Mar 16, 2018

Analyzing the Winding-Up Process of Stratas in BC Using a Corporate Law Prospective

The Owners, Strata Plan VR2122 v Wake, 2017 BCSC 2386 (CanLII)

Introduction

The Owners, Strata Plan VR2122 v Wake[1] is one of the first cases where a strata corporation sought confirmation for a disputed winding-up of a strata in BC, since the provincial government lowered the threshold vote to wind-up to just 80%. This is potentially an important case that will set precedent for how courts fulfill their role of oversight in approving winding-up orders. This paper analyzes what transpired in Wake using Canadian corporate law principles, concepts and procedures. Using a corporate law lens to examine this case is quite useful and appropriate because strata legislation is a combination of property law, corporate law, and contract law.[2]

The Case

The strata building (The Hampstead) at issue in Wake was constructed in 1988, in the Lower Davie area of Downtown Vancouver and consists of 33 units.[3] In recent years, the building has required significant repairs. Between 2014 and 2015 the owners contributed $495,177 ($15,000 per unit) in order to maintain the common properties.[4]The most current depreciation report from 2014 estimated that the repair costs for the building in 2018 would be $675,000 ($20,000 per unit).[5]Given the future repair costs and the likelihood of a significant premium from a collective sale, in early 2016 the strata council began exploring the possibility of a sale of the entire building.[6]The council believed that the redevelopment value of The Hampstead was at a peak based on the recent re-zoning of the Lower Davie area.[7]

On 9 March 2016 the council meeting minutes show that developers were approaching the council inquiring about potentially developing The Hampstead.[8]There were then five information session meetings held between April and May 2016, where developers and brokers made their pitch.[9]There was some discussion about the anticipated costs of future repairs to the building and infrastructure at these meetings as well.[10]

On 24 May 2016 the president sent out an email telling the owners that the next step in the “the process of selling our property” was to hire legal council.[11]After a SGM on 5 July 2016 the strata council retained Lawson Lundell LLP to assist with the winding-up process.[12]From that point forward the process of winding-up the strata had built momentum and the strata council did not seriously consider alternatives. The strata council held further information sessions, but they were all orientated towards the sale of the property. A real estate broker was hired, offers where tendered and eventually the strata council identified the Townline offer as the best offer. Two strata councillors negotiated and signed a letter of intent.[13]On 15 June 2017, 28 out of the 33 strata lots (84.4%) voted in favour of winding-up the strata.[14]On 21 November 2017, the strata corporation held a SGM and 27 out of the 33 strata lots (81.8%) approved the winding-up of the strata.[15]

Discussion and Analysis

The process used by the strata council to decide to wind-up and sell The Hampstead is very problematic from a corporate law perspective. The decision to wind-up and sell a strata is analogous to the decision a corporation faces when it is an acquisition target. In both cases, the fiduciary duties of both directors and strata councillors might be affected.[16]Directors and strata councillors may also have conflicts of interest when there is a sale. As they might benefit more from a sale than other groups of owners. Therefore, corporate law principles and procedures may help improve the process used when considering the winding-up of a strata. The statutory duties for strata councillors are found in the Strata Corporation Act[17]and mirror those found in the Canada Business Corporation Act.[18]The duty of care analysis outlined in Peoples Department Stores Inc.[19]was adopted by the BC Court of Appeal for strata counselors in Dockside Brewing Co.:

Directors and officers will not be held to be in breach of the duty of care… if they act prudently and on a reasonably informed basis… In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts… are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.[20]


Based on the BCSC’s finding that the members of the strata council did not seriously consider alternatives, it appears that they did not use an appropriate degree of prudence and diligence in reaching their decision to pursue the winding-up of The Hampstead.

At best the council’s consideration of their options was superficial. There was very little analysis done by the councillors in making their decision to sell. One issue is that the council did not actually make a formal recommendation to wind-up.[21]They just pushed the process forward without actually taking a stance. It seems that the councillors chose to push the process forward because of a very rudimentary calculation. They relied on a three-year-old depreciation report and the belief that the condo market had reached a peak.[22]There is no source given for the assertion that the market had reached a peak. Furthermore, no analysis was done as to whether it might be a better financial decision for some owners to pay the repair costs and keep their strata lots, since the property may continue to rise in value. Between 2016 and 2017 the aggregate assessed value of the 33 strata lots increased from $13,730,000.00 to$18,367,000.00.[23] That is a 33% increase in one year. The maintenance costs for 2018 were estimated to be $20,000 per unit but the average value of the units increased by $140,000 in one year. Perhaps there would be other repair costs in the near future that would offset any further increases in value but that information was not available because the strata council did not requisition a new report.

In Wake Justice Loo acknowledged that the SPA does not expressly set out the duties of the strata council under the winding-up provisions, but she endorsed adopting the duties imposed on the sales committee and the strata titles board under Singapore legislation.[24]These duties are discussed in Ghee and others v. Dave and others.[25]Ghee was a termination by sale, which involves an elected committee that negotiates a collective sales agreement.[26]However, although Justice Loo endorsed the duties found in Ghee, she neglected to apply them. The Singapore Court of Appeal stated: “an SC must take care to inform itself of matters relevant to the decision to sell the property and take advice from appropriate experts on when and at what price to sell the property.”[27]There is no indication that the strata councillors received expert advice on when to sell The Hampstead. Additionally, the experts which the strata council received advice from were all interested in the sale of The Hampstead and thus they were not independent.

In the Canadian corporate law context, when a corporation is an acquisition target, the standard practice is to establish an independent committee formed from the independent members of the board. The purpose of an independent committee is to advise the directors and make recommendations to the board.[28]The independent committee plays an important role: “the raison d’etre of a special committee independent of management and the controlling shareholder is to protect the interests of minority shareholders and to bring a measure of objectivity to the assessment of bids.”[29]In Wake, the strata council appeared to lack this measure of objectivity. A large part of assessing the bids for The Hampstead was whether now was the right time to sell the property. The strata council appears to have merely assumed that now was the best time and very little investigation was conducted. Corporate law demands more in order to accord deference to decision makers: “the principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence in arriving at decisions.”[30]

When the court is considering confirmation of a dissolution vote, the SPA directs courts to consider, inter alia, “the best interests of the owners.”[31]BC courts have interpreted this, in another context, to mean “the corporation, must endeavour to accomplish the greatest good for the greatest number.”[32]In the context of winding-up, an independent analysis of the facts would help individual owners to evaluate a proposed sale. The timing of the recommendation is important. It is in the best interests of the owners to have the special committee make its report prior to the passage of a resolution to wind-up and sell. The Singapore model only helps ensure that the maximum profit is obtained by owners. Sometimes a corporate takeover is not in the best interests of stockholders.[33] Likewise, sometimes a wind-up and sale of a strata will not be in the best interests of 80%of the lot owners. Receiving the special committee report prior to making their decision to sell would give lot owners an opportunity to make an informed decision concerning a wind-up and sale.

Combining the corporate model of the independent special committee and the Singapore model would result in a far better process for winding-up stratas in BC. Borrowing from the Singapore model, a separate committee should be elected from among the strata owners. However, unlike the Singapore model, the committee should give its recommendation prior to the strata owners approving a wind-up. The committee could then evaluate whether it makes sense to recommend a sale, given market conditions and projected future costs of repair for the building. This would give dissenting owners the ability to elect a representative onto the committee. And if they do not agree with the findings of the committee, they could then attach their dissenting opinion to the final recommendation report, ensuring both sides have a voice in the process. Ultimately the owners would vote on there solution to wind-up and sell, however, they would do so on a much more informed basis compared to the strata lot owners in Wake.



[1] The Owners, Strata Plan VR2122 v Wake, 2017 BCSC 2386 [Wake].

[2] BCLI 2015 report, pp. 10-11.

[3] Wake, supra at para 12.

[4] Ibid at para 13.

[5] Ibid at para 14.

[6] Ibid at para 15.

[7] Ibid at para 21.

[8] Ibid at para 27.

[9] Ibid at para 27.

[10] Ibid at para 27.

[11] Ibid at para 31.

[12] Ibid at para 32, 34.

[13] Ibid at para 38.

[14] Ibid at para 44.

[15] Ibid at para 54.

[16] RevlonInc. v. MacAndrews & Forbes Holdings Inc. 506 a.2d 173 (Del. S.C., 1985)

[17] SBC 1998, c 43, s31 [SPA].

[18] RSC 1985, c C-44, s 122(1).

[19] Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3S.C.R. 461, 2004 SCC 68 (CanLII).

[20] Dockside Brewing Co. Ltd. v. Strata Plan LMS 3837, 2007 BCCA 183(CanLII).

[21]Wake,supra at para 27, 32.

[22] Ibid at para 15.

[23] The Owners, Strata Plan VR2122 v Wake, 2017 BCSC 2386), (June 272017) No. s-176056 Vancouver Registry, (Petition to Wind-up) https://docs.wixstatic.com/ugd/fcc4e8_ac1c2d95b26547a7909650bc4472acae.pdf.

[24] Wake, supra at para 112.

[25] Ghee and others v Dave and others, [2009] 3 SLR. 109, [2009] SGCA14 [Ghee].

[26] BCLI 2015 report, pp. 46.

[27] Ghee, supra at para 160.

[28] Pente Investment Management Ltd. v Schneider Corp. (1998), 42 O.R.(3d) 177, 1998 CarswellOnt 4035 (C.A.).

[29] Ibid.

[30] UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. 2002 CarswellOnt2096, 27 B.L.R. (3d) 53, 32 C.C.P.B. 120.

[31] SPA s 278.1 (5)(a).

[32] Gentis v. The Owners, 2003 BCSC 120 (CanLII) at para 24, citingSterloff v. Strata Plan VR2613, 1994 CanLII 1011 (BC SC).

[33] NeoMaterial Technologies Inc., Re, 2009 CarswellOnt 5084, 32 O.S.C.B. 6941, 63 B.L.R. (4th)123 (Ont. Securities Comm.)