Appointing a receiver with power of sale where debtor asserts equity of redemption?

Bank of Montreal v Haro-Thurlow Street Project Limited Partnership, 2024 BCSC 47
Can a receiver be appointed with a power of sale where the debtor asserts its equity of redemption?

Overview: In this case, the Court considered whether a receiver with a power of sale could be appointed in circumstances where the debtors asserted their equity of redemption. The Court acknowledged that a receivership, including one that entails sale powers, would have an effect on the debtors. However, that must be balanced against the interests of the lender, who is entitled to appoint a receiver and realize on its security failing repayment. The Court appointed the receiver, but delayed its right to undertake any sales efforts for about a month and a half and its right bring any sale approval application until after April 26, 2024.

The petitioner, Bank of Montreal, was a secured creditor of the respondent limited partnership, which owned a development property in downtown Vancouver, BC. BMO was owed over $82.2 million in principal and interest, and its debt had been in default since July 2023. BMO sought the appointment of a receiver of the real and personal property secured in its favour, effective in early 2024, with the principal purpose of arranging a sale of the property by spring 2024 to repay the debt owing to it. All of the respondent debtors/guarantors, with one exception, opposed the appointment of a receiver, particularly one having the power of sale. They sought further time—to June 2024—to arrange a refinancing of the lands, asserting that they were entitled to and needed this further time to allow them an opportunity to redeem their equity of redemption. They relied on their continued cooperation in remitting the monthly rents to partially pay the interest and in responding to any other request for documentation or information by BMO.

BMO emphasized that the Borrowers had not secured any concrete offers to refinance the debt. They were, at best, “hoping” that they would be able to refinance by June 2024. By June 2024, the debt will be at approximately $85 million. BMO argued that the Borrowers had been in default for five months and were simply seeking more time for a market reversal or “miracle”, all the while disregarding the delay and prejudice that was being visited upon BMO in the face of their unsupported hope that the property may be worth more than what was owed on the debt. BMO claimed that it had lost confidence in the Borrowers’ ability to repay the debt, and wanted a timely sale of the property to be arranged by the receiver. It would be unreasonable to allow the Borrowers another six months (to June 2024) within which to possibly find the solution to their financing woes, beyond the five months already provided to them, over which time no sale or refinancing had occurred.

BMO sought the appointment of a receiver pursuant to s. 39 of the Law and Equity Act, which allows a court to do so if it is “just or convenient” in the circumstances. BMO did not seek an appointment under the Bankruptcy and Insolvency Act so as to avoid any finding that the Borrowers were insolvent.

The granting of a receivership order is “extraordinary relief which should be granted cautiously and sparingly”. All relevant factors should be viewed holistically. The main plank of the Borrowers’ argument was that BMO was attempting to do an “end run” around the usual foreclosure practice so as to defeat their equity of redemption. They objected to any receiver having a power of sale until after the expiry of a six-month redemption period, arguing that BMO had failed to establish any “special circumstances” to shorten the “usual” period. The “usual” case is that, in the absence of special circumstances, a six-month redemption period will be set, which recognizes the right of the mortgagor to seek either a sale or refinance of the debt in a foreclosure. The onus of proving any special circumstances rests on the mortgagee, usually said to arise from a lack of equity or wasting of the property.

The issue could be considered through the lens of either foreclosure or receivership, as both are paths that a secured creditor, such as BMO, may follow. A secured creditor is entitled to elect the means by which the security will be enforced, as provided in the credit agreement, subject to the Court granting any relief sought from it. In foreclosure law, the Court is able to exercise its equitable jurisdiction to fashion a redemption period. The practice in most cases is to set a six-month redemption period, save in special or extraordinary circumstances. The onus rests with the mortgagee to to establish that a shortened redemption period should be set in light of “extraordinary” or “special” circumstances. In most cases, those circumstances will be a proven risk by a lack of equity (either presently or over the redemption period) or some jeopardy to the property that requires immediate attention.

In this case, BMO chose to pursue a receivership, not a foreclosure. In receivership, a secured creditor bears the onus of establishing the appropriateness of the appointment, again recognizing that it is “extraordinary relief which should be granted cautiously and sparingly”. If the appointment is appropriate, the Court will then proceed to consider what powers should be granted to the receiver, including whether there should be a power of sale and, if so, when any sale powers should be effective. Accordingly, there is great similarity in the test to be applied in both paths—whether foreclosure and/or receivership—in that the onus rests of the secured creditor/mortgagee to show special circumstances or justify the extraordinary relief sought.

Among other things, the Court should consider the debtor’s equity of redemption in terms of whether a receiver will be appointed and, if so, whether that receiver will be granted the power of sale and when. Such a consideration is clearly relevant to the question as to whether any such appointment and power is “just or convenient”, again having regard to the nature of the relief sought. In addition, a consideration of any equity of redemption also comes within the Maple Trade receivership factors in relation to the “effect of the order upon the parties”.

The property was a tenanted commercial and residential complex, i.e. an operating business. It was also a unique development property, which will attract only a certain cohort of potential purchasers. Selling the property would require the specialized expertise of a receiver to competently list and market the property, which may include the receiver retaining a commercial real estate brokerage. Further, the Borrowers’ position, that BMO should be delayed in being granted any right of sale until after June 2024, would significantly expose BMO to more risk. When one considers that any sales approved after that time would further delay repayment, any sale would have to achieve in excess of $85 million (to account for a further six-months interest ($2.7 million)) and pay outstanding and accruing property taxes, commissions on a sale and receiver expenses. The Court noted that even if one accepted that the real estate market is not declining, but remaining stable, this scenario would put BMO into a far riskier recovery situation that even what presently existed.

The Court acknowledged that a receivership, including one that entails sale powers, would have an effect on the Borrowers. However, that effect must be balanced against the interests of BMO, who was entitled to appoint a receiver and realize on its security, failing repayment, within a reasonable period of time after default, and in circumstances where risk of repayment exists. BMO met its burden to establish that it was just and convenient to appoint the receiver. The Court appointed the receiver effective as of January 12, 2024 so as to allow the receiver to investigate the circumstances of the property and the rental business with a view to considering how a sales process might be implemented. However, the receiver would not be empowered to undertake any sales efforts until after February 23, 2024. In addition, the receiver would be unable to file any application for approval of any sale until after April 26, 2024.

Judge: Justice Fitzpatrick

Counsel: Kibben Jackson and Mishaal Gill of Fasken for BMO; Scott Turner and Ding Chang Han of Turner & Co. for Haro-Thurlow Street Project Limited Partnership et al.; Ritchie Clark KC of BHL Vancouver for Forseed Haro Holdings Ltd.; Colin Brousson of DLA Piper for Terrapoint Developments Ltd.; Dennis Fitzpatrick of Burns Fitzpatrick for Wei Dong et al.; Daniel Shouldice of McMillan for Treasure Bay HK Limited; Claire Hildebrand of Blakes for Deloitte as Receiver