FSC (Annex) Limited Partnership v. Adi 64 Prince Arthur L.P.
Ontario Reports
Ontario Superior Court of Justice
Koehnen J.
August 21, 2020
152 O.R. (3d) 568 | 2020 ONSC 5055
Case Summary
Contracts — Remedies — Specific performance — Applicant and respondent in partnership to develop property — Applicant exercising buy/sell provision and respondent electing to purchase applicant's interest — Respondent relying on circumstances of COVID-19 pandemic for not meeting closing date — Applicant seeking and obtaining specific performance — Pandemic had nothing to do with respondent's failure to obtain financing — Damages not an adequate remedy and no equitable considerations prevented specific performance.
Contracts — Interpretation — Shotgun buy-sell provision — Applicant and respondent in partnership to develop property — Applicant exercising buy/sell provision and respondent electing to purchase applicant's interest — Respondent relying on circumstances of COVID-19 pandemic for not meeting closing date — Applicant seeking and obtaining specific performance — Pandemic had nothing to do with respondent's failure to obtain financing — Damages not an adequate remedy and no equitable considerations prevented specific performance.
Sale of land — Breach of contract — Defence of frustration — Applicant and respondent in partnership to develop property — Applicant exercising buy/sell provision and respondent electing to purchase applicant's interest — Respondent relying on circumstances of COVID-19 pandemic for not meeting closing date — Applicant seeking and obtaining specific performance — Pandemic had nothing to do with respondent's failure to obtain financing and did not result in frustration of the contract.
Sale of land — Specific performance — Failure to complete — Applicant and respondent in partnership to develop property — Applicant exercising buy/sell provision and respondent electing to purchase applicant's interest — Respondent relying on circumstances of COVID-19 pandemic for not meeting closing date — Applicant seeking and obtaining specific performance — Pandemic had nothing to do with respondent's failure to obtain financing — Damages not an adequate remedy and no equitable considerations prevented specific performance. [page569]
The applicant and respondent were partners in a joint venture to rezone and redevelop a condominium property. The applicant held 80 per cent of the equity, with the respondent holding 20 per cent and managing the development in return for a fee. The parties had trouble working together and on January 9 the applicant exercised the buy/sell provision in the limited partnership agreement. The respondent elected to purchase the applicant's interest as opposed to selling its own interest to the applicant. The closing date was agreed to be April 8, but on March 25 the respondent advised that the closing would be delayed due to the unforeseeable circumstances of the COVID-19 pandemic. The applicant sought specific performance.
Held, the application should be allowed.
The respondent could not argue that the applicant had not come to court with clean hands. The respondent argued that the applicant was in default of several provisions of the joint venture agreements, the most significant of which was failure to pay development management fees. However, the respondent was fully aware of the alleged default when it received the buy/ sell notice and never raised it as a basis for invalidating the shotgun offer, limiting its exercise, or for giving a right of set-off. The respondent had advanced no reason for failing to raise the alleged default earlier.
The contract had not been frustrated. The respondent had three months to obtain financing but within that time it had not managed even to obtain a letter of intent. The respondent's discussion with a limited number of potential financing sources had nothing to do with the pandemic but was rather a deliberate choice. The respondent was free to make that choice, but it could not take the position that the contract had been frustrated simply because its approach to only a small number of potential lenders had not resulted in financing. Also, although the pandemic was an unusual circumstance, restrictions on the availability of credit were not uncommon.
No equitable considerations militated against specific performance. The respondent argued that the applicant ought to be restricted to the remedy in the limited partnership agreement, which contained a clause allowing the applicant to purchase the respondent's interest at a 10 per cent discount for failure to close. However, that remedy was "in addition to any other remedy" under the agreement, which also provided for a non-defaulting party to bring proceedings for specific performance. The agreement contained a number of other provisions, such as the requirement of approval of a sale to a third party, which created a series of practical complications against the respondent's argument that damages were an adequate remedy. It would have been an inequitable result to relieve the respondent of the risk of a decline in real estate markets or a contraction in the availability of financing and place that risk on the applicant.
First Real Properties Ltd. v. Biogen Idec Canada Inc., [2013] O.J. No. 4906, 2013 ONSC 6281, 37 R.P.R. (5th) 113, 235 A.C.W.S. (3d) 520, distd
Other cases referred to
Bang v. Sebastian, [2018] O.J. No. 5388, 2018 ONSC 6226; Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, [2001] S.C.J. No. 56, 2001 SCC 58; Paradise Homes North West Inc. v. Sidhu, [2019] O.J. No. 1255, 2019 ONSC 1600, 6 R.P.R. (6th) 149; Ltd. v. C-I-L Inc., [1987] A.J. No. 409, [1987] 4 W.W.R. 719, 52 Alta. L.R. (2d) 263, 79 A.R. 378, 5 A.C.W.S. (3d) 293, 1987 CanLII 3376 [page570]
APPLICATION for specific performance.
Eric Block and Shayan Kamalie, for applicant.
Young Park and Maxwell Reedijk,for respondent.
KOEHNEN J.: —
Overview
[1] The applicant seeks an order requiring the respondent to specifically perform the purchase of a condominium development project pursuant to a shotgun buy/sell clause that the applicant triggered and pursuant to which the respondent agreed to purchase the applicant's interest.
[2] The respondent submits that the shotgun purchase has been frustrated by the COVID-19 pandemic, that an order for specific performance would serve no purpose because the respondent is unable to obtain financing to complete the purchase and because equitable principles militate against specific performance.
[3] At the close of oral argument, I advised the parties that I granted the application for specific performance with reasons to follow. On my review of the circumstances of the case, the obligation to purchase under the shotgun clause has not been frustrated. At best, the ability to borrow money has become more limited than it was before the pandemic. Limitations on financial liquidity do not amount to frustration. They are regular events that occur during each economic cycle. If decreased liquidity was tantamount to frustration, it would mean that a large number of contracts for which parties required financing would be frustrated in every recession.
[4] Specific performance continues to have a salutary effect even if as the respondent submits, it cannot obtain financing. At a minimum, it forces the respondent to make more meaningful efforts to obtain financing that it had to the date of closing and affords the court the opportunity to provide flexible and appropriate relief if the respondent does not obtain financing.
[5] There are no equitable principles present in this case that militate against specific performance. The respondent knew that the project faced challenges. It could have sold pursuant to the shotgun provision, but it chose to buy. The respondent willingly took the risks of that obligation. There is no reason to relieve the respondent of that obligation or its attendant risks. [page571]
The Parties and the Project
[6] The applicant, FSC (Annex) Limited Partnership, is an affiliate of Forgestone Capital. Forgestone is a Canadian private equity and advisory firm that specializes in real estate. Among other things, it manages a number of funds that invest in real estate projects on behalf of institutional investors. For ease of reference I will refer to the applicant throughout these reasons as "Forgestone".
[7] The respondent, Adi 64 Prince Arthur L.P. is a single-purpose entity affiliated with the Adi Development Group, a real estate developer focusing on the development and construction of condominium projects in the Greater Toronto Area. For ease of reference I will refer to the respondent as "Adi".
[8] Forgestone and Adi are partners in a joint venture to rezone and redevelop 64 Prince Arthur Avenue in Toronto into a luxury condominium with approximately 140 units. They hold their interest in the project through a limited partnership. Adi holds 20 per cent of the equity, Forgestone holds 80 per cent. Their financial obligations are commensurate with their equity interests. Consistent with other projects that Adi has developed, it tends to take a minority position in the project but manages and executes the development in return for a development management fee
[9] It appears that Forgestone and Adi had difficulty working together. As a result, Forgestone exercised the buy/sell provision in the limited partnership agreement on December 20, 2019. On January 9, 2020, Adi elected to purchase Forgestone's interest for $12,733,289 as opposed to selling its own interest to Forgestone for an identical price prorated to Adi's 20 per cent interest. In agreeing to purchase, Adi also agreed to close the purchase on April 8, 2020.
[10] On March 25, 2020, Adi advised that it would not close on April 8, 2020. In doing so, Adi stated that the "closing would be delayed" due to the "unforeseeable delay caused by" the COVID-19 pandemic.
[11] In response, Forgestone brought this application for specific performance. Adi resists on three principal grounds: (i) Forgestone does not come to court with clean hands; (ii) the agreement to purchase has been frustrated; and (iii) equitable principles militate against specific performance.
(i) Clean hands
[12] Adi submits that Forgestone is in default under several provisions of the joint venture agreements, the most significant [page572] of which is that Forgestone has, since July 1, 2019, failed to pay the development management fee it allegedly owes Adi.
[13] It is not necessary to delve into the conflicting facts about whether Forgestone is or is not in default of this obligation. The default that Adi alleges is one of which Adi was fully aware when it received the buy sell notice on December 20, 2019. Adi never raised the alleged default as a basis for invalidating shotgun offer, limiting its exercise, or for giving Adi a right of set-off. Instead, Adi unreservedly agreed to purchase Forgestone's interest.
[14] Adi has advanced no reason for failing to raise the alleged default at an earlier stage. Having agreed to purchase Forgestone's interest with full knowledge of the alleged default, Adi cannot now raise the alleged default as a basis for prohibiting Forgestone from exercising its rights under the buy/sell provision.
(ii) Frustration
[15] Adi submits that it has not breached the purchase agreement but that its ability to close was frustrated by COVID-19.
[16] Adi cites Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, [2001] S.C.J. No. 56, 2001 SCC 58, at para 53, for the proposition the doctrine of frustration relieves the parties of their bargain:
when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes a thing radically different from that which was undertaken by the contract.
[17] Adi points out that when it entered into the purchase agreement, market conditions were favourable and that the COVID-19 pandemic was an extraordinary event that had never occurred before in human history. It says the economic downturn as a result of COVID-19 was completely unforeseeable.
[18] I take a different view based both on the facts of this case and on the law of frustration.
[19] Turning first to the facts of the case. Adi accepted the obligation to purchase Forgestone's interest on January 9, 2020. The Government of Ontario did not declare a state of emergency until March 17, 2020. That gave Adi over three months to obtain financing. Within that three months it had not managed even to obtain a letter of intent.
[20] Adi's efforts to obtain financing could be described as somewhat relaxed.
[21] When Adi accepted the obligation to purchase, it did not have any financing available. There is no evidence that it made efforts to investigate financing before accepting the obligation to [page573] purchase. The obligation to purchase was unconditional and was not in any way associated with the ability to obtain financing.
[22] Before Adi advised on March 25, 2020 that it would not be closing on April 8, it had discussions with only a handful of potential financing sources. The more limited scope of those discussions had nothing to do with COVID-19. Rather, they were a deliberate choice made by Adi. As Mr. Adi testified during cross-examination:
We are a relationship-driven company. . .
We do not go out into the market and hop deals, so to speak. We have got deep, entrenched relationships that are built on trust and integrity, that trust in our ability to execute, understand our experience and track record as an operator that can execute on very large-scale projects. And generally, those relationships are all that is necessary to have discussions about a site like this.
[23] How broadly Adi wants to make inquiries about financing is a decision it is free to make. If, however, it chooses to limit itself to a narrow canvas of the market, it cannot later take the position that the contract has been frustrated simply because its narrow canvas has not resulted in financing.
[24] Adi decided to approach only a small number of potential lenders although it knew that the project had its challenges. Moreover, it sought funding for more than was required to buy out Forgestone. By way of example, Adi asked one potential lender, KingSett for $4 million more than was required to purchase Forgestone's interest. Even accepting the frustration argument for a moment, all this would demonstrate is that Adi was frustrated in its ability to obtain $4,000,000 more than required to buy out Forgestone, not that it was frustrated in its ability to obtain financing to buy out Forgestone.
[25] I also take a different view of the, "never before in human history" approach to the issue. While it may be that we have not experienced a pandemic of this proportion in our lifetimes, restrictions on the availability of credit are not uncommon. They occur regularly as part of the ebb and flow of economic cycles. Any decline in values of real estate is associated with more restrictive lending practices and reduced liquidity. There is nothing unusual about that. That is one of the risks entrepreneurs face. While there was no expert evidence led on the point, there does not appear to be any widespread freezing of liquidity in the marketplace as occurred for example in 2008-2010. Even if there were a general freezing of liquidity, that would also not constitute frustration because restrictive lending practices are not unforeseen and are a common feature of economic downturns. Moreover, it is also a risk against which a purchaser can protect itself by making the purchase conditional upon financing. [page574]
[26] Adi responds that it could not make the purchase conditional upon financing because a conditional purchase was not valid under the buy/sell provision. That misses the point. At its highest, that simply means that Adi did not have the financial wherewithal to exercise the purchase option and should not have done so. Adi must bear the risk of its choice.
[27] It would be entirely unfair to let Adi exercise the purchase option and then let it claim frustration when it could not obtain financing as a result of an economic downturn. The potential for an economic downturn is an inherent risk in any purchase decision and is not one from which a purchaser should be protected by the doctrine of frustration.
[28] If it were otherwise, purchasers would have the option to resile from contracts if economic circumstances took a turn for the worse between the date of the agreement of the date of closing. There are of common contractual provisions to cover that eventuality such as financing conditions, material adverse change clauses and material adverse event clauses. Adi employed none of them.
[29] The risk of committing to purchase under a buy/sell provision is well known. As the Alberta Court of Queen's Bench put it in Trimac Ltd. v. C-I-L Inc., [1987] A.J. No. 409, 1987 CanLII 3376 (AB QB), 52 Alta. L.R. (2d) 263, at para. 29:
A shotgun buy-sell is strong medicine. One takes it strictly and in accordance with the prescription or not at all.
Other courts have also held that economic downturns and lack of financing do not amount to frustration. In Bang v. Sebastian, [2018] O.J. No. 5388, 2018 ONSC 62264, the purchaser failed to close and argued that the decline in the value of real estate and the inability to obtain financing amounted to frustration. The court rejected the submission because neither event "radically altered" the purchaser's obligations. The court noted that, as is the case here, the defendant in Bang knew she would need financing when she entered into the agreement. A decline in the value of real estate did not "radically" change the defendant's obligations under the agreement to pay a specific amount on closing, regardless of whether she could obtain financing: see paras. 33 --34 and 37. The court in Paradise Homes North West Inc. v. Sidhu, [2019] O.J. No. 1255, 2019 ONSC 1600, came to a similar conclusion.
[30] The respondent places considerable weight on First Real Properties Limited v. Biogen Idec Canada Inc., [2013] O.J. No. 4906, 2013 ONSC 6281 in support of its argument with respect to frustration. Adi notes that in First Real Properties, a contract [page575] was found to be frustrated because the cost of performing it exceeded the expectations of the parties. The case is, however, more nuanced than that. In First Real Properties, a landlord had agreed to install windows along the wall of a building to accommodate a tenant's wishes. Both landlord and tenant thought the windows would cost approximately $48,000. The wall turned out to be loadbearing which increased the cost of installing the windows by a factor of ten. In that case, the court found that it was inappropriate to compel the tenant to take the premises without the windows and found that the contract was frustrated.
[31] In arriving at the conclusion of frustration, the court noted that businesspeople from both landlord and tenant felt they could not compel each other to perform. The court also cited authority that tied the doctrine frustration to that of mistake. In First Real Properties, both parties were mutually mistaken that the windows would cost $48,000. The court also tied the concept of frustration to that of equity with the underlying question being whether it was just to the parties or their bargain to hold that the contract was frustrated. In circumstances where the businesspeople of both sides agreed they could not hold each other to the bargain, both parties were under a mutual mistake and the where correct state of affairs increased the cost by tenfold, the court found that it was just to release the parties from their bargain.
[32] The facts of this case are quite different. There was no mutual mistake. The risk of economic downturn was well known and was one against which Adi could have, but did not, protect itself.
(iii) Equitable considerations
[33] Adi raises a number of considerations which it submits make specific performance inappropriate.
[34] First, Adi points to s. 10.4(h) of the Limited Partnership Agreement, the effect of which is to allow Forgestone to purchase Adi's interest in the joint venture at a 10 per cent discount from the shot gun price because Adi failed to close. Adi submits that Forgestone should be limited to this remedy. However, s. 10.4(h) makes it clear that the discounted purchase is a remedy available to the vendor "in addition to any other remedy which it may have under this Agreement". Section 11.1(b)(i) of the Limited Partnership Agreement provides that, in the event of a default by a partner, the non-defaulting party may
bring any proceedings in the nature of specific performance, injunction or other equitable remedy, it being acknowledged by the Limited Partners that damages at law may be an inadequate remedy for a Default, breach or threatened breach of this Agreement.
[35] Second, Adi submits that damages are an adequate remedy. [page576]
[36] In this regard, Adi submits that there is nothing unique or special about the purchase agreement, that Forgestone's interest in the property was for the sole purpose of realizing a financial return, and that the joint venture agreements themselves are not unique.
[37] I see a number of difficulties with this submission. First, the Limited Partnership Agreement provides for specific performance and acknowledges that damages may not be an adequate remedy.
[38] Second, the damages that Adi suggests Forgestone pursue are those that would arise by having Forgestone sell its interest to a third party purchaser and sue Adi for the difference in price between the shotgun sale and the purchase price on the sale to the third party. This only embroils the parties in a further lawsuit. Presumably one that could become additionally complicated by potential allegations of Forgestone's failure to mitigate by marketing its interest improperly.
[39] A sale by Forgestone becomes additionally complicated because any purchaser would have to become party to multiple agreements that govern the project. In addition, s. 10.1 of the Limited Partnership Agreement provides that no transfer of a partnership interest can occur without the approval of 100 per cent of the limited partners. In other words, Adi would have to approve of the sale.
[40] These provisions create a series of practical complications. They require Forgestone to find someone willing to acquire an interest in the limited partnership subject to Adi's right to continue to manage it. They require this in circumstances where the sale is occurring because of a breakdown in relations between Adi and Forgestone. And they require this in circumstances where Adi must approve the sale. If Adi refused a potential purchaser, there would presumably be a further fight about the degree to which the refusal was based on bona fide reasons or the degree to which it was based on inappropriate reasons such as, for example, the fact that the purchase price was lower than the price under the shotgun offer and would therefore subject Adi to an action for damages.
[41] In the foregoing circumstances, specific performance has much to recommend it.
[42] Finally, Adi submits that the balance of equities does not favour an award of specific performance. It submits that the court would be allocating a "disproportionate amount of risk" to Adi by requiring it to pay the purchase price because the court would be allocating "100% of the risks and pressures arising from an unprecedented health pandemic and the associated economic blowback, entirely to" Adi, which it submits is unjust, unfair and inequitable. [page577]
[43] I see the equities differently. As noted earlier, while the temporary economic downturn is attributable to a pandemic unprecedented in most of our lifetimes, the idea of a decline in real estate markets or a contraction in the availability of financing is by no means unprecedented. Those are risks that all purchasers who require financing assume when they enter into purchase agreements. To relieve Adi of that risk and place the risk upon Forgestone would be the inequitable result. It would effectively mean that a purchaser could obtain all of the benefit of a decision to purchase but leave with the vendor all of the risk that may arise between the date of purchase and the date of closing. While there are contractual mechanisms to bring this about, they were not employed here. Adi must take the bitter with the sweet. If it wishes to enjoy what it presumably perceived as the superior benefits of purchasing from rather than selling to Forgestone, it must also assume the attendant downside risks.
Disposition
[44] For the reasons set out above, I order that, within 90 days of June 26, 2020, Adi specifically perform its obligations to purchase Forgestone's interest in the project pursuant to its offer to purchase dated January 9, 2020.
[45] If any party seeks costs as a result of these reasons, they may file written submissions within 14 days of their release. A responding party will have seven days to answer with a further three days for reply.
Application allowed.
End of Document