COURT FILE NO.: 17-62851

DATE: 2018-06-01

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2587508 Ontario Inc. Plaintiff

A N D:

Hamilton City Centre Holdings Inc., Defendant

BEFORE: The Honourable Mr. Justice P. R. Sweeny

COUNSEL: Eric C. Nanayakkara, for the Plaintiff Amandeep S. Dhillon for the Defendant James Klein, for Sheldon Barris and Jorlee Holdings Limited

HEARD: 16 April 2018

E N D O R S E M E N T

[1] There are three motions before me arising out of the failure of 2587508 Ontario Inc. (258) and Hamilton City Centre Holdings Inc. (HCCH) to complete an agreement of purchase and sale for a commercial property at 77 James Street North, Hamilton, Ontario (the Property). HCCH brings a motion to discharge a certificate of pending litigation. 258 opposes the motion and also seeks an order for production of documents and an order consolidating this action with another action against the second mortgagees. The second mortgagees on the Property, Sheldon Barris and Jorlee Holdings Limited, move for an order varying the order of Arrell J. dated October 10, 2017 which limits any dealings with the Property.

Background

[2] On March 13, 2017, HCCH entered into an agreement of purchase and sale to sell the Property to Movengo Corp., in trust, for a corporation to be incorporated. The purchase price was $55 million. Movengo Corp. paid a deposit of $250,000. The agreement of purchase and sale was assigned to the plaintiff, 258, after it was incorporated on July 14, 2017.

[3] On May 30, 2017, the agreement was amended to include a representation and warranty about the capitalization (CAP) rate being 8.18% or greater. This amendment includes a Secondary Deposit in the amount of $2 million “be paid within three business days of the Waiver Notice” payable to EIR Investments Inc. Brokerage in Trust, to be held on the same terms as the initial Deposit. On June 9, 2017, a further amendment was executed. This changed the CAP rate to 8.12% or greater.

[4] There was a further amendment to the agreement on or about June 17 which changed the due diligence date to July 14 and the mortgage condition date to July 14.

[5] On July 19 and 20, the lawyer for 258 requested direction as to whom the secondary deposit should be paid. No response was received from the lawyer for HCCH to that question, but at 4:50 pm an email was sent by the lawyer for HCCH advising that, “Our respective clients have been in discussions in order to enter into an amendment which will also entail confirmation of the deal.”

[6] On July 21, the lawyer for 258 asserted that the deal was in full force and effect and governed by the agreement of purchase and sale as amended. He requested being advised as to how to deal with the Secondary Deposit. He asked that the lawyer for the HCCH advise if his client takes the position there is no binding agreement of purchase and sale.

[7] On August 22, 2017, the lawyer for HCCH sent an email to the lawyer for 258 outlining a number of issues. This correspondence addressed the fact that the $2 million deposit had not been paid. In an email response on August 25, the lawyer for 258 asserted that it was held in the trust account but the lawyer for HCCH failed to advise to whom it should be paid. He also noted “in any event, the same is completely irrelevant to your clients' breach of the subject agreement.” He asserted that the vendor was in material breach of the subject agreement of purchase and sale.

[8] On August 24, the Barris mortgage was registered against the property for $20 million. At that point, Scotiabank had a first charge in the amount of $34 million. In addition, there was a second mortgage in the amount of $40 million to Partners Real Estate Investment Trust which was a guarantor of the Scotiabank debt.

[9] On August 28, 2017, the closing date was extended to September 8. On September 7, in anticipation of the closing on September 8, documents were delivered to the lawyer for 258. There were objections raised to a number of the documents. On September 7, by email, the lawyer for 258 raised a number of issues and asserted that HCCH was in substantial breach of the agreement of purchase and sale. He also asserted that he had instructions to commence an action for, among other things, specific performance on a significantly abated purchase price.

[10] Neither party tendered on September 8, 2017.

[11] HCCH returned the $250,000 deposit to the lawyer for 258 by certified cheque which has not been deposited or cashed to date.

[12] On September 14, 2017, 258 commenced this action against HCCH seeking specific performance with an abatement of purchase price. In the alternative, damages in the amount of $67,250,000 and a CPL against the property. On September 19, 2017, 258 brought an ex parte motion and obtained a CPL on the property which was registered on title.

[13] 258 commenced an action against Sheldon Barris alleging that the mortgage is fraudulent.

[14] On October 12, 2017, Arrell J. made an order prohibiting and restraining any further mortgaging or encumbering of the property or the shares in HCCH. The Barris defendants had no notice of that order. The Barris defendants moved to set aside or vary the order of Arrell J. An interim order was made by Ramsay J. which added the Barris defendants to this action and permitted the discharge and reregistration of the Barris mortgage ahead of the CPL to facilitate a refinancing.

[15] Refinancing did not occur through RBC, but Romspen Investments paid out Scotiabank and has taken an assignment of its mortgage.

[16] The following issues are to be determined by me:

(1) Should the CPL be discharged?

(2) Should this action be consolidated with the claim against Barris?

(3) Should the Barris defendants be required to produce certain documents?

(4) Should the Order of Arrell J. be varied?

(1) Should the CPL be discharged?

[17] HCCH argues that the certificate of pending litigation ought to be discharged on the following basis:

(i) The plaintiff’s motion material contained a material nondisclosure and the order should be set aside in accordance with rule 39.01(6) of the Rules of Civil Procedure:

(ii) The plaintiff does not have reasonable interest in land claimed; and

(iii) The Dhunna factors/equity supports a discharge of the CPL.

[18] Section 103 (6) of the Courts of Justice Act, provides:

(5) The court may make an order discharging a certificate,

(a) where the party at whose instance it was issued,

(i) claims a sum of money in place of or as an alternative to the interest in the land claimed,

(ii) does not have a reasonable claim to the interest in the land claimed, or

(iii) does not prosecute the proceedings with reasonable diligence;

(b) where the interests of the party at whose instance it was issued can be adequately protected by another form of security; or

(c) on any other ground that is considered just

And the court may, in making the order, impose such terms as to the giving of security or otherwise as the court considers just.

[19] The parties appear to agree on the appropriate legal analysis.

[20] The first question is whether or not the claim for specific performance has merit. Even if the claim for specific performance has a reasonable prospect of success, the court must be satisfied that damages would not be an appropriate remedy. Even if the plaintiff has a potential case for specific performance, the court may refuse the CPL if it would be unjust to order it. The court must consider the equities of granting this form of interim relief. This is not a mechanical application of a test of the exercise of discretion to achieve a just result. The factors the court may consider include the strength of the case, the uniqueness of the land, the adequacy of damages as a remedy, whether the CPL appears to be for an improper purpose, and the balance of convenience (see: Interrent International Properties Inc. v. 1167750 Ontario Inc., 2013 ONSC 4746 at para. 15).

(i) Should the order be made without notice be set aside because of a material nondisclosure?

[21] Rule 39.01 (6) provides that where a motion is made without notice, the moving party shall make full and fair disclosure of all material facts, and failure to do so is in itself sufficient ground for setting aside any order obtained on the motion.

[22] With respect to the material nondisclosure, HCCH points to the assertion in the affidavit sworn in support of the certificate of pending litigation and paragraph 45 that:

Prior to the September 8, 2017 closing date the plaintiff entered into a contractual agreement where it agreed to sell the property to a subsequent buyer.

[23] The affidavit further asserts at paragraph 49 that:

If a CPL is not registered on the title of the property the plaintiff may be held liable for damages as a result of its inability to resell the property to the subsequent buyer.

These statements are false.

[24] 258 did not have a contractual agreement to sell the property to a subsequent buyer. The plaintiff was referring to a letter of intent to purchase a 50-80% interest dated July 3, 2017. The purchaser was shown to be Movengo Corp./Lamb Development Corp. and the vendor to be the Hamilton City Centre. HCCH did not know of this document. There was no contractual obligation to convey the property. HCCH says this is a material nondisclosure. The plaintiff says it is not a material nondisclosure.

[25] This statement is not merely the omission of a material fact but is a false statement. On that basis alone, in my view, the certificate of pending litigation obtained on a motion without notice ought to be set aside.

[26] I am satisfied that the inclusion of this statement is material. The fact that there is a contractual obligation to convey this property could have had an impact on the motion judge’s decision. On that basis, the certificate of pending litigation should be set aside.

[27] I am also satisfied that, in all the circumstances of this case, even in the absence of the false statement in the affidavit, the certificate of pending litigation should be discharged.

(ii) Does the Plaintiff have a plausible claim to an interest in the land?

[28] I am to review all of the evidence put forward by the parties and determine on the totality of the evidence whether there is a triable issue. I must determine whether the claim has a reasonable prospect of success. The reasonable prospect of success is not only a reasonable prospect of proving a breach of contract, but also succeeding in obtaining the equitable remedy of specific performance. I must be satisfied that damages would not be an appropriate remedy (see Interrent, supra).

[29] The property was being purchased, at least in part, for investment purposes. The plaintiff specifically requested and obtained a warranty with respect to the CAP rate prior to the closing of the transaction. In fact, the plaintiff asserts it failed to complete the transaction because the defendant would not agree to an abatement of the purchase price on the basis of a breach of the warranty. The plaintiff relies on evidence that this is a unique property because of its location, history in the city of Hamilton, and the potential to build upon the existing foundation. The insistence on the CAP rate as a factor in determining the purchase price suggests it was purchased for an investment purpose. The plaintiff’s representative initially deposed that the property was to be resold which would suggest an investment purpose. I am not satisfied that the uniqueness of the property is determinative.

[30] The claim seeks specific performance and, in the alternative damages, which are quantified in the statement of claim. In the circumstances, there is an issue as to whether the plaintiff has a reasonable interest in the land.

[31] The plaintiff failed to pay the $2 million deposit as required by the amendment to the agreement of purchase and sale. This failure to pay the deposit could be fatal to the plaintiff’s claim (see Rothwell Corporation v. Amstel Brewery Canada Limited (1991), 1991 CanLII 7296 (ON SC), 6 O.R. (3d) 651). If, however, 258 merely seeks to claim damages based on the anticipatory breach of the contract, then the failure to deliver the deposit may be justified but it could be fatal to the plaintiff’s claim for specific performance. I do not make a determination of this issue but I note that the claim, especially the claim for specific performance, has challenges for 258 which is a factor I may consider.

[32] Even if the plaintiff has a reasonable interest in the land claimed, I am still required to consider the equities which include Dhunna factors. Those are the factors set out by Master Donkin in 572383 Ontario Inc. v. Dhunna, 1987 CarswellOnt 551 which are as follows:

(a) whether the plaintiff is a shell corporation;

(b) whether the land is unique

(c) the intent of the party in acquiring the land;

(d) whether there is alternative claim for damages,

(e) the ease or difficulty of calculating damages

(f) whether damages would be a satisfactory remedy;

(g) the presence, or absence of another willing purchaser; and

(h) the harm to each party if the CPL is or is not removed with or without security.

I shall address each of these factors.

[33] With respect to the first factor, the plaintiff is a shell corporation.

[34] With respect to the second factor, the land is unique in that it is presently a shopping centre in downtown Hamilton. It occupies a prime location.

[35] On the issue of the intent of the parties in acquiring the land, it appears that the purchaser was interested in purchasing the property for investment purposes. The focus in the CAP rate supports the view that the property was purchased for investment. The plaintiff also asserts intentions to develop the property. However, there are no contractual obligations to do so. I am not satisfied that the plaintiff has established the property was purchased other than for investment purposes.

[36] In this case, there is an alternate claim for damages.

[37] As to whether the damages can be properly quantified, the plaintiff specifically included a number for damages in the statement of claim. Given the focus on the CAP rate, it is reasonable to conclude that the plaintiff had undertaken analysis of the income required to earn appropriate profit and that will form the basis for a claim for damages. I conclude that the damages can be readily calculated.

[38] Insofar as the property was purchased for investment purposes, damages would be a satisfactory remedy.

[39] There is no evidence in this case that there is a willing purchaser.

[40] What is a relative harm to the parties if the CPL was held in place? The CPL has an impact on the ability of the vendor or HCCH to encumber or sell the property. The plaintiff made a deposit of $250,000 on a property that had valued at 55 million. In all the circumstances, it seems that the right of the vendor to seek another purchaser or refinance is important.

[41] Considering all the circumstances, I am satisfied that the certificate of pending litigation should be discharged.

(2) Should this action be consolidated with the claim against the Sheldon Barris in Court file number 70-63269?

[42] In the Barris action, 258 seeks a declaration that the Barris mortgage registered on August 24, 2017 is void and unenforceable. 258 asserts that the mortgage was a fraudulent transaction. In his defence, Barris asserts he was a prior security holder and had an equitable charge on the property. This equitable charge was registered as it was entitled to do.

[43] I am satisfied that this arises out of the same transaction or series of transactions and that it would be in the interests of justice that the actions be tried at the same time, or immediately following one another as directed by the trial judge. Pleadings have been exchanged in both proceedings and, in my view, consolidation is not appropriate.

(3) Should the Barris defendant be required to produce certain documents?

[44] The Barris action has not proceeded to the discovery stage. There has been significant documents provided to 258 by Barris. It is appropriate that the parties first follow the rules of civil procedure and that the discovery process proceed in accordance with the rules. This would include the exchange of affidavit of documents and examinations for discovery. The plaintiff’s motion for production at this time is dismissed.

(4) Should the order of Arrell J. be amended such that it does not extend to the Barris defendants?

[45] The order of Arrell J. is an interlocutory order made without notice to the Barris defendants. They assert that the order has a significant impact on their rights as mortgagees. Given that the certificate of pending litigation was registered after the Barris mortgage, it should not give the plaintiff more rights than it ought to have.

[46] By its terms, the provision of the order dealing with the further mortgaging or encumbering of the property is only effective until the hearing and adjudication of the defendant’s CPL discharge hearing. I have ordered that the CPL be discharged. Therefore, the order is no longer in effect. Accordingly, there is no need to vary the order.

[47] I am advised that there are two contempt motions outstanding with respect to the order. At this time, I am not prepared to make an order to retroactively vary the order of Arrell J. If that is necessary, it can be addressed in the context of the contempt motions. I am not ruling on this. The motion of the Barris defendants is adjourned to the judge hearing the motions for contempt.

[48] In the result, there will be an order as follows:

1. that the certificate of pending litigation shall be removed

2. this action Court file number 17-62851 is to be heard together with Court file number 17-63269 or one after the other as directed by the trial judge

3. the plaintiff’s motion for production of documents from the Barris defendants is dismissed

4. the Barris motion to vary the order of Arrell J. is adjourned

Costs

[49] If the parties are unable to agree on costs, I will accept written submissions limited to 10 pages together with bills of costs, offers to settle and authorities. HCCH and the Barris defendants shall have 15 days from today to deliver their submissions. 258 shall have a further 15 days to respond. HCCH and the Barris defendants will have 10 days for a brief reply limited to five pages each. If I receive no costs submissions within 15 days, the costs shall be deemed to have been settled amongst the parties.

Sweeny J.

DATE: June 1, 2018