Can a stalking horse bid be made subject to a right to redeem the property?
The Receiver of a six-storey commercial project in Vancouver (“Gateway”) ascertained that a significant amount of work was required to bring the project to completion, estimated to cost in excess of $600,000 and take up to eleven months to complete. The Receiver was approached by and entered into an agreement whereby a third party (the “Stalking Horse Bidder”) was willing to purchase the entire development for $38.25 million. Accordingly, the Receiver sought approval of a stalking horse bid process with respect to the sale of the entire development and a vesting order of title to the stalking horse bidder subject to the outcome of the stalking horse bidding process.
A stalking horse bid process involves the court approving an initial offer and then putting into place and implementing a sales process whereby the property is marketed with a view to trying to obtain better offers. If no other offers are received, the stalking horse bidder’s contract will be completed. If superior bids are received within the time stipulated in the bidding process, the stalking horse bidder has the opportunity to improve its offer. The rationale is that the property will be sold for a price not less than—and potentially more than—the stalking horse offer, and in a relatively short period of time.
The issue before the court was whether it was appropriate to grant a vesting order in favour of the stalking horse bidder, subject to a better offer being received. Gateway argued that the vesting order as drafted should be amended to include a provision that in the event that no other bids were received, the stalking horse bidder would be entitled to a vesting order, “only if Gateway has not obtained an extension to the redemption period”.
The right to redeem is fundamental in the law relating to mortgages. The redemption period expired in July, and Gateway made no application to extend it. Based upon the evidence before the Court, an application to extend would not succeed. The test to extend the redemption period is:
- there must be sufficient equity in the property; and
- there must be a reasonable likelihood of payment.
There was no equity in the property. The stalking horse bid was superior to the outcome that would follow if the subdivision plan was registered and the pre‑sales were to close. On the question of reasonable likelihood of payment, there was no evidence that would lead to the inference that payment would be forthcoming. The fact that there was no equity would tend to suggest that the possibility of a third-party lender advancing sufficient funds to see the petitioner made whole was improbable.
In most cases where there is an application for sale approval, there is evidence of marketing and appraised value. The purpose of the appraisal and marketing evidence is to show the court that the proposed offer is reasonable in all of the circumstances. In this case, Gateway had already been marketing the property, and its pre‑sales were evidence of value to be received if the subdivision process was completed. Gateway had sold 92 percent of the square footage, and only 8 percent remained to be sold. There was little or nothing to be gained by having an appraisal or marketing evidence because there was very little left for Gateway to market. The court, therefore, had the evidence it needed to assess the efficacy of the stalking horse bid.
The redemption period expired, and Gateway had not brought an application to extend it. In rare cases, courts have allowed a respondent to redeem after a sale has been approved, and in rarer cases still, following an order absolute. However, the stalking horse bidder irreversibly committed to purchase, subject only to being outbid. If Gateway intended to apply to extend the redemption period, the time to do so had passed. The Court inferred that it had not done so because it could not succeed. There was no evidence that Gateway would be in any better position to redeem in the near future.
Granting a vesting order in favour of the stalking horse bidder, subject to there being a better offer, represented the best chance for maximum recovery.
Judge: Wilson J.
Counsel: Colin Brousson of DLA Piper for the Receiver Bowra Group Inc.; Bryan Gibbons and Noor Mann of Lawson Lundell for Institutional Mortgage Capital Canada Inc.; Ritchie Clark Q.C. of BHL Vancouver for 0876242 BC Ltd. and Gateway Development Limited Partnership
By Matilda Lici