Canada: The Thin Edge Of The Wedge: The Hampstead Strata Corporation Wind-Up

What you need to know:

  • The BC Supreme Court, for the first time under new legislative provisions, approved a wind-up of a strata corporation despite the objection of dissenting owners actively opposing it in court.
  • The court's analysis was driven by the strict material compliance with the governing legislation, the above market price offered (it was 2 ½ times the assessed value of the units), and the ability of the residents to purchase another home in the community from sale proceeds.
  • Judges will have the challenge of balancing the economic interests of all owners and the right of the dissenting owners to stay in their units.
  • Winding-up a strata corporation is a complicated process and there are a myriad of issues that can arise. Getting the right advice at every step is key to preventing costly mistakes. 

The Thin Edge of the Wedge: The Hampstead

Recent changes to the Strata Property Act ("SPA") have made it easier to wind up a strata corporation and sell a previously strata-titled property as a whole. Prior to these amendments, the voluntary wind-up of a strata corporation required unanimous consent from all of the owners, with one narrow exception.  Now, a resolution passed by at least 80% of the owners is sufficient to move ahead with the wind-up process. However, the court still provides important oversight.  Cases involving these new provisions of the SPA are beginning to work their way through the judicial system, yielding important lessons for strata corporations considering this option.

Under the previous SPA provisions, strata corporations were rarely wound up. The BC Law Institute published a report in 2015 recommending that the legislature should reduce the consent threshold required to approve the sale. BC's provincial government, recognizing the benefits of redevelopment of older stratified buildings for owners and local governments, adopted the recommendations of this report. Changes to the SPA came into effect on July 28, 2016.

The cancellation and wind-up process still requires multiple stages of approvals and strict compliance with applicable legislation. If there is opposition to the wind-up, court approval is also required.  Until recently, the legal test for court approval set out in the new SPA provisions had not been judicially considered.  It remained to be seen how the court would adjudicate disputes between the majority of consenting owners and the interests and rights of those minority dissenting owners.

On December 22, 2017, the Madam Justice Loo of the British Columbia Supreme Court released her decision in Hampstead (The Owners, Strata Plan VR2122 v. Wake, 2017 BCSC 2386), in which the court approved the wind-up of a Vancouver strata corporation known as "The Hampstead".  This was an important decision, marking the first time that a British Columbia court has approved a cancellation of strata plan under these new provisions of the SPA, despite active court opposition by a minority of owners.  It also clarified some procedural points involved in the wind-up and sale process.

The Hampstead is located in a neighbourhood in Vancouver's West End known as Lower Davie. The building was constructed in 1988 and was a four-storey wood frame structure. There had been several major repairs in the last couple of years resulting in special levies to raise capital replacement funds and more were on the horizon. Given the high repair costs, the strata council, as governing body of the Hampstead (the "Council"), began exploring the option of selling the entire building to a developer. The West End has been going through a significant period of redevelopment and densification and the timing was right for a sale. The Council held information meetings, hired a law firm and real estate agency, and began looking for a buyer. It received multiple offers and entered into an agreement to sell the building to a developer for $45.25 million, conditional upon court approval of the wind-up.  The owners would keep their contingency reserve fund and be entitled to remain in their units for six months following completion, rent free.

Council convened a Special General Meeting to discuss the offer and owners voted on the wind-up resolution by secret ballot. The vote passed with 28 votes in favour (84.8% of owners) and four against. The Council held another special general meeting confirming the appointment of a liquidator, and subsequently filed a petition seeking court approval.

At the petition hearing, dissenting owners claimed generally that priority should be given to a home owner's right to live in the home of their choice and that the court should also consider other factors in declining to approve the sale, such as neighbourhood heritage and the social and environmental impacts on the community flowing from redevelopment. Madam Justice Loo, however, found these grounds insufficient to block the will of the majority of owners who were seeking to realize on their property. She also made it clear that it is not the place of the courts to second guess the decisions of local governments in matters of social housing, densification, rezoning or community development. In the approval of strata wind-up resolutions, the court will consider what is in the best interest of the owners, while other matters are within the purview of the municipality.

The dissenting owners also advanced some specific legal claims. They argued that the law firm appointed by the strata corporation acted in a conflict of interest because it had also represented the chosen developer on unrelated projects (a fact the lawyers disclosed to the owners prior to being retained), and the Council had acted contrary to its fiduciary duties set out in the SPA (specifically the duty to act honestly and in good faith in the best interests of the strata corporation, the duty to exercise care and diligence and duty to not treat an owner with significant unfairness). Madam Justice Loo was not persuaded that the law firm was in conflict and found that the Council did not breach its duties to the owners.

The dissenting owners also said that the process of the winding-up vote was flawed for three reasons, two omissions and one substantive challenge to the resolution. The first issue was that the resolution omitted a charge over the lands held by the City of Vancouver (the "City") relating to a sidewalk on the property. The City took no position and Justice Loo found that the omission of the City's charge was not fatal to the resolution. The resolution also did not set out the name and address of the liquidator, which had not been chosen at the time of the SGM and was selected shortly afterward.

As support for their position, the dissenting owners pointed to another recent case dealing with strata wind-up, Bel-Ayre, arguing that these irregularities should vitiate the wind-up.  In Bel-Ayre, Mr. Justice Milman (The Owners, Strata Plan VR 1966, (Re), 2017 BCSC 1661) declined to approve a wind-up because the wind-up resolution failed to include a schedule that set out the interests of each of the owners. This schedule was required by the SPA and, according to the court, was an essential term of the liquidator's mandate. Bel-Ayre confirmed that strict adherence to the requirements set out in the legislation is necessary and, as a result, any material failings on the part of owners and strata councils could cause significant and costly delays. Justice Loo however distinguished the failings in Bel-Ayre from the addition of the liquidator's name and address at issue in Hampstead, by highlighting that the interest schedule is essential to the mandate and creates a roadmap for the liquidation process. Lucky for the majority of owners at the Hampstead, she found that the same could not be said of the later addition of the liquidator's name and address, which in her view did not make up the substantive content of the resolution. It may also have been of assistance that the Council held a second special general meeting once a liquidator was found, a resolution containing this additional information was passed by the required threshhold, and the name and address of the liquidator was contained in the filed petition.

The dissenting owners also challenged the resolution on the grounds that the Council was not authorized by the SPA to sell the building—only the liquidator was. However, Justice Loo confirmed that it is a strata council and not the liquidator that should obtain the price for the property in order to fully inform the vote to wind up and present the court with the relevant information to approve the process. Having to wait until the liquidator is in place to market and obtain a price for the property would reduce the oversight role of the court, would lengthen, split and delay the process, and would increase the risk that the property does not sell and would have to be restratafied. Hampstead also confirms that strata councils should feel free to engage in the listing and marketing of the building to better understand their options prior to embarking on this process.

It appears that in any application for approval of a wind-up under the SPA, the court will look to what is in the "best interest of the owners" and will consider what is best from the position of the owners as a whole. This will also necessarily include examining the process and outcome for any significant unfairness that any owner individually will suffer in the process. It will also include examining any significant unfairness and confusion to other stakeholders, such as charge holders and creditors, might also experience as a result of the wind-up. In Hampstead, significant unfairness was not present, and winding up was ultimately in the best interest of the owners as a whole.

The court looked to a few key pieces of evidence that may form best practices when applying to wind up despite dissenting owners. The Council introduced evidence of comparable properties for sale in the neighbourhood that were equivalent to or below the price each owner would receive in the sale, and the court relied heavily on this evidence to discount the claim that the dissenting owners were being displaced from the neighbourhood. The court carefully considered whether owners would receive more or less money by selling their units individually. Justice Loo remarked a number of times that the ability of the Hampstead residents to realize on their property and stay in the community were significant factors in her analysis.

There is a tension between Hampstead and Bel-Ayre, in that Justice Milman emphasized the fact that strata lots are homes, and that winding up represented an involuntary taking of a home. Justice Loo placed more emphasis on property rights as economic interests, even saying that she does not agree that "property rights as a home should be given greater emphasis in the face of 80% or more of the owners who want to take advantage of the increased profit to be made as a result of rezoning and redevelopment, particularly when the preponderance of the evidence is that the owners who want to remain living in the community can do so." This tension between viewing strata-titled properties as homes or investments will likely continue to play out in hearings and decisions into the foreseeable future.

Bel-Ayer and Hampstead are the first in what will likely be a long line of cases that define and refine what is required of strata councils and owners engaged in the wind-up process. Given the age of many strata developments and the property values across British Columbia, this process is sure to become a more attractive alternative to costly repairs and special assessments. Having expert legal guidance through every step of the process will help ensure an efficient and successful result.

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Strata plan cancellation and winding up of a strata corporation

Condominium law in British Columbia underwent a major shift in 2016 when new legislative provisions were enacted, enabling strata corporations to apply to court to cancel a strata plan and voluntarily wind up, pursuant to a resolution approved by at least 80% of the owners.  In the current real estate market in British Columbia, this option may be desirable, especially for older, stratified developments about to incur significant structural or building envelope repair expenses.  However, the issues facing a strata corporation in achieving its goal of winding up and selling its previously strata-titled property to a developer, are extremely complex. Recent jurisprudence indicates that if the wind-up process is not strictly compliant with applicable legislation, the Court may decline to approve it, which is costly and could set back the sale back by months, years, or could even cause developers to walk away from the deal entirely. Having the right legal advisors can help achieve a swifter and more economical solution for your strata corporation.

The expertise to succeed

Gowling WLG has the right combination of expertise and experience to manage the wide variety of issues which may emerge during the wind-up process, from listing agreements, purchase contracts, drafting of resolutions, all the way through to the court approval and liquidation process.  Our leading real estate department is backed by a litigation team with world class expertise in insolvency and restructuring.

We provide comprehensive solutions for strata corporations throughout the strata plan cancellation, wind-up and sale process. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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