When constitutes a fair and reasonable sales process during the COVID-19 crisis?
The Receiver sought an order approving the Sale Procedure outlined in the First Report of the Receiver, which features an asset purchase agreement by way of a credit bid with the Applicant (the “Stalking Horse Agreement”). The asset consists primarily of a commercial rental property known as the North Barrie Crossing Shopping Centre (the “Barrie Property”), which is a shopping centre with 27 tenants.
The issue on this motion was whether the Sale Procedure was fair and reasonable. The parties agreed that the criteria to be applied were set out in the well-known case of Royal Bank of Canada v. Soundair Corp. (1991):
- whether the receiver has made a sufficient effort to get the best price and has not acted improvidently;
- whether the interests of all parties have been considered;
- the efficacy and integrity of the process by which offers are obtained; and
- whether there has been an unfairness in the working out of the process.
The approval of a particular form of Sale Procedure must keep the Soundair principles in mind and assess:
- the fairness, transparency and integrity of the proposed process;
- the commercial efficacy of the proposed process in light of the specific circumstances facing the receiver; and
- whether the sales process will optimize the chances, in the particular circumstances, of securing the best possible price for the assets up for sale.
The crux of this motion was that the Sale Procedure was being contemplated during the COVID-19 pandemic. At the time the pandemic hit, there were 27 tenants at the Barrie Property. Since then, 16 tenants have temporarily suspended operations, with another 6 tenants offering limited services. However, the financial difficulties encountered by the Debtor pre-dated the pandemic. Prior to the Receivership Order being granted, the Debtor had been attempting to sell or refinance the Barrie Property for approximately 16 months. It was in default on its indebtedness. There were also substantial unpaid realty taxes from late 2018 up until the time of the Receivership.
The Debtor argued that the credit bid contained in the Stalking Horse Agreement was significantly below appraisals obtained by it. The Court did not accept this argument. It found that the Receiver obtained an estimate on the Barrie Property from a reputable commercial real estate company. The estimate was comprehensive and expressly factored into the valuation difficulties in collecting rental income due to the COVID-19 crisis. By contrast, the Debtor’s estimates did not deal with the ramifications of COVID-19. Moreover, the fact that the Debtor was unable to sell the Barrie Property over a protracted period of time leading up to the Receivership suggested that the price it was asking for was too high.
The Debtor also complained that the Receiver was prepared to undertake the Sale Procedure without obtaining a valid environmental report, a valid building condition assessment report or any tenant estoppel certificates. The Receiver argued that there was an existing environmental report that was approximately 1.5 years old, the Barrie Property was only recently constructed (2016), and tenant estoppel certificates would be very difficult to obtain, given the current economic climate and the fact that some tenants were not operating and were seeking rent abatements.
The Court held that it was preferable to obtain an environmental report, valid building condition assessment and tenant estoppel certificates from the seven major tenants. The Receiver had recently determined that the environmental assessment report could be obtained in three to four weeks and the building condition assessment report in two to three weeks. Both reports could be obtained at a very modest cost. As such, it was best to err on the side of caution and ensure that this information, which may enhance the Sale Procedure, was available to bidders.
Similarly, it was also reasonable to obtain tenant estoppel certificates from the seven major tenants because bidders would likely be interested in this information. It would be more difficult to obtain the certificates from the minor tenants, many of whom are not fully operating at this time. The Court ordered the to use best efforts to obtain the tenant estoppel certificates from the seven major tenants as soon as reasonably possible.
Finally, the Debtor submitted that a Sale Procedure should not be undertaken at this time, given the COVID-19 crisis. The Court noted that this insolvency was not generated by the COVID-19 crisis. The Debtor had experienced financial difficulty for several months preceding the pandemic and had been unsuccessfully attempting to sell the Barrie Property for some time. There was no certainty that the economic situation will improve in any given period of time and it may continue to ebb and flow before it gets better.
The Court held that the Sale Procedure complied with the principles set out in Soundair. The Stalking Horse Agreement and Sale Procedure struck the necessary balance to move quickly and to address the deterioration of the value of the business, while at the same time setting a realistic timetable that would support the process. The Court granted the Receiver’s Order authorizing the Stalking Horse Agreement and the Sale Procedure.
Counsel: Michael De Lellis and Shawn Irving of Osler, Hoskin & Harcourt LLP for the Applicant, Tim Duncan and Michael Citak of Gardiner Roberts LLP for the Respondents and Eric Golden and Chad Kopach of Blaney McMurtry LLP for RSM Canada Limited, in its capacity as Court-appointed Receiver.
Judge: McEwen J.