Court File and Parties

COURT FILE NO.: CV-21-00661522-00CL DATE: 2021-09-16

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ENWAVE GEO COMMUNITIES LP, Applicant AND: KING TOWNS NORTH INC., Respondent

BEFORE: Chief Justice G.B. Morawetz

COUNSEL: Geoff R. Hall and Bonnie Greenaway, for Enwave Geo Communities LP George Benchetrit and Saneea Tanvir, for King Towns North Inc.

REASONS RELEASED: September 16, 2021

Endorsement

[1] Enwave GEO Communities LP, (“EGC”) brings this application for an order, inter alia:

(a) a declaration that King Towns North Inc. (“KTNI”) has acted in bad faith by unreasonably withholding its consent to EGC’s requested consent to an indirect change of control pursuant to the Lease (the “Change of Control Consent”) dated July 10, 2010 by and between KTNI, Urbancorp Renewable Power Inc. (“URPI”) and Vestaco Homes Inc. (“VHI”), as amended by an Acknowledgement dated March 13, 2020 executed by KTNI in favour of URPI and VHI, as assigned by VHI and URPI to EGC on December 31, 2020 (collectively, the “Berm Lease”);

(b) an order compelling KTNI to exercise its contractual discretion in good faith, including by granting the Change of Control Consent on terms that reflect reasonable compensation consistent with the purposes of the Berm Lease; and

(c) an order compelling KTNI to deliver the Environmental Compliance Materials (as defined below) to EGC.

[2] The Berm Lease relates to a berm of land on which certain geothermal assets (the “Geothermal Assets”) are located. The Berm Lease contains a provision granting KTNI, as landlord, discretion as to whether to consent to a change of control of the tenant, EGC. The ultimate parent of EGC is Brookfield Infrastructure (“Brookfield”). Brookfield is selling its Canadian Enwave interests to two pension funds, Ontario Teachers’ Pension Plan Board (“Teachers”) and Australian based IFM Global Infrastructure Fund (“IFM”).

[3] The transaction will result in no operational change in respect of the Berm Lease – there will be the same tenant (EGC) as before. The Applicant contends that both the old parent (Brookfield) and the new parents (Teachers and IFM) provide impeccable covenants and KTNI is in no way prejudiced by the change of control.

[4] KTNI is beneficially owned by UMI. The shares of UMI are owned by Aubergine Investments Inc., the shares of which are owned by Doreen Saskin and the Alan Saskin Family Trust. Vestaco Homes Inc. (“VHI”) and URPI are also Saskin controlled entities (collectively referred to as the “Urbancorp Group”). Mr. Saskin is the Vice-President of KTNI, and the President of URPI and Vestaco. The Urbancorp Group was engaged in development of residential properties and also owned and operated the Geothermal Assets.

[5] “The Bridge” is a residential condominium building in Liberty Village. Since 2010, a geothermal energy system has been operating on (i) the Bridge Lands; and (ii) vacant land on a berm north of the Bridge Lands (“the “Berm Lands”).

[6] KTNI owns the Berm Lands containing 82 of the 86 geothermal wells that are integral to the geothermal energy system. The Berm Lease, executed in 2011 and dated July 20, 2010, provides for a 50-year term, with an annual rent of $200,000 per year. The lease was amended in 2015 and the annual rent was reduced to $100. The tenant has the unilateral right to extend the lease in perpetuity on the same terms, provided that the underlying Geothermal Supply Agreement is also extended.

[7] The “successors and assigns” provision in s. 13.4 of the Berm Lease provides that the tenant must obtain the landlord’s consent for a “transfer”. A “transfer” pursuant to s. 13.4 includes a transfer or sale of all or part of the shares of the tenant which results in a change in the effective voting control of the tenant. It is acknowledged that the transaction as between Brookfield and Teachers and IFM is a transfer within the meaning of s. 13.4 of the Berm Lease. For the purposes of this motion, the key provisions of the Berm Lease are ss. 13.4(b) and 13.4(e).

13.4(b) The Tenant acknowledges and agrees that its rights under this Lease Agreement shall not be assignable or otherwise transferable by the Tenant and the Tenant shall not effect any assignment, sublease or Transfer the Lease without the prior consent of the Landlord, which consent may be unreasonably withheld. Any request for consent shall be accompanied by payment of the Landlord’s processing fee for review of such requests, and by such information and documentation as reasonably required by the Landlord. Subject to the foregoing, this Agreement shall enure to the benefit of and be binding on the parties and their legal representatives, heirs, executors, administrators, successors and permitted assigns, as the case may be.

13.4(e) Where the Transferee pays or gives to the Transferor money or other value that is reasonably attributable to the desirability of the location of the Leased Premises or to leasehold improvements that are owned by the Landlord or for which the Landlord has paid in whole or in part, then at the Landlord’s option, the Transferor will pay to the Landlord such money or other value in addition to all Rent payable under this lease and such amounts shall be deemed to be further Additional Rent.

[8] KTNI, acting through its principal, Mr. Alan Saskin, is asking for payment of $5.8 million to grant its consent.

[9] KTNI is no stranger to the litigation process in its attempts to obtain what it considers to be rightful compensation for its contractual position. The issues involved in this application, either directly or indirectly, have been the subject of three decisions.

[10] The first decision (Urbancorp, 2020 ONSC 7920) is dated December 23, 2020 (the “First Decision”). The decision was in respect of a motion brought by the Monitor in the insolvency proceedings of Urbancorp Group for approval of an Agreement of Purchase and Sale (the “Sale Agreement”) between the Receiver and Monitor of Urbancorp Group and EGC, by way of assignment from Enwave Energy Corporation. The subject matter of the Sale Agreement was the Geothermal Assets.

[11] The motion was opposed by KTNI. KTNI advised the court officer that it would not consent to the assignment of the Berm Lease without receiving a portion of the proceeds from the sale of the Geothermal Assets prior to closing.

[12] EGC allocated $2,049,000 of the purchase price to the Berm Lease. KTNI did not agree with this allocation.

[13] The Sale Agreement was approved with allocation entitlements to be addressed at a future date.

[14] No appeal was taken from this decision.

[15] The second decision (Urbancorp, 2021 ONSC 3593) is dated May 20, 2021 (the “Second Decision”). At issue were competing applications in respect of the insolvent entity, Urbancorp Management Inc. (“UMI”). The Monitor had issued an Application for Bankruptcy Order against UMI. Doreen Saskin, the spouse of Alan Saskin, responded by issuing an Application for an Order Appointing a Receiver and Manager (in such capacity, the “Receiver”) of UMI pursuant to s. 243 of the Bankruptcy and Insolvency Act (the “BIA”) and s. 101 of the Courts of Justice Act.

[16] Doreen Saskin contends that she is a secured creditor, holding a general security agreement (“GSA”) from UMI and is owed the principal sum of approximately $2.2 million plus in excess of $600,000 of accrued interest.

[17] The Monitor, KSV, questions the quantum of the debt owed to Doreen Saskin and also raises concerns with respect to the validity and enforceability of the GSA. Doreen Saskin and UMI are not at arm’s length and KSV wants to review transactions as between Doreen Saskin and UMI.

[18] The Application for Bankruptcy Order was granted and the Application for the Order appointing the Receiver was stayed, pending final completion of KSV’s review of Doreen Saskin’s secured claim in the BIA proceedings.

[19] The third decision, Urbancorp Toronto Management Inc., 2021 ONSC 5073 (the “Third Decision”) is being released concurrently with this decision. The Third Decision addresses the allocation entitlements referenced in the First Decision.

[20] In view of the multiple litigation routes being pursued by KTNI, it is necessary to summarize the arguments being put forth by KTNI.

(a) S. 13.4 (b) of the Berm Lease provides that KTNI must consent to any assignment or transfer of the lease by URPI or Vestaco, and KTNI may unreasonably withhold consent to any assignment or transfer of the Berm Lease.

(b) The Tenant’s interest in the Berm Lease was transferred to EGC as part of a sale of assets, pursuant to court order in December 2020.

(c) The transaction involving Brookfield and Teachers and IMF is a “Transfer” and requires the consent of KTNI.

(d) KTNI demanded payment of $5,875,269 in connection with the Change of Control pursuant to s. 13.4(e) of the Berm Lease, being the amount that KTNI believes is reasonably attributable to the desirability of the location of the Berm Lands.

(e) The $5,875,269 figure represents the estimated net present value of the Berm Lease. In the context of a dispute with Canada Revenue Agency (“CRA”) concerning the value of the Berm Lands in 2012, KTNI and CRA reached a consent agreement in January 2020 which valued the Berm Lands at $2,868,500 in 2012. KTNI’s net present value calculation is based on the assumption that a property worth $3 million in 2012 would have a market rent of $225,000 annually in 2012 (a rate which Mr. Saskin believes is accurate based on his 40 years of experience in the Toronto real estate market), increasing annually by the increases in the rate under the Bridge Geothermal supply contract (being 3.5%), and then discounted at an appropriate rate.

(f) Contrary to what is suggested by EGC, the $75,000 that EGC has funded to KTNI as a “processing fee” pursuant to s. 13.4(b) of the Berm Lease is not a payment for the “value that is reasonably attributable to the desirability of the location of the “leased premises” pursuant to s. 13.4(e).

[21] As noted above, on the sale of the Geothermal Assets, Enwave attributed $2,049,000 of the purchase price to the Berm Lease. Doreen Saskin took the position that the Geothermal Assets were worth more than that, at least $2,800,000, which was the 2012 value of the interest subject to the lease, as reflected in a consent agreement with Canada Revenue Agency (“CRA”). Ms. Saskin contended that whether the correct amount is $2,800,000 or $2,049,000, that value should be paid to KTNI, as landlord.

[22] In the Third Decision, I concluded that the transfer provision was indeed enforceable and that KTNI was entitled to the $2,049,000, pursuant to s. 13.4(e) of the Berm Lease. I rejected Ms. Saskin’s arguments with respect to the $2,800,000 valuation. The Third Decision is incorporated, by reference, into this decision. I rejected the $2,800,000 valuation in the Third Decision and do so again.

[23] KTNI relies on s. 13.4(e) of the Berm Lease which provides that in the event of a transfer, KTNI may elect to require the transferor to pay to KTNI any additional amount that is in excess of the annual rent that the transferor has received that is attributable to leasehold improvements owned by or paid for by KTNI or the desirability of the location of the berm lands.

[24] EGC is of the view that s. 13.4(e) is not relevant to this application. EGC contends that the Brookfield/IMF transition involved shares and no monetary allocation was attributed to the Berm Lands.

[25] EGC argues that in demanding payment of $5.8 million to consent to a change of control, where the Change of Control will result in no operational change in respect of the Berm Lease and consequently, there is no prejudice to the landlord, and KTNI cannot be said to be acting in good faith. EGC references Wastech Services Ltd. v. Greater Vancouver Sewage and Drainage District, 2021 SCC 7 as support for its position that a party holding a discretionary power in a contract is required to exercise that power in good faith.

[26] As noted, KTNI demanded payment of $5,875,206 in exchange for granting its Consent to the Change of Control. In demanding this amount, Mr. Saskin provided his own present value calculation. In an attempt to extract this payment from EGC, Mr. Saskin threatened to increase the price by $100,000 per day for two weeks, should the transaction not close by March 26, 2021. Mr. Saskin also offered to reduce the price by $100,000 per day prior to March 25, 2021 to incentivize EGC to make the payment.

[27] The $5,875,269 calculation must be rejected for a number of reasons, which are summarized at paragraphs 46 – 48 of the Applicants Factum.

[46] Fourth, even if the value of the Berm Lands is relevant, Enwave Geo (EGC) does not accept Mr. Saskin’s valuation. Mr. Saskin is not an expert in real estate valuation or appraisal. His “valuation” is entirely his own, based on unsupported assumptions and questionable analysis.

[47] Mr. Saskin valued the property by basing his assessment on the Tax Court of Canada’s reduction of his income in the amount of $2,868,500 concerning the sale of the Berm Lands, and rounding that figure to $3 million. Mr. Saskin then assumed, without considering any comparable properties or other valuation methods, that the Berm Lease rent would be $225,000 per year in 2012 and would increase annually at a rate of 3.5%, because that is the annual increase that is contained within a contract between KSV and Bridge Corporation.

[48] Mr. Saskin also applied a discount rate of 8% that is based “on standards suggested by the International Valuation Standards Council for renewable energy products in North America”, again without consulting any professionals or specific comparables. Neither the Berm Lease or Lands are being sold to Enwave Geo (EGC), and KTNI is not entitled to value from a contract that it is not a party to. Nor does Mr. Saskin’s valuation account for the environmental contamination and the significant allocation of environmental risk to the Tenant.

[28] In addition, Mr. Saskin’s attempt to negotiate a prompt payment by offering a $100,000 per day discount for up to a potential $1.4 million, is not supported by any economic rationale. Rather, it has the hallmark of a “shakedown”. Interestingly, in the Third Decision, KTNI argued it was entitled to the $2.8 million calculation, with the fallback position of the $2,049,000 calculation. KTNI did not advocate for the $5,875,269 figure.

[29] The potential to increase the payment request by up to $1.4 million over the space of two weeks or a corresponding decrease of the same amount cannot, in my view, be based on rational thought. Rather, it is nothing more than an overt attempt to extort payment from EGC and only serves to undermine the credibility of the submission.

[30] EGC did pay $75,000 to KTNI on account of a processing fee referenced in s. 13.4(b) of the Berm Lease. EGC takes the position that this processing fee should cover KTNI’s legal and accounting costs associated with the change in control. Mr. Saskin admitted on cross-examination that, aside from legal and accounting costs, KTNI did not expected to incur any other expenses in connection with the consent to the change of control.

[31] I am in agreement with the position put forth by EGC that s. 13.4(e) is not relevant to this application for two reasons. First, in the transaction that gave rise to the change of control, the transferee did not pay or give to the transferor money or other value that was reasonably attributable to the desirability of the location of the leased premises. Second, the amount payable under this section has already been awarded in the Third Decision.

[32] Simply put, KTNI has already received the s. 13.4(e) compensation and any attempt to obtain the same or an increased amount in this Application is an attempt to achieve double recovery.

[33] In the context of this Application, any argument put forth by KTNI that it is entitled to additional compensation pursuant to the provisions of s. 13.4(e) is no longer relevant.

[34] The remaining issue to be determined is whether KTNI is entitled to additional compensation pursuant to the provisions of s. 13.4(b). EGC has already tendered a processing fee that estimates to be $75,000 to KTNI. There is no evidence that has been tendered by KTNI that would suggest that its costs will be greater than $75,000. Therefore I accept this figure is being an appropriate processing fee.

[35] Given that the Berm Lease has already been assigned and KTNI has been awarded compensation pursuant to .s 13.4(e), there is, in my view, no principled basis on which KTNI can demand an amount in excess of $75,000 pursuant to s. 13.4(b).

[36] Further, if KTNI now attempts to ground its demand for payment of $5,875,269 to s. 13.4(b), this argument is not sustainable. It brings into play the submissions of EGC to the effect that KTNI is not acting in good faith.

[37] I agree with the submissions of the Applicant to the effect that the contractual purpose of KTNI’s discretion is to protect it from the costs and prejudice associated with a transfer. It is not to give KTNI the ability to try and extract the entire value of the Berm Lease or the Berm Lands as compensation for consenting to a change in control.

[38] In the result, I find that the $75,000 processing fee is the only amount to which EGC is obligated to pay to KTNI under s. 13.4 of the Berm Lease and accordingly, KTNI is directed to provide its consent to the change in control.

[39] KTNI is also ordered to deliver any Environmental Compliance Materials that it may have in its possession or control.

[40] In the result, the Application is granted with costs payable to the Applicant in the agreed upon amount of $35,000.

Chief Justice G.B. Morawetz

Date: September 16, 2021