Receiver Can Sell Property Free of Unit Holders’ Interests

The dispute in Firm Capital Mortgage Fund Inc. v. 2012241 Ontario Ltd. (ONSCJ) centered on a commercial property owned and developed by 2012241 Ontario (the “Company”). The project was slated for completion in 2011, and agreements of purchase and sale had been signed in anticipation. TD Bank was the first mortgagee, on a mortgage registered in 2008. When the Company defaulted in 2011, TD Bank refused to lend additional funds and instead assigned its position to Firm Capital who appointed a Receiver. At this point, construction was nearly complete and some units had tenants already operating businesses out of their leased units. All of their agreements had been signed after the 2008 mortgage, but none were registered on title.

The Receiver, asserting that it did not have the financial resources to bring the project to completion, wanted to sell the property as a whole, to attract the widest possible market and maximize recovery. However, that would require the termination and “vesting out” of the existing leases and agreements of purchase and sale. The Receiver therefore brought a motion for court approval of the termination and vesting-out as part of its proposed sale process.

A group of the unit holders opposed the Receiver’s plan. Many had made significant financial investments in the project: some had paid for their units entirely, while others had made leasehold improvements at their own expense. They claimed the Receiver’s proposal benefitted only Firm Capital as mortgagee, while disregarding their interests as unit holders.

The court held that in this situation, Firm Capital’s position took legal priority over the interests of these buyers and tenants. Firstly, the latter were all parties to unregistered agreements and leases that had succeeded the mortgage, and which contained a subordination clause making them subordinate to any mortgages arranged by the developer. Next, although sections 78 and 79 of the Condominium Act, 1998 imposed statutory obligations on an “owner” or “declarant” to expedite the condominium registration process, neither Firm Capital nor the Receiver fell into these categories. Also, the unit holders were essentially asking the court to order specific performance of their purchase agreements, which courts resist doing if it involves ordering money to be borrowed and construction to take place simply to bring the condominium into existence. Finally, the equities of the situation did not favour the unit holders: although the Receiver’s plan to terminate the agreements and leases had different outcomes for various categories of purhasers, many could simply avail themselves of the right to have their deposits returned. Those who stood to lose the cost of leasehold payments had spent money at their own risk, and in the face of the subordination clause to which they had expressly agreed.

In the end, having found the Receiver’s plan to be reasonable, the court granted the motion, and approved the marketing and sale process as proposed.