Allocating costs in a multi-property receivership

Ontario Securities Commission v. Cacoeli Asset Management Inc. et al.
How are costs allocated in a multi-property real estate receivership with multiple secured creditors?

Summary: The Ontario Court has approved a receiver’s methodology for allocating general professional fees among real property entities in a receivership, holding that costs may be divided using a reasonable proxy for the work performed rather than through strict accounting or according to creditor recoveries. The receiver proposed allocating shared fees based on each property’s proportionate rental income, after separately tracking costs directly attributable to individual properties, because properties with more occupied units and tenants required greater oversight. A second mortgagee on one property argued that the allocation unfairly burdened the multi-residential properties and should instead reflect the amount of first-ranking mortgage debt. The Court rejected that approach as arbitrary and found no rational connection between mortgage balances and the receiver’s unallocated work. It confirmed that insolvency costs must be allocated fairly and equitably without altering creditor priorities, and that once a proposed methodology appears prima facie fair, the opposing creditor bears the burden of showing unfairness or prejudice, a burden the second mortgagee failed to meet.

On the application of the Ontario Securities Commission under section 129 of the Ontario Securities Act, on February 14, 2025, Grant Thornton Limited ("GT") was appointed as monitor (the "Monitor") of the Respondents. On May 23, 2025, the Court issued an endorsement appointing GT as receiver and manager (the "Receiver") of all of the assets, undertakings and properties (collectively, the "Property") of the Respondents. On June 5, 2025 (the "Appointment Date"), the Court issued an Order (the "Receivership Order") formalizing the appointment of the Receiver.

Following its appointment, the Receiver took possession and control of four real properties of the Respondents (the “Multi-Residential Properties” and the “Steeles Property”, respectively), which were the primary physical assets comprising the Property under receivership. Following the Court's approval of respective sale processes for each of the Multi-Residential Properties and the Steeles Property, the Receiver canvassed the market for prospective purchasers, reviewed bids, negotiated agreements of purchase and sale, and selected the successful bids.

The Receiver returned to Court for four approval and vesting orders approving the sale transactions. The Receiver also sought an ancillary relief order, among other things, approving the Receiver's proposed methodology for allocating general professional fees incurred in the proceedings among the Respondents holding Real Property (the “Real Property LPs”) based on their proportionate share of base rental income, as defined by the occupied units and the applicable underlying lease agreements (the "Cost Allocation Methodology").

The agreements of purchase and sale were conditional on the granting of the AVOs. The Court was satisfied that the factors articulated in Soundair were satisfied as, among other things:

1. the Real Properties were marketed through Court-approved sale processes by experienced real estate brokers; and

2. extending or restarting the sale processes was unlikely to generate superior offers and would instead result in additional professional fees without a corresponding benefit to stakeholders.

With respect to the Receiver’s proposed methodology for the allocation of costs of professional fees, the Court noted that the Receiver and its counsel had maintained accounting records particularized by property where work performed was directly attributable to a specific property. However, significant portions of the proceedings had necessarily been general in nature and related to the collective administration of the proceedings.

When assessing how best to allocate the general professional costs incurred in the administration of the proceedings, the Receiver considered three methods for the allocation of professional costs among the Real Property LPs, namely:

1. Straight-Line Allocation: general professional fees were divided equally among the Real Property LPs;

2. Share of Rental Revenue Allocation: general professional fees were divided among the Real Property LPs based on their proportionate share of base rental income, as defined by the occupied units and the applicable underlying lease agreements; and

3. Sale Price Allocation: general professional fees were allocated among the Real Property LPs based on the proportionate sale price achieved in the relevant sale process.

The Receiver was of the view that the Share of Rental Revenue method represented the most fair and equitable allocation of the expenses of the proceedings, because:

1. each of the Real Property LPs were subject to tenancies generating rental income. While the Steeles Property could have longer-term development potential, all of the arm's-length bids submitted in its sale process appeared to have been submitted based on its existing income-generating use, which supported rental revenue as an appropriate metric for allocation purposes;

2. in contrast to the Straight-Line methodology, the Share of Rental Revenue methodology most accurately reflected the effort required by the Monitor and the Receiver to oversee and/or manage the Multi-Residential Properties, as properties with a greater number of occupied units and tenants generally entail more intensive oversight and administration; and

3. the Sale Price methodology would distort the allocation by overstating the relative value of the Steeles Property, as the purchaser’s credit bid significantly exceeded the market value reflected by the results of the sale process undertaken for the Steeles Property and, therefore, did not serve as a reliable proxy for relative administrative burden or effort.

Vault Capital Inc. (“Vault”) held a second mortgage on one of the Multi-Residential Properties (the “Centreville Property”) securing up to $2,000,000. Vault opposed the Receiver’s proposed allocation, arguing that it favoured the mortgagee for the Steeles Property. Vault submitted that because a professional manager was appointed to provide property management services for the Multi-Residential Properties, an allocation of the Receiver’s and its counsel’s professional fees based on rental income would result in a disproportionate allocation to the Multi-Residential Properties. Instead, Vault suggested that the professional fees should be allocated using a method that reflects the amount of first-ranking mortgage debt each of the Real Properties carried.

The general principles governing the allocation of a receiver’s costs include:

1. The allocation of such costs must be done on a case-by-case basis and involves an exercise of discretion by a receiver or trustee;

2. Costs should be allocated in a fair and equitable manner, which does not readjust the priorities between creditors, and which does not ignore the benefit or detriment to any creditor;

3. A strict accounting to allocate such costs is neither necessary nor desirable in all cases;

4. A creditor need not benefit “directly” before the costs of an insolvency proceeding can be allocated against that creditor’s recovery;

5. An allocation does not require a strict cost/benefit analysis or that the costs be borne equally or on a pro rata basis;

6. Where an allocation appears prima facie as fair, the onus falls on an opposing creditor to satisfy the court that the proposed allocation is unfair or prejudicial.

The Court held that Vault’s proposed allocation based on the amounts secured by first mortgages on each of the Real Properties was arbitrary, and did not reflect a rational connection between the aggregate amount of unallocated fees charged by the Receiver and its counsel and an amount to be allocated based on the amounts secured by first mortgages. The Receiver’s proposed methodology most accurately reflected the effort required by the Monitor and the Receiver to oversee and/or manage the Multi-Residential Properties, as properties with a greater number of occupied units and tenants generally entail more intensive oversight and administration. The Court was satisfied that the Receiver’s proposed allocation appeared prima facie fair and found that Vault had failed to discharge its onus of showing that the proposed allocation was unfair or prejudicial.

The Court approved the Receiver’s proposed allocation methodology.

Judge: Justice Cavanagh

Professionals involved:

• Ian Aversa, Miranda Spence and Matilda Lici of Aird & Berlis for Grant Thornton (Jonathan Krieger and Jason Kanji) as receiver

• Erin Hoult for the Ontario Securities Commission

• Derek Ketelaars and Akshay Sandhir of Scalzi Law for Clifton Blake

• Caroline Harrell of Adair Goldblatt Bieber for Cacoeli

• Julian Binavince of Levy Zavet for Vault Capital

• Oren Chaimovitch of Devry Law for Cosman Mortgage Holding Corp.

• Thomas Gertner of Gowling WLG for CMLS Financial

• Sam Robinson of Stockwoods for MCAP Financial