Last week’s CBA Insolvency Law Conference featured an expert panel of lawyers who shared what lenders and borrowers need to consider when dealing with real estate security, including how to value, protect and enforce. The panel discussed what is included in a proper suite of real estate security, best practices for updating the security and jurisdictional differences in enforcement across Canada. The panel also examined a fascinating case study involving a real estate development company whose receivership proceedings were converted into CCAA proceedings in very unique circumstances.
Participating in the panel were:
- Jeremy Nemers, Partner, Aird & Berlis LLP (moderator)
- David Gruber, Partner, Bennett Jones LLP
- Michael McDonald, Associate, Soloway Wright LLP
- Heather Meredith, Partner, McCarthy Tétrault LLP
Ensuring you have a comprehensive real estate security package
Michael McDonald began by giving an update on the real estate sector, noting that residential purchases have slowed with the increase in the cost of borrowing. The commercial market has remained relatively stable, although clients appear to be more hesitant and likely to do more due diligence before jumping into a deal. Developers have remained busy, as there is ongoing demand for residential developments.
Michael then discussed what constitutes a comprehensive real estate security package in the residential, commercial and development contexts. In a residential context, typically a mortgage and an assignment of insurance is given. A commercial real estate security package is much broader, typically including: a mortgage; an assignment of leases (which may include a general assignment, but also specific assignments for anchor tenants); a general security agreement to allow the lender to take over personal property and assets in order to keep the building operational; guarantees from individuals and entities who actually have money since the borrower is usually a shell company; environmental indemnities due to a lender’s potential exposure to environmental liabilities; and an assignment of insurance. From the perspective of a developer, the income from the property is based on its future value, so the developer needs to ensure it can take control of the development process by being first in line to get control of the assets. This includes getting: an assignment of construction contracts; an assignment of project plans, specifications and permits; as well as an assignment of purchase agreements for units in the property.
Michael turned to best practices in Ontario for updating real estate security on title. When the quantum of the mortgage has changed over time, insolvency professionals reviewing a client’s security package should keep in mind that, among other things: notices amending the mortgage security need to be registered against title; those amendments are subject to priority rules, meaning that amendments may not be in first priority to subordinate lenders and it is necessary to get a postponement from other lenders for every amendment; acknowledgments from guarantors of any amendment also need to be obtained; and title insurance needs to be updated. These considerations apply equally to situations of amalgamations and mergers for borrowers.
Jurisdictional differences in enforcement
David Gruber then covered certain differences in enforcement across Canada. David explained that these differences stem from the fact that, historically, a mortgage security took the form of an actual transfer of title, where the mortgagee became the legal and beneficial owner of the property, and the mortgagor just held an equity of redemption that was enforced in courts of chancery. In some provinces, the mortgage will include a power of sale in favour of the mortgagee, while in other provinces, this will not be enforceable as a clog on the equity of redemption.
In Ontario, while the power of sale is recognized, it is more common for mortgagees to seek a receivership order because they are worried about being found to have conducted an improvident sale. Depending on the rules of the province where the receivership is taking place, the process is different. In Ontario, the receiver is allowed to market the property for sale. In other provinces, the receiver is not able to sell or even market the property until the mortgagor’s equity of redemption has expired. As a result, in some cases, lenders will opt for a consensual CCAA or NOI over a receivership so that they are able to conduct a sale process right away without the debtor holding the process up.
Case study: Clover on Yonge
Heather Meredith then shared an interesting case study on the Clover on Yonge insolvency proceedings. A receivership application was brought by the lender, which was adjourned at the request of the company. In granting the adjournment, the Court applied the just and convenient test, but also considered the ability of the respondent to answer the allegations against it and concluded that the value of the property was not going to deteriorate during the adjournment period. Ironically, during the adjournment period, the COVID-19 pandemic began, and by the return date for the receivership application, the company brought a competing CCAA application. Although the Court granted the receivership, it rejected the lender’s argument that the CCAA was not appropriate for a real estate special purpose vehicle.
Concord Pacific then purchased an equity interest in the company and the company brought another CCAA application on the basis that all secured creditors and receivership costs would be paid. This time, the CCAA application succeeded over arguments that Concord had scooped the property without a sales process. Concord, as the new owner of the company, then wanted to disclaim individual unit purchaser agreements so that it could resell the units for market value. This was challenged by existing unit purchasers, who argued that they were entitled to the increase in value of the units since they signed their purchase agreements. At this time, there was not enough money to continue building since most units had already been sold, so no money was coming in while construction costs were increasing. Ultimately, a negotiation between the parties resulted in a compromise whereby purchasers had the option to receive compensation for their units, plus an 8% premium, or repurchase them at a higher price. Those options were worked into the company’s CCAA plan.