Authority changed to assess the first year at commercial rates. Mr. Evans learned about this in 1998 through his interest in developing the Opus Hotel.

[709] This change rendered false the hypothesis in the Notes to Financial Projections that said, “It is expected that for 1999 the property will be classified as residential property.”

[710] Again, however, as with the other hypotheses and assumptions, the Developer and OHR only stated their beliefs as of November 8, 1996 and that statement concerning the expected property taxes for the first year was not rendered false or misleading by any change of policy in 1998, because it also was restricted to a belief as of November 8, 1996 and therefore was not required as an amendment under s. 56(a) of the Real Estate Act.

[711] I turn next to a consideration of s. 56(b) that requires an amendment to a Disclosure Statement when a change occurs to any matter in the Disclosure Statement that brings into being a fact or proposal that should have been disclosed in the Disclosure Statement if the fact or proposal had existed at the time of filing of the Disclosure Statement.

[712] I will consider firstly the issue as to what is a “fact” meant by s. 56(b).

[713] The Investors again say that the change was to the matter of the express statements of belief made in s. 1.4 of the Disclosure Statement, brought about by the Opus report and the November 1998 Business Plan, as well as the change to the expectations concerning property taxes in the first year. They say the “facts” brought into being were that the original statements of belief were no longer true.

[714] I accept that assumptions and hypotheses and projections considered reasonable by the Developers and OHR and the course of action planned and their judgment as to the most probable set of economic conditions are all matters that could all change over time. However, I do not believe that the word “fact” in s. 56(b) includes any change in belief in what was said in s. 1.4 of the original Disclosure Statement, because the issue of a change in belief is a matter already covered by s. 56(a) if it has the effect of rendering a statement in the Disclosure Statement false or misleading, and any change in belief here did not render the statement in s. 1.4 false or misleading as it was restricted to November 8, 1996. Accordingly I conclude it cannot be at the same time a “fact” within s. 56(b), brought into being.

[715] The defendants say that the word “fact” brought into being here must refer only to an existing thing and not to any new projection such as the November 1998 Business Plan with new assumptions and hypotheses because projections cannot be facts.

[716] I agree a new projection itself cannot be a fact brought into being for the purpose of s. 56(b). Accordingly, even if the hypotheses and assumptions changed after November 8, 1996, that did not bring into being any fact, but at most a new projection. In my view the Business Plan was not a new fact but a further projection. In the context of s. 56(b) “fact” must only refer to an existing thing.

[717] I also observe that the word “fact” in s. 56(b) is coupled with the word “proposal”. Although a “proposal” is a form of planning as opposed to merely projecting, it speaks of the future as well and not the present. This is another indication to me that a fact in s. 56 must be an existing thing, as distinct from a future projection or new assumptions and hypotheses associated with it.

[718] I turn next to the question of whether a change to any matter in the Disclosure Statement brought into being a “proposal” within s. 56(b) which should have been disclosed in the Disclosure Statement if it had existed at the time of filing.

[719] The OHR Business Plan could become a proposal in my view if it was a settled proposal accepted by the Developer.

[720] The evidence surrounding this is quite contentious as to whether the Business Plan or at least the year 1999 and 2000 budgets contained therein were proposed to be instituted.

[721] On November 6, 1998 the Business Plan in draft was presented by OHR personnel to Developers personnel at a meeting at OHR’s offices in Vancouver. The Business Plan was a comprehensive document including a Mission Statement, an Executive Summary, a Three Year Strategic Plan, and 1999 and year 2000 Operating Budgets.

[722] The Executive Summary in the Plan advised that the Westin Grand would find itself in the midst of a highly competitive environment in 1999 because of changes to global and local market conditions that would impact potential growth and business strategies of the Westin Grand. Room supply was expected to increase 21% by 2001 and 62% by 2002, over 1996 levels. Room demand was expected to face a substantial downturn, putting pressure on rates.

[723] The Westin Grand was still projected to exceed 100% on the occupancy share index by year 2000 and exceed 100% on the revenue share index by 2001.

[724] Confidence was expressed that the Westin Grand could perform well against the Disclosure Projections for average daily rate, but given marketplace conditions, for occupancy that was not expected to happen. Instead the expectation was that the Westin Grand would perform at only 80% - 90% of the Disclosure Projections over the next three years. A projected negative variance in revenue per available room of 7% - 8% against disclosure was expected over the next three years.

[725] Gross operating profit was expected to be short of the Projections because of reduced revenue per available room, minor department revenues were expected to be well short of the Projections, and sales and marketing expenses were expected to be in excess of the Projections.

[726] Net income was projected to be 5.41% less than the 1996 projections for 1999, 21.42% less for year 2000 and 27.98% for 2001.

[727] The Westin Grand occupancy rate for nine months in 1999 was projected to be 67.6%, for 2000 – 68.18% and for 2001 – 64.75%. The competitive set occupancy rates for the same time periods were expected to be 69.27% in 1999, 67.85% in year 2000 and 64.30% in 2001.

[728] The 1999 and year 2000 net income figures and the relationship to the 1996 Projections were shown as part of the Operating Budgets for those years included in the Business Plan.

[729] The evidence of Messrs. Evans, Cressey and Johnston who attended for the Developers at the presentation is all to the effect that they had no confidence in the person presenting on behalf of OHR, Mr. Douglas, who they considered to be a junior, and others in attendance from OHR did not seem to be familiar with the Business Plan.

[730] Mr. Evans and Mr. Cressey say that Mr. Cressey raised questions no one appeared able to respond to and the discussion of the Business Plan ended quite quickly and inconclusively in 15 minutes or so before the meeting moved on to other matters. Mr. Johnston however says the meeting was about one hour and it was all about the Business Plan.

[731] The Developers’ witnesses looked on the Business Plan as a preliminary view, as a work in progress only, and not as a final product. They had many questions in their minds and they were not in agreement with some of the basics of the projections for 1999 and 2000.

[732] Mr. Cressey says that at the meeting he looked at the 1999 budget and saw that the food and beverage figures looked large for the plan that the restaurant was going to be operated by a third party and no revenue was going to go to the Westin Grand except for a small surcharge. He says he asked at the meeting how the numbers were arrived at and could not get an answer as if the OHR people did not understand.

[733] He says parking revenue was going to go to a third party operator as well and so he asked about that figure but got no response either but instead an awkward silence.

[734] Mr. Evans left the meeting concerned that Mr. Robert O’Neill, who had been involved originally in the Projections, had not been involved in the Business Plan, and he wanted to contact him to see if he was involved at all.

[735] Mr. Robert O’Neill had not been at the Business Plan presentation and in his evidence confirms that he did not have any involvement with it and had never reviewed it.

[736] The evidence from the OHR personnel at the presentation is different. Mr. John O’Neill says he was present and the meeting lasted two hours and all items in the Business Plan were addressed. He does agree the tone of the meeting was a bit uncomfortable and there may have been some errors in the presentation, but he has no recollection of the Developers taking issue with any part of the presentation other than the food and beverage projections.

[737] Mr. Abji of OHR says the meeting was about two hours in length, was all about the Business Plan, and Mr. Douglas of OHR did a Power Point presentation for the Developers. He says the group worked through the Business Plan with questions from the Developers and answers from OHR personnel.

[738] Mr. Abji says at the end of the meeting he asked Mr. Evans whether he was obligated to give the new projections to the Investors and Mr. Evans said he was not obligated to do that as in the Disclosure Statement they were never guaranteed any of the numbers.

[739] Mr. Abji says the meeting adjourned with OHR responsible for looking at the food and beverage issue and getting back to the Developers.

[740] Mr. Douglas says much the same as Mr. John O’Neill and Mr. Abji about the content of the meeting and he says he thinks the decision was made at the meeting not to present the new figures to the Investors until after the opening.

[741] Mr. Evans says he has no recollection of talking to Mr. Abji about duties to disclose, but he does not specifically deny that he did.

[742] Mr. Cressey cannot recall Mr. Abji even being present, but he denies that any discussion in his presence took place of whether the new projection would be disclosed to the Investors, as he says he would have remembered that if it had happened.

[743] Subsequent to the meeting Mr. Evans says he placed a telephone call to Mr. Robert O’Neill, in the presence of Mr. Johnston, during which he says he confirmed that Mr. O’Neill had not been involved in the Business Plan and knew nothing about it. He says Mr. O’Neill promised to look at it and get back to him if there were any issues. Mr. Robert O’Neill cannot recall this conversation at all.

[744] Mr. Evans says he never heard back from Mr. Robert O’Neill on the business plan although he agrees there were a number of occasions after this telephone call when he would have seen him on other business and he did not follow up on this issue himself at any time.

[745] Mr. John O’Neill says at some time later Mr. Robert O’Neill came into his office and mentioned something about a telephone call with Mr. Evans asking about the Business Plan. Mr. John O’Neill says they had some discussion about it at that time but he cannot recall the details. However, whatever it was did not cause him to make any changes to the 1999/2000 Business Plan other than to the food and beverage elements.

[746] The 1999 budget came up for discussion at a later meeting on December 4, 1998 where the food and beverage issue was discussed.

[747] Mr. Cressey does not recall the meeting but he has a copy of this 1999 budget in his possession, dated December 4, 1998, with his handwriting on it. He does not recall when or how he received this budget but he remembers at some point asking questions about the food and beverage. He remembers having some concern about the November 6, 1998 budget and he remembers asking questions to see whether or not proper assumptions were made about how the restaurant was going to be run and whether there was proper allocation that was now being done to the income statement that the owners would be seeing.

[748] He says he was otherwise satisfied with the December 4, 1998 budget, for 1999, and considered it phenomenally close to the Projections at only a 3.5% variance.

[749] This December 4, 1998 edition of the 1999 budget showed the contribution to the Westin Grand from the food and beverage division of $17, 267 instead of the contribution that had showed in the November 6, 1998 edition of the 1999 budget, of $71,668.

[750] In this budget of December 4, 1998 the net income was shown as 3.5% less for 1999 than the 1996 Projections for 1999 had shown, adjusted for only a nine month period, instead of the figure of 5.4% less that had been shown in the November 6, 1998 edition of the 1999 budget.

[751] Net income from the November 6, 1998 edition of the 1999 budget was $2,732,188 and this was increased to $2,787,212 resulting in the reduced variation of 3.5% in the December 4, 1998 budget.

[752] There is no evidence of any further consideration of the 1999 or 2000 budget by the Developers and OHR thereafter.

[753] On December 9, 1998 the Developers distributed a letter to the Investors that provided some statistics taken from the November 6, 1998 Business Plan.

[754] OHR considered the Business Plan and budgets finalized save for the changes to the food and beverage figures and no more work was done by it on the budgets before the closing with the Investors on April 13, 1999.

[755] OHR did not independently disclose the budgets to any investors before closing. Mr. John O’Neill says that he disclosed these figures to the Developers and that is where his disclosure ended.

[756] Mr. Evans says it always remained his belief that the Projections would be achieved notwithstanding the Business Plan of November 6, 1998.

[757] On April 14, 1999, one day after closing on April 13, OHR Grand in the presence of Mr. Cressey and Mr. Johnston for the Developers, conducted a presentation for the Investors who had closed, informing them of the current situation and informing them of current plans. The presentation advised of a downturn in the Asian economy in 1997/1998, potential instability in Europe, a downturn in overnight visitors to Vancouver, and an increase of approximately 21% of room nights available. Positive remarks were made about the Westin Grand and the ideal location of the hotel for its target market.

[758] Projections were given for future room night demand and occupancy.

[759] The Investors were informed by PowerPoint presentation of 1999 operating budget highlights (9 month adjusted figures), for revenue per available room of $123.73, room revenue of $7,000,000 and net income of $2,700,000.

[760] On the PowerPoint presentation of the 1999 Operating Budget highlights the words “as per 1996 Disclosure Statement” were found related to the word “Budget”.

[761] Mr. John O’Neill says the source of these numbers was the December 1998 updated Operating Budget for 1999 that OHR had continued to work with. He says that at the presentation meeting the budget presented was just for the balance of 1999 as his intention was to do a year 2000 budget in the Fall of 1999.

[762] My conclusions on the Business Plan and budgets are as follows:

a) I accept the evidence of Mr. Abji that Mr. Evans told him he did not consider the Developers had any obligation to give new projections to the Investors before closing.

(b) I conclude that Mr. Evans held this honest belief at that time.

c) I conclude that OHR had no duty to the Investors to provide any updated projections before closing as the Investors were the clients of the Developers.

d) I accept that the Developers never agreed with the November 6, 1998 draft Business Plan of OHR in total, and it therefore never became a settled proposal accepted by the Developers and required to be disclosed through an amendment to the Disclosure Statement.

e) I accept that the Developers came to accept the 1999 Budget, by December 4, 1998, when the amended budget was produced, through the acceptance of Mr. Cressey when he saw that the variance for 1999, adjusted, was only 3.5% less than the Projections.

f) I accept that the Developers knew and expected that OHR Grand would put the 1999 Budget before the Investors at the presentation meeting on April 14, 1999.

g) I accept that the 1999 Budget became a proposal under s. 56(b) that required an amendment to disclose it at the time it was accepted by the Developer. At that point it was no longer a projection.

h) In my view any original purchaser following the establishment of this 1999 Budget would be entitled to have this budget disclosed to them before purchasing.

[763] If the year 2000 Budget also presented on November 6, 1998 had been a true budget intended to be implemented and was accepted by the Developer, I would have concluded that it also was a proposal and that it would have required an amendment to the Disclosure Statement because it showed a material change for the year 2000 of 21.4% from the year 2000 projections made in 1996.

[764] However, I accept Mr. John O’Neill’s evidence that OHR did not intend to prepare a year 2000 Budget until the Fall of 1999. Accordingly I conclude the year 2000 Budget presented on November 6, 1998 remained nothing more than a draft and did not ever attain the status of an established budget so that it became a proposal within s. 56 of the Real Estate Act.

[765] The Developers Declaration to the Second Amendment says that the foregoing declarations (the Second Amendment) constitute full, true and plain disclosure of all material facts relating to the development … as required by the Real Estate Act as of the 22^nd day of March 1999.

[766] I have already concluded that material facts are matters of existing facts and not matters of projection or forecast only, so there was no misrepresentation in the Developer’s declaration because of any change in projections or assumptions and hypotheses.

[767] The original Disclosure Statement, as amended, did not contain any untrue statement of material fact and did not omit to state a material fact that was required to be stated or that was necessary to prevent a statement that was made from being false or misleading, because any change in beliefs as to the projections or assumptions and hypotheses I have concluded were not required to be stated as facts, and were not necessary to prevent the statements surrounding those matters made in the original Disclosure Statement false or misleading in the circumstances in which they were made, because those circumstances were only as of November 8, 1996.

[768] Finally, as to common law obligations to make further disclosure beyond the requirements of s. 56 I conclude that s. 56 is a complete code of disclosure requirements after the original Disclosure Statement and if any changes in matters after the original Disclosure Statement are not required by s. 56 to be disclosed then there are no additional common law obligations to do so.

Schedule “D” to the HMA

[769] The Developers forwarded the HMA to the purchasers for execution as part of a package of closing documentation.

[770] Section 6.3(c) of the Disclosure Statement said as follows:

Rental Management Agreement

As provided in the hotel use covenant, it is mandatory for each hotel lot owner to enter into a hotel management and rental pool agreement with the manager. The rental management agreement will be substantially in the form attached hereto as Exhibit K, subject to changes agreed to by the manager.

[771] The HMA at Exhibit K to the Disclosure Statement, said in Article 5.1 that:

(1) For the first operating year, the Operating Plan and Budget has been prepared by the manager as set forth in Schedule D;

(2) After the first operating year, on or before November 1 of each year thereafter, the manager will prepare and deliver to a meeting of the strata corporation duly convened in accordance with this agreement a preliminary operating plan and budget for the following operating year and the manager will review such preliminary operating plan and budget with the strata corporation at such meeting …

[772] “Operating Plan and Budget” was defined in Article 1 of the HMA to mean “the operating plan, marketing plan and operating budget for the operations of the hotel for any Operating Year established pursuant to the terms of ss. 5.1 and 5.2.”

[773] “Operating Year” was defined to mean:

(a) firstly, the period from the Commencement Date to and including December 31 in the year after the year in which the Commencement Date occurs; and

(b) thereafter, each period of 12 months from and including the first day of January to and including the last day of December.

[774] “Commencement date” was defined to mean “the date that the Hotel (including the parking areas contained therein) is opened to the general public by the Manager for business as a hotel.”

[775] “Manager” was defined to mean OHR and include its successors and permitted assigns.

[776] Schedule D to Exhibit K was entitled “Operating Plan and Budget”, but otherwise, as previously indicated, was identical to the five year “Projected Statement of Net Income” attached as Exhibit “A” to the Auditors’ Report on Financial Projection, part of Exhibit M to the Disclosure Statement, down to the line item “Net Income”.

[777] The Sale Agreements executed by the Investors required them to enter into the HMA in the form attached as Exhibit K to the Disclosure Statement.

[778] In the Second Amendment to the Disclosure Statement OHR was replaced as Manager by OHR Grand and other consequential amendments were made to the Disclosure Statement to effect that change.

[779] The HMA included in the package of closing documents for execution by the purchasers included the same Schedule D as had been included in the form of HMA attached as Exhibit K to the Disclosure Statement.

[780] Mr. Johnston of the Developers says that in early March 1999 he learned that Mr. John O’Neill of OHR was going to go on vacation and so he had a telephone conversation with him on March 10 to finalize documentation before Mr. O’Neill left for vacation.

[781] Mr. Johnston says that the two of them reviewed the HMA in that telephone conversation. He says he asked Mr. John O’Neill if there were any more changes, if everything was fine, were the schedules fine, although he says the two of them did not go through any of the schedules individually.

[782] Mr. John O’Neill agrees that he was about to go out of town on holidays at that point in time but he says there were no documents that he had in his possession requiring his agreement before he left because he knew that he could always be reached on vacation. He says he does not recall receiving any documentation from Mr. Johnston before or during his vacation nor reviewing any documents with Mr. Johnston.

[783] Mr. John O’Neill says that the practise was that OHR and the Developers would discuss arrangements at a high level in general terms but leave the drafting and detail to the lawyers.

[784] He recalls a telephone conversation with Mr. Johnston in the same time period that was only about whether OHR would pay for all the photocopying costs for the HMA that had to be copied for execution by all the purchasers.

[785] He says his understanding was that the Developers’ counsel was responsible for assembling the documents and sending them out to the purchasers and OHR had no role in that. He says he does not recall receiving any drafts of the HMA in that period of time.

[786] Specifically Mr. O’Neill says at the time of the telephone call with Mr. Johnston he had no form of HMA in front of him to discuss and the last one he had seen was the one included in the Disclosure Statement. He says he never saw any executed HMA until after the closing, in late April or early May 1999.

[787] He says there is no way that he would have expressly approved Schedule D as it existed because it was for a full calendar year budget for 1999, whereas by March 1999, already two months into the year, any 1999 budget could only be for the balance of the year.

[788] He also says that he knew at that time that the Developers had no food and beverage deal with the hotel so he could not possibly verify a budget for 1999.

[789] He does say, however, that he expected that the HMA that would be forwarded to the purchasers for execution would be the same as had existed in the Disclosure Statement with Schedule D, with the only change being that the agreement would be with OHR Grand, the new manager.

[790] Mr. O’Neill says it had already been made clear to OHR by the Developers that there were to be no changes to the numbers in Schedule D and so he was acting on their instructions. He says that by including Schedule D he did not intend to indicate to the Developers any OHR affirmation of the 1996 numbers. OHR had already provided its updated numbers to the Developers in its November and December 1998 budgets for 1999, and he says that OHR never told the Developers anything different after that point in time.

[791] In the documents produced at trial is an email of April 6, 1999 from the lawyer for the Developers, to Mr. Johnston, including what was said to be the final version of the HMA.

[792] As previously stated, the day after the closing, on April 14, 1999 at the presentation meeting, OHR Grand presented to the purchasers a 1999 Operating Budget which was nine month adjusted figures based on the 1999 budget that OHR had prepared in December 1998, and had presented to the Developers at that time. The 1999 Operating Budget presented to the purchasers at the presentation meeting was stated to be “as per 1996 Disclosure Statement.”

[793] The Investors say Article 5.1 of the HMA provided to them by the Developer and OHR Grand for execution in April 1999, made a false representation to them at Schedule D of the true Operating Plan and Budget for 1999 that existed at that time, and was made knowing it was false or recklessly not caring whether it was true or not.

[794] Further they say that by providing the same five year projected operating results as had been set out in the Disclosure Statement, OHR Grand and the Developers were expressly or impliedly representing that the 1996 projections themselves, to include the projected operating results, remained sound and reasonable in 1999, had been prepared by OHR Grand in good faith with reasonable care and skill, and were believed by OHR Grand and the Developers to be reasonable as representing the best judgment of OHR Grand as to the most probable set of economic conditions and planned course of action for the hotel operations.

[795] They say that this misrepresentation was calculated to induce them to complete both the HMA and their Sale Agreements and they were not obliged to complete either with this misrepresentation.

[796] Those Investors who executed their Sale Agreements prior to the Second Amendment, before OHR Grand became the Manager, say that an additional reason why they were not obliged to complete is their lack of agreement to accept OHR Grand as the Manager.

[797] The Developers say the HMA was a contract only between the Investors and OHR Grand and did not involve them at all. They say they considered OHR or OHR Grand was satisfied Schedule D was the true operating budget because Mr. Johnston had asked Mr. John O’Neill if the schedules were acceptable and he had confirmed that and thereafter OHR or OHR Grand never sought to change Schedule D.

[798] OHR and OHR Grand point to the HVS draft report of January 21, 1999 to OHR on its management contract for the hotel where HVS projected better results for the first two years of operation of the hotel than had been projected in the Disclosure Statement, and better results than OHR had projected itself in its December 1998 budget for 1999. They say that this opinion of HVS at that time confirms the conclusion that Schedule D to the HMA was in fact a reasonable operating plan and budget for the first operating year, defined in the circumstances as the first 20 or 21 months from April 13, 1999 to December 31, 2000.

[799] This reference to a period of time longer than 12 months is based upon the definition of the words “Commencement Date” and “Operating Year” in the HMA. Since the hotel was not open to the public until April 13, 1999 on these definitions that would place the first operating year as ending on December 31, 2000.

[800] OHR and OHR Grand submit that the Investors could not have been induced to complete their purchases by any misrepresentations surrounding Schedule D, because they were obliged by the terms of their Sale Agreements already executed, to enter into the HMA on the terms as set out in the original HMA, part of the Disclosure Statement, to include Schedule D, and that is what was presented to them. They say that the inclusion of the same Schedule D in 1999 was not any representation that the original projections, including the operating results, remained reasonable and achievable at that time. Schedule D only purported to be the Operating Plan and Budget for the first operating year, which at that time by the definitions, ended on December 31, 2000, approximately 21 months later. They submit that the purpose of the Budget was only to aid the Investors in overseeing OHR Grand in the management of the hotel, not in order to give the Investors any right to avoid completion of their contracts.

[801] OHR and OHR Grand also say that Schedule D did not contain any of the express representations in the Disclosure Statement that surrounded the original projections, and in view of the cautionary language in the Disclosure Statement about actual results versus projections, could not reasonably be taken as impliedly carrying any such representations.

[802] Finally, they say there is no evidence that the Budget for the first operating year in Schedule D was not reasonable.

[803] The Investors submit that it does not assist OHR Grand to say that the Sale Agreements required them to enter into the HMA because that was an agreement with the Developer and not with OHR Grand.

Conclusion

[804] Article 5.1 of the HMA informed the Investors that the Operating Plan and Budget for the first Operating Year was as set forth in Schedule D.

[805] Schedule D described itself as the Operating Plan and Budget for the years ending December 31, 1999 through December 31, 2003 and it set out revenue and expense figures for each of those years.

[806] On the basis of what was said in Article 5.1, a prospective investor might look at the year 1999 in Schedule D as the first operating year.

[807] The fact is, however, by the definitions the first operating year was not to end until December 31^st of the following year.

[808] Why the Developer and OHR would include five years of an Operating Plan and Budget when Article 5.1 only called for the first operating year, is a mystery.

[809] How the Developer and OHR could even know what a first year Operating Plan and Budget would look like, for a time not to start until three years later, is another mystery. Nevertheless that is what is stated by Article 5.1.

[810] I accept the submissions that the Investors were obliged by their Sale Agreements to execute the HMA in the form it was presented to them with Schedule D, because that is what they contracted with the Developer to do.

[811] The Developer presented it in that form and in my view the Investors were obliged to execute it in that form and complete their purchases of their units.

[812] I do not consider that Schedule D carried forward to 1999 any representations surrounding the 1996 Projections nor the Projections themselves, because Schedule D did not purport to carry forward projections but only to declare a first year Operating Plan and Budget.

[813] The numbers may have been the same as the Projections for the first operating year, but in my view a budget is different than a projection. A budget is an actual plan for how the hotel will be run while a projection at best is an estimation of how the hotel should perform given certain assumptions and hypotheses.

[814] I do, however, consider that the delivery of Schedule D with the HMA to the Investors for execution in 1999, constituted a representation to them by both the Developer and OHR Grand that the first year Operating Plan and Budget remained the same as had been set out originally in Schedule D in 1996.

[815] I accept the evidence of Mr. John O’Neill over the evidence of Mr. Johnston, when Mr. O’Neill says he was never asked by Mr. Johnston to approve Schedule D before the HMA went out for execution, for the reasons given by Mr. O’Neill.

[816] However, I do not think that this finding changes the fact that the HMA was the contract of OHR Grand and represented to the Investors what the first year Operating Plan and Budget would be.

[817] I also conclude that the inclusion of the original Schedule D in the HMA also constituted a representation of the Developer as to the first year Operating Plan and Budget as it was the Developer that required the HMA to be executed in order to complete the sales to the investors, and who forwarded the HMA for execution with the same Schedule D included.

[818] I do not think that neither OHR Grand, nor the Developer, can escape the consequences of the representation in 1996 of the first year Operating Plan and Budget, if it turns out to be a different first year Operating Plan and Budget in 1999, whatever that consequence may be.

[819] Whether Schedule D does constitute a misrepresentation of the actual first year Operating Plan and Budget remains to be determined however, as does any remedy for the Investors for any difference.

[820] The day after the closing, being on April 14, 1999, a Budget was presented for the approximate nine month period remaining in 1999. That is not the Operating Plan and Budget for the first operating year as defined because the first operating year did not end until December 31, 2000. Mr. John O’Neill says he did not intend to do a year 2000 budget until the Fall of 1999.

[821] What actual Budget was put forward for the year 2000, what that produced for a first operating year budget when put together with the nine month budget for 1999, and what variance that was to the first year Operating Plan and Budget in Schedule D is unknown. What claims the Investors could have for any variance has not been canvassed and will have to remain for another day, but I am satisfied that the Investors were obliged to execute the HMA when they did and complete their purchases.

[822] I do not consider the substitution of OHR Grand for OHR, as the manager, to be any material variation affecting the project entitling the Investors to avoid execution of the HMA and completion of their contracts. OHR Grand was stated in the Second Amendment to be a wholly owned subsidiary of OHR and to have the same officers and directors. The definition of “Manager” in the HMA includes successors and permitted assigns of OHR. In my view there was no material variation to the project.

Is OHR Grand the alter ego of OHR?

[823] Counsel for the Investors and OHR Grand appear to be in agreement that the test for an alter ego relationship between OHR Grand and OHR sufficient to impose liability on OHR as the parent company, is stringent. The subsidiary OHR Grand must be under the complete control of the parent such that it has no independent function of its own and exercises no discretion independently of the parent (Aluminum Co. of Canada v. Toronto (City), [1944] S.C.R. 267; Hunt v. TNN plc (1990), 41 B.C.L.R. (2d) 269 (B.C.C.A.)).

[824] Here counsel for the Investors submits that OHR Grand was the alter ego of OHR such that OHR has liability for its actions in that OHR Grand was wholly owned by OHR and shared officers and directors, it was incorporated for tax reasons arising out of OHR’s sale of the majority of its management contracts, and both companies shared office space with OHR Grand taking over the pre-opening team of OHR upon its incorporation, but remaining under the charge of the same officers and directors.

[825] Counsel for OHR Grand submits that the requirements for an alter ego relationship have not been met. It is submitted that while OHR Grand is wholly owned by OHR and the two companies shared officers and directors, there is no proof that they were identical at all times.

[826] It is submitted there is no evidence OHR Grand was incorporated for tax purposes as the only evidence is it was incorporated on the sale of the OHR hotel management contracts, in order to take ownership of the Westin Grand management contract that OHR would not be selling.

[827] The evidence is that the officers and directors of OHR Grand were the same officers and directors: Mr. Rob O’Neill, Mr. John O’Neill and a lawyer as secretary.

[828] With the officers and directors being common to both I conclude that OHR Grand was under the complete control of OHR as its alter ego and OHR is responsible at law for any liability of OHR Grand.

Summary of Findings

[829] The projections are those financial projections set out in Exhibit “A” and “B” to the Auditors’ Report at Exhibit M to the Disclosure Statement, including the Notes at Exhibit “C”.

[830] OHR was aware that the Projection was going to be included in the Disclosure Statement and was aware and accepted that the representations made in s. 1.4 of the Disclosure Statement would be attributed to it as well as to the Developer.

[831] The representations made in s. 1.4 of the Disclosure Statement together with the similar representations made in the Auditors’ Report constitute representations by the Developer and OHR of objective reasonableness of the financial projections and hypotheses and assumptions set out in Exhibit M.

[832] The Developer and its directors are liable to make compensation to the Investors pursuant to s. 59 of the Real Estate Act for the material false statements in Note 2(a) of the Notes to Financial Projection in Exhibit M to the Disclosure Statement, that the hotel occupancy rates in the chart are equal to the expected average occupancy rates for downtown Vancouver hotels of similar quality except for 1999 and 2000 which are 92.5% and 97.5% of the average, respectively, recognizing the start-up nature of the operation.

[833] The Developer was the party that prepared footnote number one to the financial projection proforma provided to the auditor that formed the basis for the material false statement in Note 2(a).

[834] OHR and the Developer have no liability under s. 1.4 for the material false statement of Note 2(a) because it was not an hypothesis or assumption within s. 1.4 of the Disclosure Statement.

[835] HVS has no liability at common law for the material false statement at Note 2(a) nor for the other hypotheses and assumptions in Exhibit M.

[836] The Developer and its directors are liable to make compensation to the Investors pursuant to s. 59 of the Real Estate Act for the material false statement in s. 6.7 of the Disclosure Statement that “tourism is the number one growth industry in Vancouver.”

[837] The Projection in Exhibit M is not a statement within s. 59 of the Real Estate Act.

[838] The Annual Operating Projections reviewed by HVS for the purpose of its opinion letter of November 8, 1996 were the same figures as set out in the Projected Statement of Net Income in Exhibit M to the Disclosure Statement.

[839] HVS owed the Investors a duty of care in preparing its opinions and the standard of care was that of reasonable care and skill of a hotel valuator.

[840] The projected occupancy rates for the Westin Grand for the period 1999 – 2003 were unreasonable and outside any range of reasonableness and were negligently formulated by HVS.

[841] HVS was negligent in giving its opinion of November 8, 1996 that the annual operating projections were reasonable and achievable because of the negligently overstated occupancy projections.

[842] The Developer and OHR made negligent representations of objective reasonableness of the projections, to include the occupancy projection at Note 2(a), by the wording of s. 1.4 of the Disclosure Statement and the wording in the Auditors’ Report.

[843] HVS did not breach any duty of care and was not negligent in how it developed the month by month occupancy projections.

[844] HVS did not breach any duty of care and was not negligent in how it formulated the penetration rates for 1999.

[845] HVS did not breach any duty of care and was not negligent in failing to include information on the competitive set occupancy rates and on the projected level of room night demand in its opinion letter of November 8, 1996.

[846] HVS, OHR and the Developer did not fail to collaborate so as to affect the opinions of HVS.

[847] HVS did not breach any duty of care and was not negligent in its projection of room expenses, energy expenses and property and operations expenses.

[848] There were no false declarations by the Developer and its directors in 1996.

[849] There was one false declaration by the Developer and its directors to the Second Amendment in that the budget for 1999 accepted by the Developer should have been disclosed in the amendment.

[850] Both the Developer and OHR Grand made representations to the Investors by requiring the Investors to sign the HMA with Schedule D but the Investors were obliged to complete their sales and the issue of whether Schedule D constituted a misrepresentation of the actual 1999 budget and what the consequences might be for that, all remain to be determined on further evidence.

[851] OHR Grand is the alter ego of OHR and OHR is responsible at law for any liability of OHR Grand.

“Truscott J.”

Citation:	*Strata Plan LMS 3851 v. Homer Street Development,*
	2008 BCSC 1160