Pauline Lala v. Registrar, Real Estate and Business Brokers Act, 2002, 2014 CanLII 70038

Licence Tribunal

Appeal d'appel en

Tribunal matière de permis

DATE:

2014-10-17

FILE:

8455/REBBA

CASE NAME:

8455 v. Registrar, Real Estate and Business Brokers Act, 2002

Appeal from a decision of the Registrar under the Real Estate Aand Business Brokers Act, 2002, S.O. 2002, c. 30, Sch. C to Revoke a Registration

Pauline Lala

Appellant

-and-

Registrar, Real Estate and Business Brokers Act, 2002

Respondent

ORDER

ADJUDICATOR:

D. Gregory Flude, Vice-Chair

APPEARANCES:

For the Appellant:

Ian Ball, Paralegal

For the Respondent:

Robert Maxwell and Jonathan Miller, Counsel

Heard in Toronto:

September 16, 17, 18, 19 & 25, 2014

REASONS FOR DECISION AND ORDER

1The Appellants, Pauline Lala and her corporation, Platinum One Realty Inc., appeal to this Tribunal pursuant to s 14 (5) of the Real Estate And Business Brokers Act, 2002, S.O. 2002, c. 30, Sch. C (the “Act”) from a Notice of Proposal to Revoke a Registration issued by the Registrar on October 31, 2013 (the “NoP”). The allegations against Ms Lala arise out of a series of transactions commencing in September 2006 and culminating in a complaint to the Registrar from a business associate in 2012. Originally the NoP sought the revocation of the registration of Ms. Lala, her company and her real estate business partner, Hafeez Khan( “Khan”). Khan voluntarily surrendered his registration and no longer carries on business as a registrant. The Registrar proceeded against Ms Lala and Platinum One Realty Inc. Ms Lala is sole shareholder, sole director and the broker of record for Platinum One Realty Inc. All of the evidence focussed on Ms Lalas actions. It is the Registrars position that if the Tribunal finds Ms Lala is not entitled to registration then her actions taint Platinum One and its registration should be revoked.

2The sequence of events leading up to the complaint to the Registrar is not in dispute. The Tribunal will attempt to set it out chronologically but the structure of many of the agreements was so Byzantine in nature, with bare trustees of land holding for other bare trustees who were holding for beneficiaries, amalgamations of corporate entities and transfers between and among these corporations that a detailed review of all of the documents would tend to obscure the facts. One thing is clear; at all material times, the beneficiaries of all of the transactions were Ms Lala, Khan, and a third partner not in the real estate industry, PS (collectively, the “Partners”). Khan in his evidence and Ms Lala in hers both agreed that all three of the Partners were involved in the process, although Ms Lala tended to minimize her involvement to that of a follower of Khan rather than an equal participant or a leader.

3In and around 2005 or 2006, the Partners started looking to buy land for development in the Mississauga area. Their search finally drew them to land on Tomken Road owned by several related corporations, 763967 Ontario Limited, F-F Construction Company Limited and Ferkul Brothers Limited (the “Ferkul Lands”). The Ferkul Lands comprised 6.09 acres without direct frontage onto Tomken Road. The parcel had been on the market since January 25, 2006 and according to the evidence of James Steele, Executive Vice-President at the listing broker, CB Richard Ellis Limited, it had been actively marketed (Ex 4 Tabs 1 A & B and Tab 2). Mr. Steele testified that the listing price of $590,000/acre had been set taking into account the market for undeveloped, unserviced land in that area. Both he and his company were active in that market and were aware of land prices in the area. The Ferkul Group owned two other parcels that fronted on Tomken Road totalling 2.87 acres that were not part of the original listing but, following negotiations between the Ferkul group and the Partners, these lands were included at a price of $800,000/acre for a total purchase price of $5,706,400.00. The Agreement of Purchase and Sale for the purchase of these lands was signed over a number days in September 2006 with the acknowledgement signed on September 25, 2006 (Ex 4 Tab 3). Closing was set for July 24, 2007. A clause provided for adjustment of the purchase price following a survey to reflect the actual acreage. The final adjusted purchase price was $5,691,620.00 (Ex 4 Tab 7).

4In the ten months between signing the Agreement of Purchase and Sale and the closing date, the Partners started to look for financing. In his evidence, Dr. SQ explained that he was, at that time, a resident of Dubai and worked with the Dubai government. He had purchased rental condominiums through Platinum One Realty and liked their service. He testified that he had dealt with Ms Lala in these transactions but she characterized him as a client of Khan. On a trip to Canada in late 2006 or early 2007 SQ met with Pauline Lala and Khan and, incidental to that meeting, discussed the project. Again Ms Lala asserted that these discussions were with Khan and in this her evidence differs from that of SQ. SQ asked them for details of the amount of investment they were looking for and degree of participation being offered. They told him they were looking for $3,500,000 for an equity share of 37.5%. Khan testified that they represented that the purchase price of the lands was $9,043,000.00, a price established to make $3,500,000.00 approximately 37.5%. SQ testified that it was his understanding that the land had been purchased for $9,043,000.00.

5SQ undertook to see if he could find financing for the Partners. His fee for this service was 5% of any money he raised. His efforts met with initial success and by April 19, 2007 he had introduced an investor who had negotiated an Equity Participation Agreement (Ex 5 Tab 1 C, Ex 8 Tab 2). The corporation the Partners used in the Equity Participation Agreement was called Global Village Developments Inc. (“GVDI”), a corporation formed in February 2007 (Ex 6 Tab 6 I). The wording of the Equity Participation Agreement is germane to the issue in the case. Clause 1 states:

1. GVDI holds a firm contract on lands comprising 4611, 4625 Tomken Road in Mississauga measuring more or less 8.96 acres for a purchase price of Canadian Dollars (C$) 9.043,000.00.

6As of April 19, 2007, GVDI did not hold a firm contract on the subject land. The Agreement of Purchase and Sale on the Ferkul Lands did not close until July 30, 2007 and was in the name of another corporate entity, 2057057 Ontario Inc. Title was ultimately taken in late July by three corporate entities, the 205 company, 2143359 Ontario Inc. and 1572927 Ontario Inc. (Ex 4 Tab 6). Ms Lala asserted that GVDI’s agreement was verbal. The Tribunal finds it hard to accept that an experienced real estate agent is unaware that a verbal agreement for the purchase of land is unenforceable and cannot constitute “a firm contract on lands.”

7Between mid-April 2007 and the closing in July, the original equity investor pulled out. SQ was able to bring another investor to the table. The Partners met with the new investor in New York and discussed the project. In discussions with SQ following the meeting with the Partners, the new investor told SQ that he had no business interests in Canada, did not know the Canadian business market and had no reason to go to Canada. He told SQ that he would lend him the investment funds and SQ could become the investor.

8SQ concealed his change of status from the Partners. He did this for two reasons. The first reason was that he wanted the 5% commission, a sum he would presumably not be entitled to if he was the investor. The second reason was his concern that the community of which he and the Partners were a part was ageist. He was a relatively young man at that time and he did not think older colleagues would take him seriously. By representing that he was acting for a third party investor, he could use the investor’s prestige so the Partners would listen to him and heed his concerns. He kept the deception going until 2012.

9Acting now on his own behalf, SQ entered into an Equity Participation Agreement dated July 2, 2007 (Ex 5 Tab 1 D, Ex 8 Tab 3). Clause 1 is identical to the wording of the April agreement set out above. He advanced the funds as required by the agreement (Ex 5 Tab 1 I). He stated that, while he was content to be a silent minority equity participant, had he known that the true purchase price and that his interest was actually in excess of 50% he would either never have invested or would not have taken a passive role. He trusted that Partners had more at stake in the project and therefore reason to be prudent. The documents suggest that the true state of the financing as of the closing on July 30, 2007 was that the Partners had little or no equity participation. The Partners had to come up with $5.7 million on closing. The Ferkul group took a vendor take back mortgage (VTB) in the amount of $3.5 million and SQ advanced $3.5 million. There was, in fact, a surplus of $1.3 million on closing so it is difficult to see what the Partners actually invested. It appears the VTB was ultimately paid out from construction advances (Ex 4 Tab 46 C).

10GVDI did finally become the registered owner of the Ferkul Lands in October 2007. In a series of signed but undated and unwitnessed documents, the title holders transferred title from themselves to themselves (Ex 4 Tabs 22 to 41). Indeed, notwithstanding that they had paid land transfer tax at first instance, they applied for and were refunded the tax on the basis that there had been no change in beneficial ownership (Ex 4 Tab 45).

11The development proceeded and by 2010 was largely completed. There was then a proposal to develop lands to the south of the development. The Partners embarked on a similar approach. They took title to the lands in the amount of $3.0 million with a $1.5 million VTB (Ex 7 Tab 3). They then approached SQ and asked him if he could get financing of $1.5 million but represented that the purchase price was $4.3 million and that they would grant him a 37.5% interest (Ex 5 Tab 1K). SQ advanced the funds (Ex 5 Tab 1 I). Again, it is difficult to understand how the Partners invested anything into the south land project. They received a VTB for half the purchase price and the other half by way of an investment by SQ approximately one month before closing.

12Until 2011, SQ was living in Dubai. His wife is Canadian and he moved to Canada in 2011. Sales of the units in the south land project were not going well. The group was burning through its cash reserves so Khan asked SQ if he come into the office and help them sort things out. At this time there was general bad feeling between Khan and Ms Lala. According the SQ, Ms Lala was coming into the office late and nothing was being accomplished. The third partner, PS, lived in the United States. Late in 2011 Khan left the country for an extended period. SQ often found himself as the only investor in the office. In discussions with staff during this period, he was advised not to accept anything at face value and ensure he saw original documents. He slowly began to suspect something was amiss with the numbers he had been given. His knowledge was as yet incomplete so he called PS in the United States and told him he knew everything. PS confessed to some measure of wrongdoing. SQ waited for Khan to return. He then confronted Khan. He described their interaction. He said it took place in Khan’s car in the parking lot. Khan broke down and cried for about three hours admitting the whole scheme.

13The disclosure by Khan was followed by a long period during which the Partners renegotiated their agreement to reflect the true value of SQ’s interest. This negotiation ended in litigation followed by a mediated settlement. In a number of documents, SQ’s equity share was adjusted upward to reflect the percentage that his investment was of the original purchase price. As majority equity holder, SQ took over the day to day running of the project, or more properly, its winding up. The Partners and SQ agreed not to develop the south land, but rather to liquidate all of their holdings. SQ was to get his loans repaid first followed by some level of profit sharing, if there were any profits.

13Khan characterized the actions of the Partners as making two unsupportable business decisions, that is, the representation to SQ that the value of the first parcel was $9.043 million and the representation that the value of the second parcel was $4.3 million. As stated above, he said the first figure was chosen after discussions because the Partners wanted a $3.5 million investment but did not want to give up more the 37.5% of the equity. No particular explanation was given with respect to the second valuation. He did not seek to minimize his involvement or place particular blame on either of the two other Partners. It was a partnership decision.

14For her part, Ms Lala gave a number of explanations and justifications. She took the position throughout that SQ was always aware of the true nature of the deal. According to her evidence, SQ knew he was buying into a development project that was valued at $9.043 million because of the enhanced value the Partners had created by moving ahead with the development. Because of the enhanced value, the land price was irrelevant. SQ was given an opportunity to do his “due diligence” and should have been aware of the true facts.

15While there is clear evidence of SQ’s naiveté in these transactions, without full disclosure by the Partners, there was no way in which he could have checked the market price of the Ferkul Lands before he entered into the Equity Participation Agreement. The Ferkul deal did not close until almost one month after his agreement was signed. There were no documents in the public record that would show the actual purchase price.

16The only documents setting out the basis for the equity participation, the April and July Equity Participation Agreement, use the term “purchase price”. Ms Lala testified that she had objected to this wording. She wanted the wording to be project price. She stated that Khan and PS insisted on the wording and she finally went along with it. In and of itself this is an admission by Ms Lala that she knowingly endorsed a misrepresentation, albeit reluctantly.

7The Partners commissioned an appraisal of the Ferkul Lands in April, 2007 from C. Esposito & Associates Limited. It appraised them at $10.06 million. The appraiser testified. He stated that he had attended the lands and inspected them. The purpose of the inspection was to note any special features that might enhance or detract from the value of the lands. He noted that they fronted on Tomken Road and there was a proposed access road to one side. The access road was not completed and the land was not serviced at the time of his inspection. He used the comparison method to determine value. At the request of Khan, he valued that land as if it was serviced and the access road completed. In short, the value he placed on the land was not the value of the land in the condition in which he inspected it. To be fair, he does make it clear in his assumptions that he is evaluating the land as serviced land (Ex 9 Tab 2).

18The appraisal itself uses a well-known definition of value:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

Further on, there is a requirement for a “reasonable exposure time.” Mr. Esposito testified that, for commercial property of this nature, six to nine months on the market would be a reasonable exposure time. This number accords almost exactly with the time the Ferkul Lands were actively marketed by CB Richard Ellis.

19Of particular note in this appraisal process is the fact that the Partners kept Mr. Esposito in the dark about the price they paid for the land in an arm’s length transaction only months before. Mr. Espositio acknowledged that this knowledge would have been useful in his determination of the fair market value of the lands. Ms Lala assigns responsibility for the failure to give Mr. Esposito these details to Khan and stated that she was only slightly aware that an appraisal was being done. Yet she still relied on the appraisal to suggest the price of $9.043 million was reflective of an actual enhanced fair market value.

20When asked what the Partners had done in the period between signing the Agreement of Purchase and Sale in September 2006 and April 2007 that might have caused the value of the land to almost double, Ms Lala pointed to the fact that she knew that there was to be a zoning change. When the land was listed it was zoned M1. The City of Mississauga then did a wholesale re-designation of M1 lands to E2. Ms Lala testified that the E2 designation, which she knew was in the works, makes the development value much greater. She produced no evidence in support of this contention or evidence of any other improvement work done on the land. It is of note that the appraisal report uses the M1 designation, not E2. Further, both Mr. Esposito and Mr. Steele testified that the E2 designation is virtually identical to the M1 designation with a few more permitted uses. Mr. Steele did not believe the land value would have doubled over the year from September 2006 to October 2007.

21Registrants under the Act are required to renew registration every two years. Ms Lala duly renewed her registration in 2008, 2010, 2012, and 2014. One question common to all of the renewals asks: “Are you, or will you be, engaged or employed in any other business, occupation or profession?” Ms Lala answered “Yes” in 2008 and “No” in all subsequent renewals. The Registrar takes the position that throughout this period, Ms Lala was engaged in the business of real estate development through numerous corporations and that, as of the date of the hearing, she is still engaged in that business as all of the affairs of the development enterprise have not been fully wound up. The Registrar asserts that her continued shareholdings and directorships in various corporations should have triggered a “yes” answer notwithstanding that the corporations are not actively engaged in business.

22With regard to her answers, Ms Lala testified that she gave the affirmative answer in 2008 after talking with some colleagues. By 2010, she had changed her view. In her mind, in 2010 she was not engaged in anything other than real estate so the proper answer was “no” and she had answered incorrectly in 2008. By 2012, the business was being wound up and that situation continues without her involvement to the present.

23William Hunter investigated the complaint made by SQ. He wrote to both Khan and Ms Lala seeking disclosure of documents and invited them to contact him for an interview (Ex 5 Tab 4). Khan responded and provided extensive documentary disclosure. Ms Lala did not. At his interview, Khan availed himself of his right to counsel. He then gave very frank testimony that mirrored his testimony before this Tribunal. Indeed, a large number of the documents relied upon by the Registrar in this case were provided by Khan. Ms Lala asserted that she had never been asked by Mr. Hunter to give her side of the story but, once the letter inviting her to an interview was pointed out to her, she did not pursue this line.

ANALYSIS

24The Act sets out the grounds upon which a registrant may be denied registration. The applicable grounds are:

10. (1) An applicant that meets the prescribed requirements is entitled to registration or renewal of registration by the registrar unless,

(a) the applicant is not a corporation and,

(ii) the past conduct of the applicant or of an interested person in respect of the applicant affords reasonable grounds for belief that the applicant will not carry on business in accordance with law and with integrity and honesty, or

(iii) the applicant or an employee or agent of the applicant makes a false statement or provides a false statement in an application for registration or for renewal of registration;

(d) the applicant is a corporation and,

(iii) the past conduct of its officers or directors or of an interested person in respect of its officers or directors or of an interested person in respect of the corporation affords reasonable grounds for belief that its business will not be carried on in accordance with the law and with integrity and honesty, or

(iv) an officer or director of the corporation makes a false statement or provides a false statement in an application for registration or for renewal of registration;

25In this case, the Tribunal must decide whether Ms Lala was part of an undertaking to mislead SQ to gain a financial advantage for the Partners. It must also decide if Ms Lala gave false answers on her renewal applications in 2010 through 2014. Should these findings be made, the Tribunal must decide whether they give reasonable grounds for belief that she and her corporation will not carry on business in accordance with honesty and integrity and in accordance with the law. If such reasonable grounds exist, the Tribunal must they consider whether the sanction advanced by the Registrar is appropriate or whether some lesser sanction achieves the objects of the statutory scheme.

26The Tribunal is satisfied that the facts were misrepresented to SQ. Ms Lala’s version, that SQ was purchasing an interest in a project worth almost double the amount paid for the land a few short months earlier, is unsupportable. With the single exception of Ms Lala, all of the other witnesses, whether interested parties or not, or participants or not, disagreed with her version. Mr. Steele, a totally independent witness with experience in the Mississauga commercial real estate market expressed his doubts that the land value would have increased in such a manner. The land itself had been actively marketed for months and knowledgeable buyers had not snapped it up as a bargain despite Ms Lala’s assertion that the impending change in zoning enhanced its value significantly. Mr. Esposito was kept in the dark about the only recent arm’s length transaction on the land and asked to assess something other than the land as it was. Khan was clear on the reasoning that led to the overvaluation of the land and clear on the fact that the Partners misrepresented the value to SQ. Finally, the documents referring to the purchase price of the land, with which Ms Lala stated she disagreed but went along with in any event at the behest of her other Partners, constitute an admission that she was aware of and involved in the misrepresentation.

27The actions of the Partners and SQ following the disclosure of the true state of affairs are also supportive of the conclusion that SQ was misled. The group immediately agreed to a reallocation of the ownership interests. Subsequent actions by Ms Lala resulted in a long and drawn out settlement process ending in a mediated settlement, but nonetheless, the deal was renegotiated, an unlikely outcome if SQ had been fully aware of the true facts. On all of the above, the Tribunal finds that Ms Lala and the other Partners deliberately misled SQ with a view to keeping a much larger share of the equity interest in the project than their real investment would entitle them to.

28With respect to the false answers, the Tribunal finds little substance in Ms Lala’s assertion that she was involved in the real estate industry and, therefore, was not involved in any other “business.” Registration is specific to the role of either a real estate salesperson or a broker. To take the position that anything to do with the real estate industry is to do violence to the clear intent of the legislative scheme to regulate real estate brokers and salespersons and to the wording of the renewal form which is clearly focussed only on registration under the Act. Ms Lala argues that her role in the undertaking was to sell the units in the development, but it was much more than that. She was an owner, decision maker, investor and a founding Partner. As a result, the Tribunal finds that she was involved in another business in 2010 and 2012 and that her answer was false.

29There are two issues arising out of the 2014 renewal application. Ms Lala remains a corporate officer, director and shareholder of several companies that are largely inactive. The Tribunal does not accept the Registrar’s submission that being an officer, shareholder and director of an inactive corporation requires disclosure on renewal. By definition, the inactive corporations are not carrying on business. The development is still carrying on business, however, even if it is only the sale of remaining assets and the distribution of proceeds. Ms Lala is still involved to some degree in this process so, to that extent she is involved in a business, which she did not disclose on her renewals. The Tribunal finds that Ms Lala provided false answers on her renewal applications from 2010 to 2014.

30The Tribunal is concerned that Ms Lala has no grasp of the wrongful nature of her actions in making misrepresentations to SQ. She insists on putting the onus on him and claiming that he failed to do his due diligence before investing. There is some truth that SQ showed some naiveté in accepting the Partners’ word on the value of his investment, but no amount of checking would have brought the true state of affairs to light. Even had he seen the purchase agreement from the Ferkul Group, the Partners could, and, in fact, did ultimately, produce a sales agreement to GVDI in the amount of approximately $9 million. The documents would have supported the Partners’ assertions notwithstanding that the GVDI purchase was simply a paper exercise and “no money changed hands,” to quote Khan. The paper trail was a scam. Khan recognizes his wrongdoing and the documents suggest PS also recognized his wrongdoing and made efforts to make amends. Only Ms Lala fails to grasp the wrongful nature of the scheme.

31In light of her failure to accept responsibility for her part in these wrongful transactions, the Tribunal finds that there are reasonable grounds for belief that she will not carry on business in accordance with the law and with integrity and honesty. There is a direct relationship between these misrepresentations and her duties under the Act to make full and frank disclosure to consumers, even against her self-interest. When assisting clients with financing, it is a short step from her misrepresentations to SQ to making false statements to lenders to make sure a deal gets done. The Registrar does not need to demonstrate that she has made such false statements just that there are reasonable grounds for belief that she will. The Registrar has satisfied that onus.

32The Tribunal agrees with the Registrar that the only remedy in this case is revocation. The transactions involved millions of dollars of SQ’s capital that was unnecessarily exposed to risk. The setting up of the transaction was cynical in the extreme and designed to guarantee SQ and his backers could not discover the truth. Ms Lala has failed to take any responsibility for her actions and can see only conspiracies by Khan and SQ to deny her the fruits of the scheme. There are no terms of registration that could bring about the requisite change of character necessary for the Tribunal to be comfortable with permitting Ms Lala to carry on as a registrant. Having said that, the Tribunal accepts Ms Lala’s assertion that her false answers on her renewal forms were honestly but mistakenly made. If the false answers were the only issue before the Tribunal, they would not provide sufficient base for revocation.

33The focus of the hearing has been on the actions of Ms Lala. The Tribunal accepts the Registrar’s submission that Platinum One Realty Inc. must stand and fall on the findings for or against Ms Lala. If the Tribunal is satisfied Ms Lala will not carry on business in accordance with law, then s. 10(1)(d)(iii) of the Act tars the corporation with the same brush. Accordingly, the fate of the corporation must be the same as Ms Lala.

ORDER

34Pursuant to the authority vested in it under the Act, the Tribunal orders the Registrar to carry out his proposal to revoke the registrations of Pauline Lala and Platinum One Realty Inc.