Mar 25, 2019

BC Supreme Court Confirms Developer-Driven Wind-Up Resolution

The Owners, Strata Plan VR2702 (Re), 2018 BCSC 390 (CanLII)

Introduction

On July 28, 2016, amendments to the BC Strata Property Act[1] (the “Act”) came into force that lowered the threshold required to pass a wind-up resolution from a unanimous vote to 80%.[2] Re The Owners, Strata Plan VR2702[3] (“Barclay Terrace”) was the first case decided under the new 80% voting threshold in which the BCSC confirmed a less than unanimous developer-driven wind-up resolution.

Background

Working in concert, two developers (the “Developers”) gradually purchased 34 of the 36 strata units in the Barclay Terrace strata complex for the purpose of redeveloping the land. The Developers ultimately opted to sell the Barclay Terrace lands in combination with a neighbouring strata development they had acquired. In June of 2017, the Developers entered into a conditional agreement to sell the two properties for approximately $105 million.

In September 2017, the Barclay Terrace strata corporation held a special general meeting at which the Developers passed a resolution to wind-up the strata corporation and appoint a liquidator (the “Resolution”) by a margin of 94%. The Resolution was opposed by the owners of the two remaining individually-owned strata lots (the “Minority Owners”),[4] who subsequently challenged the strata corporation’s application for a court order to confirm the Resolution.[5] Among numerous objections, the Minority Owners argued that their units were improperly marketed without their knowledge or approval and that they should have been consulted, or at least informed, during the marketing and sale process.[6]

Was Excluding the Minority Owners from the Sale Process Significantly Unfair?

The Minority Owners invoked the BCSC’s decision to confirm a wind-up resolution in The Owners, Strata Plan VR2122 v. Wake (“The Hampstead”),[7] where the BCSC observed that the owners were “informed every step of the way” and “the process was transparent”.[8] The Minority Owners argued that, unlike in The Hampstead, “the process was obscure” and they were not sufficiently informed.[9] The Minority Owners complained that they only learned their units were being marketed, in combination with the neighbouring strata complex, when they received a letter from counsel for the Developers, informing them of the agreement to sell the properties for $105 million and advising them that they would receive $2,677,500 and $2,205,000 respectively. The Minority Owners also complained that the Developers withheld details such as the purchaser’s identity from them.[10]

In response, the Developers argued that they had taken steps to address the Minority Owners’ concerns, which included amending the confidentiality protections in the sale agreement and providing the Minority Owners with a copy. More importantly, the Developers argued that this case could be differentiated from The Hampstead, which involved a mixed-use development and required the reconciliation of varying interests to effect the wind-up. Here, there was no such need for reconciliation because the Developers owned enough units to pass the Resolution without the support of the Minority Owners.

On this point, Justice Milman agreed that the “procedural accommodations to which the Minority Owners [could] fairly lay claim” must vary based on the Developers’ controlling interest.[11] Justice Milman noted that the Developers’ original strategy appeared to have been to purchase all 36 units of Barclay Terrace to effect a wind-up via unanimous resolution. As such, the Minority Owners “were able to see the writing on the wall by late 2015 or early 2016, when the [Developers] sought and then acquired a controlling block in pursuit of their patent agenda to redevelop the property.”[12]

Importantly, Justice Milman held that the Minority Owners were not prejudiced by their lack of involvement in the marketing and sale process. On the contrary, Justice Milman observed that the Minority Owners stood to “share rateably in the added benefit of the assemblage, having put up no capital and taken no risk to obtain it.”[13]

Justice Milman’s concluding comments on this issue are instructive:

What legitimate expectation can the Minority Owners have to participate in the marketing and sale process in such circumstances? They cannot reasonably expect to exercise any measure of control or a veto over any deal that is struck.[14]

Ultimately, Justice Milman confirmed the Resolution, holding that it was in the best interests of the owners and would not give rise to significant unfairness to the Minority Owners.[15]

Significance

Developer-Led Wind-Ups are Permissible

Barclay Terrace is an important decision because it confirms that under the new 80% voting threshold, developer-led wind-ups are permissible. More specifically, if a developer acquires enough strata units to guarantee the passage of a wind-up resolution, with little or no input from dissenting owners, this alone will not constitute “significant unfairness” for the purposes of section 278.1 of the Act.

However, it is important not to view Barclay Terrace as an unqualified endorsement of developer-led wind-ups, as there remains the potential for significant unfairness in these situations. If, for example, the Minority Owners in Barclay Terrace had provided evidence that the Developers had, upon reaching the 80% ownership threshold, applied abusive strong-arm tactics to squeeze them out, the result of the case may have been different. Developers who seek to invoke the wind-up strategy applied in Barclay Terrace should be mindful that wind-ups remain a court-supervised process and approval is not automatic once an 80% vote is achieved.

Upholding the Legislative Purpose

The Barclay Terrace decision is also significant because it upholds the legislative purpose behind lowering the voting threshold required for wind-up resolutions. The previous framework presumed a requirement of unanimous consent,[16] which meant that a small minority of owners could frustrate widely supported wind-up efforts by demanding prohibitive premiums for their units or simply voting them down. The decision in Barclay Terrace must be viewed in the context of the legislative effort to remedy this issue by lowering the voting threshold to 80%.

In a case like Barclay Terrace, where the owners of 80% or more of the units in a strata complex are willing to sell their units to a developer and collect substantial premiums for the collective sale, there is no principled reason to impede a developer’s ability to pass a wind-up resolution. The only difference between this scenario and one in which individual owners vote to wind-up a strata corporation and sell the lands to a developer is that, in the former, the owners have decided to vote with their feet. In other words, there was no unique unfairness perpetuated by the developer-driven wind-up in Barclay Terrace. The decisions of the 34 owners who chose to sell their units to the Developers can be treated as de facto votes in favour of a wind-up resolution. Viewed from this perspective, this is precisely the type of wind-up that the 2016 amendments were intended to facilitate. While the eventual wind-up vote may seem lopsided on its face, the Developers’ controlling interest did not unfairly prejudice the Minority Owners.

Participatory Rights Refused

The Barclay Terrace decision is also noteworthy insofar as the BCSC rejected the Minority Owners’ argument that they had a right to participate in the marketing and sale process. The BCSC held that once the Developers had acquired sufficient units to render passage of the wind-up resolution inevitable, “[a]ll that remained to be determined for the Minority Owners was the timing of the transaction and the amount they could expect to receive for their units.”[17] Here, the BCSC declined to read additional participatory rights into the wind-up provisions of the Act.

In Barclay Terrance, Justice Milman noted that the Minority Owners stood to receive substantial premiums in excess of three times the assessed value of their units as a result of the Developers’ efforts to assemble and sell Barclay Terrace along with the neighbouring strata complex.[18] Of course, it remained open to the Minority Owners to present evidence attesting to any unique hardship that resulted from their exclusion from the marketing and sale process. However, in the absence of such evidence, exclusion itself did not constitute significant unfairness. This is an important ruling because it should dissuade dissenting strata owners from attempting to filibuster future sale processes by demanding active involvement.

Conclusion

In their petition to confirm the Resolution, counsel for the Developers argued that, “[w]hen buying into a strata development, strata lot owners agree to relinquish certain rights and privileges that would otherwise be associated with individual home ownership.”[19] While this is broadly true, it is important to recognize that owners who purchased strata units prior to the 2016 amendment to the wind-up vote threshold reasonably expected that their consent was required to effect a wind-up. This critique is not without merit, but it is more accurately leveled at the legislative decision to lower the wind-up vote threshold, as opposed to the Barclay Terrace decision specifically. As Professor Douglas Harris has commented, “[a] regime that facilitates the capacity of a majority to take the property interests of a dissenting minority enables strata property owners to maximize the exchange value of their interests, but at the cost of dispossessing the minority.”[20] In the context of such a regime; however, the Barclay Terrace decision was the right one.


*J.D. Candidate at the Peter A. Allard School of Law at the University of British Columbia. Thanks to Professor Douglas Harris for his comments on previous drafts.

[1] SBC 1998, c 43 [Act].

[2] Act, supra note 1, s 272(1), as amended by the Natural Gas Development Statutes Amendment Act, 2015, SBC 2015, c 40 [Natural Gas Act].

[3] 2018 BCSC 390 [Barclay Terrace].

[4] One of the two remaining strata lots was owned by couple who had purchased their unit in 1992 and had lived in it ever since, and the other unit was owned by an individual who had purchased his unit in 2013 and had lived in it ever since.

[5] Pursuant to s 278.1(5) of the Act, in determining whether to make an order confirming a winding-up resolution, the BCSC must consider factors which include: (a) the best interests of the owners, and (b) the probability and extent, if the wind-up resolution is confirmed or not confirmed, of significant unfairness to the owners.

[6] Barclay Terrace, supra note 3 at para 32. Justice Milman also considered and dismissed the following arguments made by the Minority Owners: (1) the Resolution was improperly amended at the special general meeting, (2) the sale price was too low, (3) the allocation of 75% of the total sale price to the owners of Barclay Terrace was too low, and (4) the sale agreement contained deficiencies that may cause significant confusion and uncertainty.

[7] 2017 BCSC 2386 [The Hampstead].

[8] Barclay Terrace, supra note 3 at para 41 (citing The Hampstead, supra note 7 at para 136).

[9] Ibid at para 42.

[10] Ibid at para 38.

[11] Ibid at para 44.

[12] Ibid at para 46.

[13] Ibid at para 48.

[14] Ibid at para 49.

[15] Ibid at para 91.

[16] Act, supra note 1, s 272(1), before amended by the Natural Gas Act, supra note 2. If a 3/4 vote was achieved, it was possible for a strata corporation to apply to the BCSC under section 52(3) of the Act for approval of a wind-up resolution. Alternatively, owners could apply to the BCSC under section 284 of the Act for an order to wind up the strata. However, there is only one reported case dealing with each of these two methods, as noted by Professor Douglas C Harris, “Owning and Dissolving Strata Property” (2017) 50:4 UBC L Rev 935 at 947-950. This suggests that neither method was perceived as a viable means of effecting a wind-up.

[17] Barclay Terrace, supra note 3 at para 46.

[18] Ibid at para 67.

[19] See The Owners, Strata Plan VR2702 (22 November 2017), Vancouver, BCSC S-1710850 (Petition) at 8.

[20] Douglas C Harris, “Owning and Dissolving Strata Property” (2017) 50:4 UBC L Rev 935 at 942.