Canada: "Strata Squeeze-Out": B.C. Supreme Court Confirms Strata Wind-Up Resolution Following Developers' Gradual Buy-Up of Units to Achieve Controlling Interest

Introduction

In July 2016, the approval threshold for passing a resolution to wind up a strata corporation under the B.C. Strata Property Act1 (the "Act") was lowered to 80% of all owners, replacing the previous requirement of unanimous approval. To give effect to a wind-up resolution, however, the resolution must receive subsequent confirmation from the B.C. Supreme Court (the "Court").

When we reported on "Court Confirmation of Strata Wind-Up Resolutions – The Experience So Far in B.C." back in January 2018, two contested applications for confirmation of a wind-up resolution had reached the Court and resulted in written decisions:

  • In The Owners, Strata Plan VR 1966 2 ("Bel-Ayre"), the Court refused to confirm the resolution in issue due to a fundamental deficiency in the interest schedule required to be attached to the resolution.
  • In The Owners, Strata Plan VR2122 v. Wake 3 ("The Hampstead"), the Court confirmed the resolution, finding that the statutory requirements had been met.

Since then, the Court has broken the tie and added another wind-up resolution to the "court-approved" column. In Re The Owners, Strata Plan VR2702 4 ("Barclay Terrace"), the Court confirmed a wind-up resolution passed in order to carry out a sale and redevelopment of two adjacent strata properties in Vancouver's West End, over the objections of two holdout owners who argued that the sale price was too low and that they were not kept informed throughout the sale process.

Barclay Terrace is particularly noteworthy because it involved a scenario in which two major developers gradually bought up over 80% of strata units and proceeded to use their controlling interest to successfully drive the wind-up process through what one might call a "strata squeeze-out". Developers, real estate agents, and strata owners alike should take note of the Court's comments on how this approach may influence the Court's assessment as to whether to confirm a wind-up resolution. 

Background

The strata corporation administered a 26-year-old, seven-story concrete building located in Vancouver's West End known as "Barclay Terrace". The process by which the proposed wind-up and sale proceeded contained an important nuance: whereas the previous two contested cases involved widely dispersed ownership (i.e., the many strata units were owned by many different individuals), 34 of 36 units in the Barclay Terrace property – a full 94% – were owned by two major developers (the "Majority Owners"). The Majority Owners had achieved their ownership position by gradually purchasing up units from individual owners over the course of many months.

With an overwhelming majority of units in hand, the Majority Owners engaged a real estate agent in December 2016 to market the property, together with an adjacent strata complex consisting of four two-story townhouses owned by one of the developers (the "Adjacent Properties" and, together with Barclay Terrace, the "Combined Properties"). The agent found a buyer willing to purchase the Combined Properties for $105 million. An agreement of purchase and sale, subject to various conditions including court appointment of a liquidator, was concluded in June 2017 (the "Sale Agreement", as subsequently amended). The Sale Agreement allocated 75% of the sale price to Barclay Terrace and 25% to the Adjacent Properties.

In September 2017, the strata council held a special general meeting (the "SGM") for the owners to vote on a resolution to wind up the strata corporation and appoint a liquidator (the "Resolution"). To no one's surprise, the Resolution passed with 94% approval. The strata corporation then brought an application for court approval, an application which was opposed by the owners of the two units not held by the Majority Owners (the "Minority Owners"). 

Court Decision

Writing for the Court, Mr. Justice Milman, who also decided Bel-Ayre, noted that under s. 278.1(5) of the Act, the Court must consider the following factors in determining whether to confirm a wind-up resolution: 

  1. the best interests of the owners, and
  2. the probability and extent, if the winding-up resolution is confirmed or not confirmed, of
    1. significant unfairness to one or more
      1. owners,
      2. holders of registered charges ... , or
      3. other creditors, and
    2. significant confusion and uncertainty in the affairs of the strata corporation or of the owners.

The Court then reviewed its past decisions on strata wind-ups and extracted the following key principles:

  1. the statutory requirements in s. 277 ["Appointment of Liquidator"] and 278 ["Interest Schedule"] of the Act must be complied with unless specific provision is made there or elsewhere in the Act to relax them;
  2. the onus is on the opposing respondents to establish the factors that would justify refusing an application for an order to confirm a winding-up resolution;
  3. in determining what is in the best interests of the owners for the purpose of s. 278.1(5)(a), the interests of all of the owners must be weighed, not just those of the dissenting minority;
  4. any alleged unfairness or uncertainty must be significant enough to override the interests of the majority who voted in favour of the winding-up;
  5. the kind of "significant unfairness" referred to in s. 278.1(5)(b)(i) includes conduct that is "burdensome, harsh, wrongful, lacking in probity or fair dealing, done in bad faith, unjust, or inequitable, and might extend to less severe conduct as well"; and
  6. in determining whether confirming or refusing to confirm the winding-up order would cause significant unfairness, the court must consider whether the evidence supports the reasonable expectation asserted and if so, whether that expectation was violated in a way that is significantly unfair. 5

With these principles in mind, the Court turned to the complaints raised by the Minority Owners, who submitted that the Resolution should not be confirmed because: 

  1. The Resolution was improperly amended at the SGM, contrary to Act;
  2. the Minority Owners were not adequately consulted or kept informed during the sale process;
  3. the sale price was too low;
  4. the share of the sale price allocated to Barclay Terrace was too low; and
  5. the Sale Agreement contained deficiencies that could cause significant confusion and uncertainty. 

1.     Amendment to Resolution

Just five days before the SGM, the Court released its decision in Bel-Ayre, where it refused to confirm a wind-up resolution because the statutorily required interest schedule attached to the resolution did not include necessary value estimates and was therefore fundamentally deficient. Following the release of Bel-Ayre, the Barclay Terrace strata corporation realized that the interest schedule attached to the proposed Resolution suffered from the very same deficiency, making the Resolution liable to be found wanting in court.

The strata corporation decided to attempt to remedy this deficiency by amending the Resolution at the SGM by adding the missing value estimates. The strata corporation relied on s. 50(2) of the Act, which allows amendments to be made to the proposed wording of a resolution so long as the amendments (a) "do not substantially change the resolution" and (b) are approved by a 3/4 vote before the vote on the resolution. The Resolution was passed in amended form.

The Minority Owners argued that the addition of the value estimates was improper. They pointed to case law establishing that only "technical and relatively minor" amendments can be made to a resolution at a SGM. 6 They maintained that since the Court in Bel-Ayre found value estimates to be an "essential term" of the liquidator's mandate, the addition of missing value estimates must necessarily be viewed as a "substantial change", thus falling outside the scope of permitted amendments under the Act.

The Court agreed with the strata corporation. It reasoned that although the omission of the value estimates in Bel-Ayre was found to be "an omission of substance", it did not follow that a correction of that omission constituted a "substantial change" in the sense contemplated by s. 50(2) of the Act. The distinction in Bel-Ayre was between substance and procedure, whereas the distinction under s. 50(2) pertained to relative importance. In the Court's view, the amendments were not so significant as to change the essential nature of the Resolution, and therefore the amendments were properly made. 

2.     Alleged Failure to Consult with Minority Owners and Keep Them Informed

The Minority Owners contended that their units were improperly marketed without their knowledge or approval and that they were improperly shut out of the marketing process. They emphasized – as a point of contrast – the Court's finding in The Hampstead that "the owners were informed every step of the way, the process was transparent, and all of the owners were provided with any information they sought, answers to any questions they had, and provided with any document they requested". 7 Here, they argued, the situation was entirely different: the Minority Owners were not informed of what was occurring until it had already happened, the process was obscure, and they were not provided with the information they sought.

In response, the strata corporation submitted that The Hampstead could be distinguished because that case involved a mixed-use development held by owners with varying interests that needed to be reconciled. Here, by contrast, there was no need for such a process because 34 of the 36 units were held by two corporations who had already decided to sell the property as a redevelopment opportunity.

The Court once again sided with the strata corporation. It agreed that "the extent of the procedural accommodations to which the Minority Owners can fairly lay claim must vary at least to some extent with the context." 8 The Court observed that the circumstances in the case at bar differed from those in previous strata wind-up cases because of the high concentration of units in the hands of the Majority Owners. Moreover, the Court found that the Minority Owners "were able to see the writing on the wall" many months earlier when the Majority Owners sought and eventually acquired a controlling block in pursuit of their "patent agenda" to redevelop the property. 9 At that point, "dissolution and sale of Barclay Terrace was all but inevitable". 10 The Court wrote: 

[49]      What legitimate expectation can the Minority Owners have to participate in the marketing and
sale process in such circumstances?  They cannot reasonably expect to exercise any measure of control
or a veto over any deal that is struck.  In summary, I am not persuaded that they have been prejudiced
by the process that was followed.

3.     Adequacy of Price

The Minority Owners alleged that the sale price of $105 million was "grossly inadequate" and that the inadequacy of the sale price resulted in significant unfairness to them. 11 In support of this assertion, they pointed to two primary sources of evidence:

  1. at least two of the offers the Majority Owners had made to individual unit owners – one of which was accepted – exceeded the amounts that would be allocated to those units under the proposed transaction; and
  2. an appraisal report produced in February 2018 showed that assuming all units were sold together, the value of the Combined Properties was $150 million, exceeding the sale price by $45 million.

The Court was not persuaded. In addressing the two sources of evidence on which the Minority Owners relied, the Court reached the following conclusions: 

  1. There was evidence suggesting that at least some of the prices the Majority Owners paid to acquire individual strata units were lower than the amounts allocated to those units under the proposed transaction. Moreover, it was reasonable to infer that the Majority Owners had paid more for some units than they had for others, depending on individual seller's bargaining skills and how long into the process he or she held out.
  2. The appraisal report assumed that the Combined Properties were sold by a vendor with 100% ownership of all units. But due to the Minority Owners' holdout position, that was not the case. At least some of the price differential, to the extent any existed, may have been attributable to the litigation risk arising from the fact that ownership was less than complete.

Finally, the Court agreed that the interests of the Majority Owners and Minority Owners were aligned: both groups had an interest in maximizing the overall price paid for the Combined Properties. The Court also observed that the Minority Owners were set to receive "enormous" premiums over the 2017 assessed values of their units – indeed, they would each be receiving more than triple the assessed value. 12 Accordingly, there was no sound basis for concluding that the Minority Owners were being treated unfairly. 

4.     Allocation of Sale Price

The Minority Owners alleged that the sale price allocation as between Barclay Terrace and the Adjacent Properties (i.e., 75% to 25%), which was based on the surface areas of the unimproved lots, was significantly unfair to them because it undervalued Barclay Terrace relative to the Adjacent Properties. They argued that the allocation should instead have been based on the relative rental income–earning potential of the improvements on the two properties, rather than by reference to the bare land.

The Court dismissed this argument in short order, finding that the allocation method employed in the Sale Agreement was not significantly unfair to the Minority Owners. 

5.     Alleged Confusion and Uncertainty

Finally, the Minority Owners asserted that the terms of the Sale Agreement created a risk of confusion and uncertainty for them. They pointed to the fact that the Sale Agreement did not provide for an appeal from an order confirming a wind-up resolution, prevent the purchaser from flipping Barclay Terrace, stipulate a possession date, or permit the Minority Owners to rent back their units while searching for new accommodation. They also noted the risk that the purchaser, a company that had yet to be brought into good standing, might not complete the transaction.

The Court found that the Minority Owners' concerns could be addressed by including appropriate terms in the vesting order that a liquidator must seek under s. 279 of the Act before liquidating the assets. Further, an application for directions from the Court could be brought if necessary. 

Outcome

In the result, the Court determined that confirmation of the Resolution was in the best interests of the owners and would not give rise to significant unfairness. Accordingly, the Court confirmed the Resolution. 

Key Takeaways

Barclay Terrace breaks new ground in that it is the first B.C. case to consider a contested application for confirmation of a wind-up resolution in circumstances where a developer has gradually bought up over 80% of strata units, thereby guaranteeing success in passing a wind-up resolution.

The decision confirms that there are some advantages to this transactional approach. For example, the Court suggested that minority owners' legitimate expectations relating to their participation in the marketing and sale process may be reduced when, in the Court's words, the minority owners "were able to see the writing on the wall" for some time. The Court found that, in these circumstances, minority owners "cannot reasonably expect to exercise any measure of control or a veto over any deal that is struck". 13 Hence, it would appear that a developer who has purchased an overwhelming majority of units may be permitted to exercise a high degree of control over the wind-up and sale process, without material interference from minority owners. Relatedly, securing a firm controlling interest may lead to some degree of enhanced efficiency when it comes to marketing the property and taking the steps necessary to pass a wind-up resolution and appoint a liquidator.

That said, the "strata squeeze-out" approach carries significant risk. Even if a single entity acquires over 80% of the units, thereby guaranteeing a wind-up resolution if desired, this does not obviate the need to seek court confirmation. If confirmation were to be denied – for example, because a wind-up and sale would result in significant unfairness to one or more owners or creditors, or because of a failure to observe any of the essential requirements of the Act in passing a wind-up resolution – the controlling owner may be saddled with a property it cannot sell.

Beyond providing insight on how the gradual buy-up strategy may be treated in future cases, Barclay Terrace clarifies and summarizes the law on strata wind-ups more generally. In addition, continuing the trend in the jurisprudence, it illustrates that the transparency, sophistication, and robustness of the marketing and sale process will continue to be a familiar target in strata wind-up litigation. Accordingly, this process should be beyond reproach. Strata owners should be kept apprised of all proposed steps and material developments to the greatest extent possible, and ample opportunity should be given to owners to ask questions and seek out information throughout the process. Legal counsel can assist in structuring a robust process and ensuring that all parties are aware of their respective rights and obligations.

Readers should be advised that the Court's decision in Barclay Terrace has been appealed, and therefore the Court of Appeal will likely have the opportunity to weigh in on the issues discussed above.

Barclay Terrace is not the only recent decision of the Court to consider a contested application for confirmation of a wind-up resolution. On April 10, 2018, the Court released its decision in Strata Plan NWS837 (Re), 14 adding to the rapidly developing case law in this area. Stay tuned to Lay of the Land for an analysis on this case and its implications.

Footnotes

1 S.B.C. 1998, c. 43 [Act].

2 2017 BCSC 1661 [Bel-Ayre].

3 2017 BCSC 2386 [The Hampstead].

4 2018 BCSC 390 [Barclay Terrace].

5 Ibid at para. 17.

6 Thiessen v. Strata Plan KAS2162, 2010 BCSC 464 at para. 17.

7 The Hampstead at para. 136.

8 Barclay Terrace at para. 44.

9 Ibid at para. 46.

10 Ibid at para. 46.

11 Ibid at para. 50.

12 Ibid at para. 67.

13 Ibid at para. 49.

14 2018 BCSC 564.

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