Galleria Centre Inc. v. Terracap Galleria Centre Inc.

Ontario Reports Ontario Superior Court of Justice Pattillo J. July 5, 2019 147 O.R. (3d) 93 | 2019 ONSC 2313

Case Summary

Corporations — Oppression — Parties entering into co-tenancy agreement in respect of condominium development — Applicant giving notice that it no longer wished to continue with project — Respondent's application for oppression remedy under s. 248 of Business Corporations Act dismissed — Respondent's expectation that applicant would continue with co-tenancy agreement not reasonable — Applicant's conduct in refusing to continue with co-tenancy agreement not oppressive — Business Corporations Act, R.S.O. 1990, c. B.16, s. 248.

Corporations — Winding-up — Parties entering into co-tenancy agreement in respect of condominium development — Applicant giving notice that it no longer wished to continue with project and applying for order under s. 207 of Business Corporations Act — Application dismissed — Applicant not entitled to equitable relief under s. 207 as respondent had not breached agreements between parties — Resort to winding-up provisions in s. 207 being unnecessary in any event as parties had provided mechanism for ending their relationship — Business Corporations Act, R.S.O. 1990, c. B.16, s. 207.

Galleria and Terracap entered into a co-tenancy agreement for the purpose of developing, building, marketing and leasing a condominium development. Title to the property was held by GCTC in trust for the parties. Galleria advised Terracap that it no longer wished to continue with the project and brought an application for an order under s. 207 of the Business Corporations Act ("OBCA"). Terracap brought a cross-application for, among other things, an order under s. 248 of the OBCA that Galleria's conduct in refusing to participate in the project was oppressive.

Held, the application should be dismissed; the cross-application should be allowed in part.

There was no evidence that Terracap had done anything contrary to the agreements between the parties. Accordingly, Galleria's "expectations" were not reasonable, nor had there been a sufficiently serious failure in respect of them to warrant the grant of equitable relief to wind up the co-tenancy pursuant to s. 207 of the OBCA. In any event, the winding up provisions of s. 207 are only necessary in circumstances where the parties have not provided any mechanism for ending their relationship. That was not the case here.

Terracap was not entitled to an oppression remedy. Its expectation that Galleria would not breach the co-tenancy agreement was not reasonable in the circumstances, and Galleria's conduct in refusing to continue in the co-tenancy agreement was not oppressive.

The disengagement of the parties was to occur in accordance with the provisions of art. 18 of the co-tenancy agreement. [page94]

References

Cases referred to

• Animal House Investments Inc. v. Lisgar Development Ltd. (2007), 87 O.R. (3d) 529, [2007] O.J. No. 3879, 160 A.C.W.S. (3d) 996, 41 B.L.R. (4th) 231 (S.C.J.)
• Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481, [1995] O.J. No. 1377, 85 O.A.C. 29, 23 B.L.R. (2d) 286, 55 A.C.W.S. (3d) 86 (C.A.)

Statutes referred to

• Business Corporations Act, R.S.O. 1990, c. B.16, ss. 207, (1)(b)(iv), 248 [as am.], (3), (f), (g)

Counsel

APPLICATION for an order under s. 207 of Business Corporations Act; Cross-Application for remedy under s. 248 of Act and for other relief.

John Adair and Jordan Katz, for applicant. Mark Dunn and Dan Block, for respondent Terracap Galleria Centre Inc.

PATTILLO J. : —

Introduction

[1] The issues raised by these two applications concern the basis upon which a corporate divorce should take place between Galleria Centre Inc. ("Galleria") and Terracap Galleria Centre Inc. ("Terracap").

[2] On November 21, 2014, Galleria and Terracap entered into a co-tenancy agreement (the "Co-Tenancy Agreement") for the purpose of developing, building, marketing and leasing a 220,000 square-foot retail condominium development (the "Project") on property municipally known as 3055 Neilco Court, Dundas Street East and Neilco Court, Mississauga, Ontario (the "Property").

[3] In September 2018, Galleria advised Terracap that it was no longer prepared to continue with the Project.

[4] On October 17, 2018, Galleria commenced an application against Terracap and GCTC Holdings Inc. ("GCTC Holdings"), which holds registered title to the Property in trust for Galleria and Terracap. Galleria's application seeks an order requiring Terracap to purchase its interest in the Co-Tenancy or, in the alternative, directing Galleria and Terracap to sell the Property and the Project, both pursuant to s. 207 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA").

[5] Following commencement of Galleria's application, the parties agreed that Terracap will purchase the Property and that the value of the Property is $12.44 million. However, they can't agree on the structure of the transaction and whether Art. 13.03(a) of their Co-Tenancy Agreement applies to the transaction, whatever the structure. [page95]

[6] As a result, Terracap commenced a cross-application against Galleria and GCTC Holdings on March 2, 2019 seeking, among other things, an order pursuant to s. 248 of the OBCA that Galleria's conduct in refusing to participate in the Project is oppressive and unfairly prejudicial to, and unfairly disregards the interests of Terracap, and rectifying such conduct by granting Terracap the right to purchase the Property and the Project on such terms as are just.

Background

[7] Galleria is part of a group of "Galleria" companies which are in the business of owning and operating large Asian grocery stores throughout the Greater Toronto Area.

[8] Terracap is part of the Terracap Group, a developer with more than 30 years' experience developing, marketing and managing real estate assets in Ontario.

[9] In or around March 2008, Galleria purchased the Property which comprises some 5.7 acres, with the intention of building and operating a new flagship supermarket. Shortly after its purchase of the Property, Galleria became interested in developing it beyond a supermarket. Recognizing it had no experience in property development, Galleria entered into an agreement with a developer to carry out what became the Project. When that developer later withdrew from the Project, Galleria was introduced to the Terracap Group and the parties subsequently agreed to develop the Project together.

[10] Galleria and Terracap structured their relationship as a co-tenancy. They agreed, among other things, that that Terracap would purchase a 50 per cent beneficial interest in the Property from Galleria and that legal title would be held in trust for each of them by GCTC. Further, they would each pay 50 per cent of the costs of the Project and Terracap would manage the construction and development process required to complete the project through a related party, Terracap Developments Inc. ("Terracap Developments").

[11] On November 21, 2014, the parties signed three agreements. The agreements, which have been amended since, govern the relationship between the parties. They are:

(a) a purchase agreement which primarily governs the terms of Terracap's purchase of the 50 per cent interest in the Property from Galleria (the "Purchase Agreement");

(b) the Co-Tenancy Agreement which primarily governs the relationship between Galleria and Terracap as co-owners of the Property; and [page96]

(c) a property development agreement which governs the relationship between Galleria and Terracap as the owners of the Property and Terracap Developments as the manager (the "Property Development Agreement").

[12] The Purchase Agreement and the Co-Tenancy Agreement were subsequently amended by the parties on June 29, 2016 (the "June 2016 Amendments") and the Co-Tenancy Agreement was again amended on January 6, 2017.

The Purchase Agreement

[13] The Purchase Agreement provided that Terracap would purchase a 50 per cent interest in the Property from Galleria for $5,375,000, payable by way of two deposits of $250,000 each with the balance of $4,875,000 payable on closing. The Purchase Agreement was amended by the June 2016 Amendments to provide, among other things, that a portion of the balance of the purchase price due on closing would be satisfied by a vendor-take-back mortgage from Terracap of $3,025,093.51 for a term of five years.

The Co-Tenancy Agreement

[14] The parties to the Co-Tenancy Agreement are GCTC (as "trustee"), Terracap Developments (as "manager") and Galleria and Terracap (collectively as "owners"). Paragraph (d) of the preamble of the Co-Tenancy Agreement provides:

(d) The Owners have entered into this Agreement together with the Trustee and the Manager in order to govern their rights and obligations with each other relating to the Co-Tenancy and its operations.

[15] Article 2.07 of the Co-Tenancy Agreement provides that the term of the Co-Tenancy "shall continue until the sale of all of the Real Property, the liquidation of the remaining Co-Tenancy Assets and the distribution of all receipts and payments related thereto in accordance with Article 18 . . .".

[16] Article 18 of the Co-Tenancy Agreement deals with termination. Specifically, Art. 18.01 provides:

The Co-Tenancy shall be terminated only in the event of the sale of all of the Real Property to a Third Party or Third Parties or to a single Owner, or by the operation of law. In the event of a dissolution or termination of the Co-Tenancy as herein provided, the Accountants shall make out a balance sheet showing the assets and liabilities of the Co-Tenancy and the capital account of each Owner for their respective share of the Co-Tenancy's profits or losses. The said balance sheet shall be signed by or on behalf of each Owner, failing which any outstanding questions shall be referred to and finally determined by the Accountants and when so signed or determined shall be conclusive except if a manifest error shall be discovered therein within one year after the date of signing thereof, in which case such error shall be rectified forthwith. [page97]

[17] Article 18.06 provides:

The Co-Tenancy shall not be dissolved or terminated by the withdrawal, incompetence, death, bankruptcy, insolvency, amalgamation, dissolution, liquidation, winding-up or receivership of any Owner or Trustee (except in the circumstances as provided for in this Agreement).

[18] Article 18.02 provides, in part, that upon termination of the Co-Tenancy as provided, the affairs of the Co-Tenancy shall be wound-up and the Co-Tenancy assets liquidated by the manager and the owners shall continue to share profits and losses during the period of liquidation in the same manner as before dissolution.

[19] Article 18.03 deals with the distribution of the "proceeds from the liquidation of the Co-Tenancy Assets or profits and proceeds available on dissolution of the Co-Tenancy" and provides that they shall be distributed in the following order of priority:

a) to pay the expenses of liquidation and debts and liabilities of the Co-Tenancy to its creditors and to make provision for the payment thereof;

b) to provide for reserves which the Manager considers reasonably necessary for any contingent or unforeseen liability or obligation of the Co-Tenancy, and any such reserve shall be paid to and held by the Manager for the purpose of the payment of liabilities or obligations of the Co-Tenancy and any balance remaining shall be distributed at the direction of the Trustee in the manner set out in the Co-Tenancy Agreement; and

c) to distribute the surplus, if any, in the manner and order provided for in Art. 13 of the Co-Tenancy Agreement.

[20] Article 13 is headed "Contributions, Allocation of Profits and Distribution". Article 13.03 which is headed "Distribution of Cash" provides:

(a) The first cash available for distribution within the Co-Tenancy, up to the amount of Four Million ($4,000,000.00) Dollars, shall be paid to the Terracap Owner as a distribution of Profits to the Terracap Owner, which shall not be treated as a repayment of any of the capital contributions of the Terracap Owner.

(b) All remaining cash available for distribution within the Co-Tenancy for any Fiscal Year if any, after payment of the amounts provided in Subsection (a) above, shall be distributed to the Owners in accordance with their Unit Proportions from time to time. Notwithstanding the foregoing, if the Terracap Owner has made a loan to the Galleria Owner in respect of a required contribution pursuant to Section 11.03, any distribution which would otherwise have been made to the Galleria Owner, shall first be applied and paid to the Terracap Owner on account of any such loan made until such loan and all interest has been paid in full.

[21] As part of the June 2016 Amendments to the Co-Tenancy Agreement, the parties agreed that Terracap could require that [page98] the Project not proceed and that the Property be sold to a third party on the happening of any one of four conditions. The amendment also dealt with how the proceeds of such sale were to be distributed.

[22] Following the November 2014 Agreements, the parties each carried out certain work and they each expended considerable time and money moving the Project forward.

[23] Following the June 2016 Amendments, which occurred after extensive negotiations and with the benefit of legal advice for both parties, Galleria determined that the terms of the June 2016 Amendments were unfair. As a result, it refused to complete the sale of the Property to Terracap on September 28, 2016 as agreed by the parties, requiring Terracap to bring an urgent action for specific performance to enforce its rights. Terracap's action was subsequently resolved by a consent order, requiring Galleria to complete the sale transaction.

[24] In the summer of 2017, a further dispute arose between the parties because Galleria refused to provide funding in accordance with the terms of the Co-Tenancy Agreement. The issue, along with other issues, was eventually settled through arbitration in Terracap's favour as provided by the Co-Tenancy Agreement.

[25] Galleria says that its expectations of a cooperative working relationship with Terracap became frustrated. It points to Terracap's aggressive and punitive negotiating positions; its refusal to provide Galleria with information requested; and its referral of "comparatively minor financial disputes" to lengthy and costly arbitration.

[26] Galleria further says that the capricious manner in which Terracap carried out its responsibilities under the Co-Tenancy Agreement resulted in an erosion of Galleria's trust in and ability to work with Terracap and ultimately led to its decision in September 2018 to advise Terracap that the relationship between them could not continue.

The Issues

[27] In light of the fact that the parties have agreed that Terracap will purchase Galleria's 50 per cent interest in the Property and that the value of the Property in respect of such sale is $12.44 million, the parties agree that the issues to be decided on both applications are

(1) how should the transaction be structured; and

(2) the basis upon which Galleria should be paid. [page99]

Position of the Parties

i. Galleria

[28] Galleria submits, in respect of the first issue, that Terracap should purchase its shares in GCTC at 50 per cent of the agreed value together with repayment of the vendor take-back-mortgage. It further submits that Terracap should purchase its beneficial interest in the remaining Co-Tenancy Assets, the value of which should be determined by a reference.

[29] In support of its submission, Galleria relies on s. 207 of the OBCA and specifically the "just and convenient" provision in s. 207(1)(b)(iv), together with the broad remedial remedies available in s. 207(3).

[30] In respect of the second issue, the basis upon which Galleria should be paid, Galleria submits that Art. 13.03(a) of the Co-Tenancy Agreement which provides that the first available cash for distribution from the Co-Tenancy up to $4 million shall be paid to Terracap (the "Preferential Distribution Right"), does not apply in respect of the termination of the Co-Tenancy.

ii. Terracap

[31] Terracap submits that Galleria's conduct in refusing to participate in the Co-Tenancy is oppressive and unfairly disregards its interests in accordance with s. 248 of the OBCA. It seeks an order pursuant to the broad remedial powers of s. 248(3) rectifying Galleria's oppressive conduct by granting Terracap the right to purchase the Property and the Project on such terms as are just.

[32] Specifically, Terracap submits that the court should order that GCTC sell the Property to Terracap for the price agreed to by the parties. Thereafter, the proceeds together with the proceeds from the sale of any other Co-Tenancy Assets should be distributed in accordance with the provisions of the Co-Tenancy Agreement.

[33] Terracap submits that any distribution of cash pursuant to the Co-Tenancy Agreement would be in accordance with Art. 13.03 thereof and, in particular, the Preferential Distribution Right. It agrees, however, that as part of the transaction, it must pay out the vendor take-back mortgage it gave to Galleria at the time of the purchase of its interest in the Property.

[34] Terracap further submits that it intends to bring an arbitration claim against Galleria for damages arising from Galleria's alleged breach of the Co-Tenancy Agreement due to its termination of the Co-Tenancy. Given that Galleria is a single purpose entity, it submits that Galleria's entitlement to the proceeds from the termination of the Co-Tenancy pursuant to the Co-Tenancy [page100] Agreement should be held in trust or otherwise secured pending the determination of its intended damage claim.

Analysis

a) Galleria's application

[35] Article 18.01 of the Co-Tenancy Agreement clearly provides that the Co-Tenancy can only be terminated in the event of a sale of the Property to a third party or parties or to a single owner or by operation of law. (Although the June 2016 Amendments added another way in which the Co-Tenancy could be terminated, it is not relevant to this discussion.)

[36] Galleria and Terracap agree that the Co-Tenancy has been terminated by the sale of the Property to Terracap. Galleria also submits that an order pursuant to s. 207 of the OBCA would be an "operation of law" pursuant to Art. 18.01 also terminating the co-tenancy (and enabling its preferred structure of the sale transaction).

[37] Although not raised in its notice of application, in its factum, Galleria also relies on s. 248 of the OBCA to support its submission the court should order that the sale of the Property be undertaken by Terracap purchasing its shares in GCTC. Specifically, Galleria relies on s. 248(3)(f) and (g) which gives the court the jurisdiction to order a corporation to buy another's securities.

[38] Section 207 of the OBCA permits a court to wind-up a corporation if it is satisfied that it is just and equitable to do so. Section 207(1)(b)(iv) of the OBCA provides:

207(1) A corporation may be wound up by order of the court,

(b) where the court is satisfied that,

(iv) it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation, that it should be wound up.

[39] Justice Wilton-Siegel J. considered what is required to satisfy a court that it is "just and equitable" pursuant to s. 207(1)(b)(iv) in Animal House Investments Inc. v. Lisgar Development Ltd. (2007), 87 O.R. (3d) 529, [2007] O.J. No. 3879 (S.C.J.). At para. 57, he stated:

All of the cases cited to the Court reflect the underlying and unifying principle that a Court will only exercise its discretion to order a "just and equitable" winding-up if the disharmony has resulted in a sufficiently serious failure of the reasonable expectations of the parties to warrant such equitable relief. In [page101] order to satisfy this test of serious failure of expectations, an applicant must demonstrate that the parties regarded, or would have regarded if they had turned their minds to it at the time of the formation of the business association, the particular circumstances resulting from the disharmony to constitute the termination or repudiation of the business relationship among them. Accordingly, incompatibility is significant only insofar as it has resulted in a state of affairs in which the reasonable expectations of the parties are unattainable and from which the Court can reasonably infer that the business arrangement between the parties has been repudiated or terminated.

[40] Similarly, s. 248 of the OBCA, the "oppression" section, also involves a determination of what the "reasonable expectations" of the claimant were. See Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481, [1995] O.J. No. 1377, 85 O.A.C. 29 (C.A.), at para. 29.

[41] In his affidavit in support of Galleria's application, Sam Park, a director of Galleria, sets out four "expectations" about how Galleria felt the relationship would work and what was required of it which he says Galleria developed a few months after executing the agreements in November 2014. They are

(1) the parties would be involved in and cooperate on all significant steps and matters with respect to the Project;

(2) the Project would be completed by the end of 2018 (based on the sale terms of pre-construction units);

(3) the equity required from each co-owner would not exceed $1,750,000; and

(4) Galleria would not have to guarantee any debt associated with the Project.

[42] I am satisfied from the record and specifically the affidavit of Larry Krauss, president of Terracap, together with the provisions of the Co-Tenancy Agreement that the above "expectations" are either not reasonable or they have been met. Specifically:

(1) The parties did co-operate on significant steps. Any failure to co-operate was by Galleria when it refused to close the Purchase Agreement and to fund the July 2017 Cash Call which resulted in arbitration.

(2) The Co-Tenancy Agreement has very limited termination rights and failure to complete by the end of 2018 is not one of them. Further, as part of the June 2016 Amendments, the parties agreed that Terracap could terminate the Co-Tenancy if the Project was delayed and unit purchasers did not extend the completion dates in their purchase agreements. Galleria did not bargain for a similar termination right. [page102]

(3) While the Co-Tenancy Agreement initially provided that Galleria's maximum equity contribution would be capped at $1.75 million, the parties agreed as part of the June 2016 Amendments (s. 4(b)) to remove the limit on Galleria's equity contribution.

(4) Galleria has not guaranteed any Project-related debt. Its complaints arise from negotiations surrounding an interim financing arrangement for the cash requirements of the Project. Ultimately, Galleria did not guarantee that financing or any other financing.

[43] Galleria also points to various events which it submits eroded the relationship of confidence and trust between the parties, including the addition of the Terracap "termination right" as part of the June 2016 Amendments which it tried unsuccessfully to remove afterwards; Terracap's repeated threats to terminate the Co-Tenancy; its aggressive position in commencing litigation over Galleria's refusal to close the Purchase Agreement and commencing an arbitration over its refusal to respond to a cash call for the Project; and financing issues surrounding the conditions of the mezzanine loan to pay development charges.

[44] The above issues arise mainly as a result of Galleria's conduct and not that of Terracap. There is no evidence that Terracap has done anything contrary to the Agreements between the parties. Accordingly, I do not consider that Galleria's "expectations" are reasonable or that there has been a "sufficiently serious failure" in respect of them to warrant the court granting equitable relief to wind up the Co-Tenancy pursuant to s. 207 of the OBCA.

[45] In any event, the winding up provisions of s. 207 of the OBCA are only necessary in circumstances where the parties have not provided any mechanism for ending their relationship. That is not the case here.

[46] For the above reasons, therefore, I am satisfied that Galleria is not entitled to the equitable relief it requests either pursuant to ss. 207 or 248 of the OBCA.

b) Terracap's application

[47] Terracap relies on the oppression remedy in s. 248 of the OBCA.

[48] It submits that Galleria's conduct in unilaterally announcing in September 2018 that it would no longer be part of the Co-Tenancy was a breach of its reasonable expectation that Galleria would act in accordance with the agreements between the parties by contributing to and participating in the development of [page103] the Project and was oppressive within the meaning of s. 248 of the OBCA. It further submits that the appropriate remedy is to require that GCTC sell the Property to Terracap and distribute the sale proceeds in accordance with the Co-Tenancy Agreement, once Terracap's damages claim is resolved.

[49] The Agreements setting out the relationship between the parties in the Co-Tenancy are detailed and provide for their rights and obligations to one another. In particular, they envisaged that one or other of them may not abide by the Agreements and accordingly provided a mechanism (arbitration) for resolving any disputes, including breaches of the Agreements that may arise between them. Terracap utilized that mechanism when Galleria failed to act in accordance with the Agreements. Indeed, Terracap says that it intends to bring a claim against Galleria for damages arising from its improper termination of the Co-Tenancy Agreement which is the reasonable expectation Terracap says Galleria has breached.

[50] While I accept that Terracap had an expectation that Galleria would not breach the Co-Tenancy Agreement, I do not consider in the circumstances that it is reasonable or that Galleria's conduct in refusing to continue in the Co-Tenancy is oppressive. While it may constitute a breach of the Co-Tenancy Agreement, Terracap has a remedy in respect of such breach (which it intends to utilize) within the Co-Tenancy Agreement. For the above reasons therefore, I do not consider that the oppression remedy is available to Terracap.

[51] I am also not prepared to order that any moneys due to Galleria arising from the termination of the Co-Tenancy should be either put in trust or otherwise secured pending Terracap's pursuit of an intended damage claim against Galleria under the Co-Tenancy Agreement.

[52] There is no evidence before me of what Terracap's damages are arising from Galleria's actions in leaving the Co-Tenancy or when, if ever, it will bring its claim. In any event, it is not appropriate to withhold moneys due to Galleria based simply on an intended claim at this stage.

The structure of the transaction

[53] How then should the transaction be structured? In my view, the answer to that question is contained in the Co-Tenancy Agreement.

[54] The agreement that Terracap will purchase Galleria's interest in the Property results in termination of the Co-Tenancy pursuant to Art. 18.01 of the Co-Tenancy Agreement. [page104]

[55] As noted, Art. 18.01 of the Co-Tenancy Agreement provides that the Co-Tenancy shall be terminated on the happening of certain limited events, one of which is the sale of the Real Property to "a single Owner". The owners are identified in Schedule "A" to the Co-Tenancy Agreement as Terracap and Galleria. In my view, the agreement between Galleria and Terracap that Terracap will purchase Galleria's interest in the Property represents a sale of the Real Property to a single Owner such that the Co-Tenancy is terminated pursuant to Art. 18.01.

[56] In their applications, both Galleria and Terracap propose different ways in which Galleria's sale of its interest in the Property and the other Co-Tenancy Assets should be structured. In my view, however, the answer to the question as to how the transaction is to be structured is provided by the parties themselves in the Co-Tenancy Agreement and specifically in Art. 18.

[57] As set out in the balance of Art. 18, upon termination of the Co-Tenancy, the Co-Tenancy Assets which are defined in Art. 2.04 to be the Real Property, Chattels and all other assets of the Co-Tenancy, both real and personal, are liquidated and the moneys distributed in accordance with Art. 13.

[58] Specifically, Art. 18.02 provides, in part, that upon termination, "the affairs of the Co-Tenancy shall be wound-up and the Co-Tenancy Assets shall be liquidated by the Manager [Terracap Developments] as 'Liquidating Trustee'".

[59] Article 18.02 further provides that the Liquidating Trustee has "full right and unlimited discretion to determine the time, manner and terms of any sale or sales of the Co-Tenancy Assets pursuant to such liquidation having regard to the activity and condition of the discharge of the Co-Tenancy's liabilities to enable the Liquidating Trustee to minimize normal losses upon liquidation".

[60] Accordingly, the manager is the person the parties have agreed who shall determine the manner and terms of any sale or sales of the Co-Tenancy Assets, which includes, in my view, the structure of the transaction.

The basis upon which Galleria should be paid

[61] Article 18.03 provides that the net proceeds from the liquidation of the Co-Tenancy Assets or profits and proceeds shall be distributed in the order of priority set out. The third and last priority is to distribute the surplus, if any, in the manner and order provided for in Art. 13 of the Co-Tenancy Agreement.

[62] Galleria submits that Arts. 18.02 and 18.03 do not apply because what is happening is not a liquidation. But that is precisely what will happen as required by Art. 18.02 as a result of the termination of the Co-Tenancy. And it makes commercial [page105] sense. Once one of the parties leaves the Co-Tenancy, it no longer is a co-tenancy. In such circumstances, the parties agreed to liquidate all the assets and distribute the net proceeds.

[63] Galleria further submits that following Arts. 18.02 and 18.03 would mean the end of the Project in that the Property, purchaser contracts and other third party contracts, would have to be sold. The question of whether the Project will continue will be up to Terracap. It has already indicated it is prepared to buy the Property from GCTC. While the value of the other Co-Tenancy Assets may be difficult to determine, there is no reason to suggest that Terracap would not buy them as well.

[64] Galleria submits that Art. 18.03 which provides for the distribution of the net proceeds from the liquidation of the Co-Tenancy Assets and incorporates the priority set out in Art. 13 does not apply because it is not a liquidation. As I have already noted, however, it is a liquidation pursuant to Art. 18.02. Article 18.03 applies and as a result, incorporates the priorities in Art. 13 and specifically Art. 13(a).

[65] Finally, Galleria submits that Art. 13(a) does not apply to the net proceeds generated from the liquidation because, based on its own words, it applies only to profit and the Project does not have any profits.

[66] Article 13(a) does not, however, provide that it applies only to profit. Rather, it applies to the "first cash available for distribution" and characterizes the payment as "a distribution of Profits to the Terracap Owner, which shall not be treated as a repayment of any of the capital contributions of the Terracap Owner".

[67] Accordingly, Art. 13(a) which provides for the Preferential Distribution Right applies in respect of the distribution of the net proceeds of the liquidation of the Co-Tenancy Assets.

[68] Further, as agreed by Terracap, Terracap shall pay Galleria the amount owing on the vendor take-back mortgage as part of the transaction.

Conclusion

[69] For the above reasons therefore, Galleria's application is dismissed.

[70] As part of the relief claimed in its application, Terracap seeks an order granting such other relief as is required to effect the disengagement of the parties on terms as are just. Accordingly, while I have dismissed Terracap's claims for oppression and prejudgment execution, for the above reasons, I allow it in part and order that the disengagement of the parties shall occur in accordance with the provisions of Art. 18 of the Co-Tenancy Agreement as provided herein. [page106]

[71] The parties are encouraged to discuss and agree on costs. In the absence of agreement, they shall make brief (no more than three pages) written submissions together with cost outlines. Galleria shall submit its submissions within 15 days and Terracap ten days after receipt of Galleria's submissions.

Application dismissed; cross-application allowed in part.

End of Document