Taking on a construction lender for refusing to fund

GEC (Richmond) GP Inc. v. Romspen Investment Corporation, 2025 BCCA 332
Can a lender be held liable for terminating a loan?

Summary: Last year, we wrote about a case where the British Columbia Court considered whether Romspen Investment Corporation, a private mortgage lender, breached the duty of good faith in terminating a $422 million construction loan after failing to syndicate, a decision which ultimately led the borrower (a construction developer) to file for protection under the CCAA. In particular, the trial Court considered whether the contract required Romspen to continue funding its $212 million commitment when it was unable to syndicate the other $210 million. The trial Court found that Romspen was entitled to terminate the loan, did not breach its duty of good faith or honest performance, and met its obligations to use reasonable commercial efforts to syndicate the loan. The British Columbia Court of Appeal has now overturned part of that decision, finding that Romspen’s “lender commitment” of $212 million was a binding obligation independent of syndication, and that ceasing advances breached the agreement. However, damages were left to be assessed, as Romspen may yet establish entitlement to withhold funds based on other unmet loan conditions such as the fixed-price construction contract requirement. The Court upheld various of the trial Court’s findings, including that Romspen acted in good faith in its syndication efforts, while various other outstanding issues were remitted to the trial Court.

In 2017, the appellant Developers became involved in an ambitious $726 million development of seven residential and commercial towers covering an entire city block in Richmond (the “Project”). The appellant Guarantors guaranteed the Developers’ indebtedness. In 2018, GEC, also an appellant, pre-purchased two towers and some retail office space in the Project for over $100 million, and paid a $60 million deposit pursuant to a purchase and development agreement with the Developers, which it secured by way of a mortgage over the lands on which the Project was to be built.

The respondent, Romspen, began providing construction financing for the Project in February 2019. Romspen and the Developers entered into a commitment letter pursuant to which Romspen agreed to lend the Developers $90 million at 10% interest plus $1.8 million in fees, to be secured by, among other things, a first ranking mortgage on the Project Lands and first ranking general security agreements charging all personal property of the Developers. This loan also required the Developers and Guarantors to jointly provide general security agreements charging their personal property. In addition, Romspen required that GEC’s mortgage and option to purchase be subordinated to Romspen’s mortgage. GEC entered into a subordination and standstill agreement with Romspen in March 2019.

By mid-September 2019, the Developers had not been able to secure construction loan financing for the Project from a conventional lender, and asked Romspen to consider providing a construction loan of up to $422 million for the first phase of the Project. Romspen and the Developers understood that Romspen could not carry a loan of $422 million on its own and would have to syndicate part of it.

On November 22, 2019, Romspen, the Developers, and the Guarantors entered into the contemplated construction loan agreement (the “Loan Agreement”) pursuant to which Romspen agreed to provide a “Construction Loan Commitment Amount” defined as $422 million inclusive of the $95 million it had already advanced, subject to the terms and conditions of the Loan Agreement. Romspen would have until March 31, 2020 to syndicate the loan. Its portion of the Construction Loan Commitment Amount was defined as $212 million (inclusive of the $95 million already advanced), leaving an “aggregate $210 million” to be raised through syndication. On the same date the Loan Agreement was signed, GEC entered into a subordination agreement, subordinating its security to Romspen’s.

Romspen advanced funds under four separate draws, bringing the funding amount to $143.6 million inclusive of the $95 million already paid to the Developers before the agreement was signed. Romspen was unable to syndicate the loan and, accordingly, advised the Developers that it would suspend all further draws and advances under the Loan Agreement because the syndication condition had not been fulfilled. The Developers were unable to secure alternate financing to continue with the Project, and subsequently sought restructuring of their substantial debt in proceedings under the Companies’ Creditors Arrangement Act.

GEC commenced an action against Romspen, alleging that Romspen’s decision to stop funding the Project was a breach of the subordination agreement. Romspen sought judgment against the Developers and Guarantors for the outstanding debt owed under the Loan Agreement and guarantees. The Developers and Guarantors commenced an action against Romspen, alleging that Romspen’s decision to stop funding the Project was a breach of the Loan Agreement. The claims were heard together on the issue of liability only, with damages to be assessed in a later proceeding.

The trial judge concluded that Romspen had no obligation to provide a minimum loan of $212 million to the Developers. Rather, the $212 million lender’s portion represented a maximum contribution subject to all conditions, including successful syndication. The judge therefore concluded that Romspen had not breached the Loan Agreement and ordered the Developers and Guarantors to pay the principal and interest due under the loan. He also held that GEC was bound by the subordination agreement and had breached it when it commenced the action challenging Romspen’s priority over the security.

On appeal, the Developers, Guarantors, and GEC argued that Romspen breached its $212 million funding obligation under the Loan Agreement, thereby causing the appellants damage and loss. The Court of Appeal found that the trial judge erred in principle in coming to the conclusion that the impugned provisions of the Loan Agreement imposed a limit on any contribution Romspen might make, rather than imposing a commitment to loan the amount of $212 million. The judge’s interpretation failed to give meaning to the parties’ creation of a $212 million “Lender Commitment” separate from the $422 million Construction Loan Commitment Amount Romspen would be obligated to provide upon successful syndication. On the judge’s interpretation, these two commitment amounts, separately defined and referenced throughout the Loan Agreement, would serve no purpose since both sums would be subject to all the same conditions, including the syndication condition.

The existence of an obligation to fund $212 million was also consistent with the obligation of the Developers to pay a lender’s fee of $5.275 million upfront (one-half of the full $10.5 million fee if syndication occurred) as part of the first draw under the Loan Agreement. A fee of that magnitude made little sense in the context of Romspen having no obligation to fund beyond March 31, 2020 if it could not syndicate. The impugned provisions could only be read coherently if Romspen’s funding commitment was $212 million regardless of syndication. It followed that Romspen breached the Loan Agreement when it refused to advance further funding after March 31, 2020 on the basis of the syndication condition.

This finding did not, however, provide a straightforward path to the recovery of damages by the appellants because Romspen also argued at trial that it was entitled to suspend funding on March 31, 2020 based on funding conditions other than the syndication condition. Romspen relied on the fixed-price contract funding condition set out in the Loan Agreement, which required the Developers to enter into a fixed-price construction agreement with the general contractor for the entirety of the first phase of the Project.

The trial judge found that as of March 31, 2020 the Developers had not yet met this condition. He also found that Romspen had waived the condition in respect of the first four draws, but had informed the Developers that the condition would need to be met before Romspen would advance the fifth draw. As the fifth draw could not be advanced before April 1, 2020, the need for the Developers to comply with the fixed-price condition had not yet crystallized, and could not support Romspen’s refusal to fund on March 31.

Thus, although the Court of Appeal found that Romspen breached the Loan Agreement when it refused to fund any further advances beyond March 31, 2020 based on the syndication condition, it remained to be determined, in the assessment of damages, whether Romspen would have been entitled to rely on the fixed-price contract condition or any other funding condition to refuse to fund draws requested after March 31, 2020.

The Court of Appeal found in Romspen’s favour on the good faith issues, affirming that Romspen acted in good faith and made commercially reasonable efforts to syndicate the $422 million construction facility before March 31, 2020, rejecting the Developers’ and Guarantors’ alternative claims that Romspen’s efforts were inadequate or dishonest. The Court found no basis to disturb the trial judge’s conclusion that Romspen had conducted an active marketing process but was thwarted by the onset of the COVID-19 pandemic and deteriorating credit markets.

The Court also agreed that Romspen did not breach its duty of honest performance by failing to warn the borrowers that syndication would likely fail; the evidence showed that Romspen’s communications were candid and that it continued to explore potential participants. In other words, although Romspen was ultimately found to have breached the funding obligation based on the interpretation of the contract, its conduct during the syndication process remained consistent with the principles of good faith and fair dealing.

The Court further upheld the trial judge’s findings that GEC violated the standstill clause in its subordination agreement when it brought an action challenging Romspen’s priority and seeking equitable subordination. The clause prohibited GEC from contesting the validity or priority of Romspen’s security while its debt remained outstanding, finding this restriction enforceable and not contrary to public policy.

The Court remitted certain matters for further consideration at trial, including whether the Guarantors should be relieved from liability given the appellate finding that Romspen breached the loan agreement.

Judges: The Honourable Madam Justice Fenlon, the Honourable Mr. Justice Butler and the Honourable Justice Winteringham

Professionals involved:

• John Sullivan and Salman Bhura of Harper Grey for GEC (Richmond) GP Inc. and Global Education City (Richmond) Limited Partnership

• Shane Coblin and Milaad Hashmi of Kornfeld for Alderbridge Way Limited Partnership, Alderbridge Way GP Ltd. and 0989705 B.C. Ltd.

• Peter Bychawski and Joshua Hutchinson of Blakes for Romspen Investment Corporation