COURT OF APPEAL FOR ONTARIO

CITATION: Freed (Yorkville) Ltd. v. High Value Consultants Limited, 2016 ONCA 444

DATE: 20160607

DOCKET: C61505

Cronk, Blair and Pardu JJ.A.

BETWEEN

Freed (Yorkville) Ltd.

Plaintiff

(Appellant)

and

High Value Consultants Limited

Defendant

(Respondent in Appeal)

Harvin D. Pitch and Adam Brunswick, for the appellant

Michael R. Kestenberg, for the respondent

Heard: May 27, 2016

On appeal from the judgment of Justice David G. Stinson of the Superior Court of Justice, dated December 7, 2015, with reasons reported at 2015 ONSC 7625.

ENDORSEMENT

[1] Freed (Yorkville) Ltd. and High Value Consultants Limited, and their principals, are experienced and sophisticated players in the field of commercial real estate purchases and financings. They are represented by experienced and sophisticated advisors.

[2] In October, 2012, Freed agreed to purchase a property on Dupont St. in Toronto from High Value for $9 million, subject to a vendor take-back mortgage (“VTB”) of $4.5 million. The property was to form part of a land assembly Freed was putting together for the construction of a residential mixed use condominium development. The Agreement of Purchase and Sale (the “APS”) was amended several times over a period of almost two years of negotiations, with a final closing date set for July 25, 2014.

[3] The transaction failed to close. Freed and High Value brought competing motions for summary judgment relating to the return, or non-return, of $1.2 million in deposits Freed had paid prior to closing. On December 2015, David Stinson J., of the Superior Court of Justice, granted judgment in favour of High Value, ruling that it was entitled to retain the deposits. Freed appeals from that judgment.

[4] We dismiss the appeal, essentially for the thorough and careful reasons provided by the motion judge.

The Agreements, the Further Negotiations, and the Failure to Close

[5] Under the APS, Freed was to, and did, pay a series of four deposits, totalling $1.2 million. The deposits were to vest in favour of High Value in February 2014 upon the waiver of certain conditions by Freed. Freed waived those conditions.

[6] The APS contained three terms relating to the VTB that are particularly important to the dispute between the parties:

(i) the VTB was to include an “Escrow Deed Provision” pursuant to which – in the event that Freed defaulted under the VTB without curing the default within a specified period of time (30 and 32 days) – High Value was entitled to register a deed (prepared, and held in escrow in the meantime) transferring the property back to High Value free and clear of encumbrances.

(ii) while the original APS contained a clause prohibiting secondary financing, a “Secondary Financing Amendment” was negotiated permitting such financing on the following strict terms:

No secondary financing shall be allowed on the Property, save and except in the event such lender under such financing agrees to subordinate its rights (including a standstill) in favour of High Value’s rights under the VTB.

(iii) the APS contained an “Escalator Clause” pursuant to which the purchase price and the amount of the VTB would be increased retroactively based on a formula applied to the subsequent sale of the two adjacent properties that were to form the rest of the planned land assembly.

[7] The transaction ran aground on the Secondary Financing Amendment.

[8] Freed had difficulty obtaining a secondary financing commitment, but advised High Value three days before the date fixed for closing that Romspen Investment Corporation had provided a commitment. A flurry of last-minute negotiations and late-night presentation of draft documentation ensued, but ultimately the parties could not agree that the secondary financing proposal complied with the Secondary Financing Amendment. This was because Romspen insisted that High Value execute a Subordination and Standstill Agreement (the “SASA”), the draft details of which were not completed but which in any event contained two requirements that became deal breakers: first, the proposed SASA required High Value to acknowledge that, if it re-acquired the property pursuant to the Escrow Deed Provision, it would do so subject to Romspen’s secondary mortgage financing; secondly, its terms would deprive High Value of the benefit of the Escalator Clause because it would limit the amount of High Value’s priority over the Romspen position to the face amount of the VTB, thereby preventing any increase in the amount of the purchase price under the Escalator Clause from being added to, and therefore secured by, the VTB.

[9] In spite of its several amendments over time, the APS continued to contain a “time is of the essence” clause. High Value tendered on the closing date. The transaction did not close. High Value took the position that Freed was in breach and retained the deposits. Freed ultimately accepted that the transaction was at an end (in its view, because of High Value’s breach by insisting on its interpretation of the Secondary Financing Amendment), and commenced an action seeking repayment of the deposits. High Value brought a cross-motion to dismiss the claim and for a declaration that it is entitled to keep the deposits. Hence the duelling summary judgment motions that the motion judge resolved in High Value’s favour.

Discussion

[10] As noted, the motion judge gave careful and full reasons, and we see no basis for interfering with his findings and conclusions. He interpreted the APS and related documentation as a whole in accordance with their terms and in the context of the purpose of the proposed transaction, the parties’ negotiations, and their experience. He made no error in law. His findings of fact underpinning the interpretive exercise were all supported by the record. His interpretation was entirely reasonable.

[11] We agree with the motion judge’s view that when High Value agreed to vary the prohibition against secondary financing, it did so under strict terms. The strict terms were that such financing would be permitted only where the secondary lender agreed “to subordinate its rights (including a standstill) in favour of High Value’s rights under the VTB”. The reference to High Value’s “rights under the VTB” signals that the parties intended to encompass more than merely the subordination of the secondary lender’s rights as that term is commonly understood. High Value’s rights under the VTB were to include its broadly protective rights under the Escrow Deed Provision and its right to enjoy and protect a potential increased purchase price under the Escalator Clause. We see no error in the motion judge’s interpretation of the APS and the Secondary Financing Amendment to this effect.

[12] Nor is there anything commercially unreasonable about such an interpretation. Freed argues that no commercial lender would ever agree to provide financing secured by a secondary mortgage but be required to discharge that mortgage without having received payment. However, while the Secondary Financing Amendment may have made secondary financing difficult to obtain – and evidently did – the benefits just referred to provided valid commercial reasons for High Value to insist on such terms, having negotiated for and originally obtained a complete prohibition against such financing. At the same time, Romspen’s mortgage rights were protected in other ways, as the motion judge observed: it was to be collaterally secured against the other properties in the land assembly package, giving it security in that regard; and it could protect itself in relation to the subject property by negotiating the ability to cure any default under the VTB – a solution Romspen’s witness suggested a secondary lender would seek in the face of a provision similar to the Escrow Deed Provision. These may not be perfect remedies for a secondary lender but they are not unreasonable limitations given the narrow margin of manoeuverability open to Freed for such financing under the Secondary Financing Agreement.

[13] Importantly as well, Freed’s interpretation of the APS and the proposed SASA would effectively emasculate the potential value of the Escalator Clause.

[14] Freed submits that the reference in the Secondary Financing Agreement to the subordination of the secondary lender’s rights “including a standstill” necessarily implies that the secondary lender’s mortgage was to remain on title and that High Value had therefore agreed to exercise the Escrow Deed Provision subject to any secondary security registered on title under the Secondary Financing Agreement. This argument may weigh somewhat in favour of Freed’s interpretation, but is not dispositive in our view. There are various types of standstill agreements, and there could be reasons for requiring the secondary lender to hold off exercising its remedies during the specified curative period that was open to Freed under the agreements.

[15] With his customary candour, Mr. Pitch acknowledges that if we accept the motion judge’s interpretation of the agreements – as we do – the respondent must prevail. It is therefore unnecessary to address the arguments flowing from the premise that Freed’s interpretation was correct about whether High Value was entitled to insist on the closing of the transaction. Having made the interpretation he did, the motion judge did not err in holding that High Value was entitled to tender, that Freed was obliged to close (and apparently had the cash funds available that would have enabled it to do so), and that, in the circumstances, the deposits were non-refundable.

Disposition

[16] For all the foregoing reasons, the appeal is dismissed. In accordance with the agreement of counsel, the respondent is entitled to its costs of the appeal, fixed in the amount of $15,000 inclusive of disbursements and all applicable taxes.

“E.A. Cronk J.A.”

“R.A. Blair J.A.”

“G. Pardu J.A.”