Can a receiver disclaim pre-sale contracts for residential condo units?
Problems with the Burnaby real estate development began in the fall of 2019. Between November and December, 2019, four builder’s liens were registered against the title to the development. Construction of the development ceased on December 17, 2019, when the development was about 85% complete. By late 2019 or early 2020, the secured creditors had stopped funding the project and began taking action with respect to the development.
The developer was eventually placed into receivership and the court-appointed receiver was tasked with completing the real estate development and selling the finished units. The receiver brought an application for directions concerning pre-sale contracts that were in place with respect to certain units. The receiver sought to either disclaim those contracts or enter into a modified sale agreement that would allow the pre-sale purchasers to receive the units. Ten pre-sale contracts related to residential units and one related to a commercial unit. Many of the pre-sale purchasers opposed the application and sought to require the receiver to complete the sales entered into by the developer.
- Firstly, what are the respective legal priority positions as between the competing interests?
- Secondly, would a disclaimer enhance the value of the assets? If so, would a failure to disclaim the contract amount to a preference in favour of one party? And
- Thirdly, if a preference would arise, has the party seeking to avoid a disclaimer and complete the contract established that the equities support that result rather than a disclaimer?
The first issue was easily resolved. The three major secured creditors held valid and enforceable security against the development. The interests of the pre-sale purchasers under the contracts did not stand in priority to the legal interests and priority of the secured creditors. The development was not ready for occupancy and no strata plan had been filed to create the legal property interests that the pre-sale purchasers wished to acquire. Consequently, the pre-sale purchasers were in no position to seek what was essentially an order of specific performance against the receiver to force completion of the contracts.
Secondly, a disclaimer would enhance recovery for the secured creditors. The receiver introduced substantial evidence of its investigation of values and market analysis. The appraisals obtained by the receiver indicated that a further $3 million in value could be obtained if the contracts for the residential units were disclaimed and market values were recovered. Appraisals of the commercial unit suggested gross proceeds of $3.1–3.3 million (versus the $2.55 million contract price). Further, not disclaiming would result in a preference to the pre-sale purchasers in respect of value that would otherwise accrue to the secured creditors under their priority security.
The Court saw no basis to criticize the receiver’s estimates of value. The receiver had considered all relevant interests and conducted various information-gathering exercises to determine estimates of values. Returning the units to the market after a disclaimer of the contracts would likely enhance recovery of the assets in the development. Moreover, allowing the contracts to complete would likely result in the pre-sale purchasers obtaining a preference in respect of the priority claims held by the secured creditors.
Finally, the Court considered equity arguments. The Court recognized that some of the pre-sale purchasers were first time homebuyers who had planned and saved for this opportunity, thinking it was their chance to finally break into the housing market. A disclaimer would cause them financial hardship. However, the equities were not tipped in favour of the pre-sale purchasers in these circumstances.
The Court concluded that the receiver was at liberty to disclaim the contracts and take immediate steps to remarket and sell the units in question.
Counsel: Alan Frydenlund, Q.C. of Owen Bird Law Corporation for the Petitioner, William Roberts and Noor Mann of Lawson Lundell LLP for Bancorp Growth Mortgage Fund II Ltd., Bancorp Balanced Mortgage Fund II Ltd. and Bancorp Financial Services Inc. and Vicki Tickle of McMillan LLP for PK Capital Ltd.
Judge: the Honourable Madam Justice Fitzpatrick