Court File and Parties

Court File No.: CV-21-00000076-0000 Date: 2023-01-04 Superior Court of Justice – Ontario

Re: Mary Lee Hasse and Jennifer Jane Grow, Applicants And: William August Hasse, Robert Morris Hasse, Thomas Edward Hasse and John B. Hasse, Respondents

Counsel: Cheryl C. M. Siran, for the Applicants Carly Deboni, for the Respondents

Heard: May 31, 2022, at Kenora, Ontario

Application Under: Section 3(1) of the Partition Act, R.S.O 1990, c. P.4.

Before: Regional Senior Justice B. R. Warkentin

Reasons on Application

[1] This is an application for partition and sale of a jointly owned recreational property located at Harbour Island on Rainy Lake, Ontario. The applicants and the respondents each own a 1/6 th interest in the property as tenants in common. The parties are siblings of each other.

[2] The applicants, Mary Lee Hasse and Jennifer Jane Grow are seeking an order for partition and sale of the recreational property. Two of their brothers, William August Hasse (“William”) and Thomas Edward Hasse (“Thomas”) have responded to and oppose the application (the “responding parties”). The other two brothers, Robert Morris Hasse and John B. Hasse did not participate in this litigation and were noted in default (the “defaulting parties”). All parties are United States residents.

[3] The property in dispute was a gift to the parties by their late mother, Kathryn Hasse. She transferred the property to her 6 children in February 2011. The gift also included two “cabin accounts”, one in Canada and one in the United States. These bank accounts were designated for the purpose of covering all the expenses related to the Harbour Island property.

[4] Prior to the transfer of the property in February 2011, the parties together retained a lawyer in Ontario to draft a Co-Owners Agreement (the “agreement”). The parties all signed this agreement on December 12, 2010. This agreement dealt with the management of the property and included a mechanism for the disposition of a co-owner’s interest. The agreement did not contemplate non-resident disposition tax, the mechanism for filing and reporting on sale proceeds including capital costs or related tax consequences from a sale or transfer of the property to either the Canada Revenue Agency (CRA) or the USA Internal Revenue Service (IRS).

[5] The property was significantly damaged by a suspected tornado on July 17, 2019. The cottage on the property was destroyed. Insurance proceeds in the amount of $182,350.20 (CAD) for the cottage and $24,272.52 (CAD) for personal property were paid out. These funds remain in the control of William and/or Thomas and there has been no accounting to the other parties regarding these funds.

[6] The parties have been unable to agree on a plan for the property. The applicants would like to sell the property and the responding parties seek to retain the property.

[7] Between July 2019 and July 2021, the parties had several meetings and discussions about what to do with the property. The applicants allege that the relationship between the parties is now broken and there is no ability for them to continue in co-ownership with the responding parties. They seek an order under the Partition Act, RSO 1990, s P.4 for the sale of the property.

[8] The responding parties ask this court to refuse to exercise its jurisdiction to order the sale of the property, alleging the applicants have acted in bad faith, oppressively or with a vexatious intent towards the responding parties. Alternatively, they argued that this is not a proper case to be determined under the Partition Act by virtue of the co-ownership agreement. They submitted that the agreement should be a significant factor that militates against the applicants’ request for the sale of the property.

Co-Ownership Agreement

[9] The agreement begins with a disclaimer that the agreement is not intended to create a partnership or join venture. It also states that there is no intention to create a partnership or other relationship between themselves; they will not have authority to act for, nor will they assume any obligations or responsibilities on behalf of the other parties unless specified in the agreement. (Paragraph 1 of the agreement).

[10] Paragraphs 2 and 4 of the agreement set out the parties’ intentions to work together and how to resolve disputes when they arise.

[11] Paragraph 2 describes that the property is a recreational property and states that the parties “generally agree to work reasonably with one another at all times and treat each other with respect and courtesy”. Paragraph 2 also refers to paragraph 4 as the means by which parties will resolve disputes that may arise.

[12] Paragraph 4 of the agreement sets out a mechanism by which the parties will resolve differences of opinion or disputes that may arise. Paragraph 4 (a), the paragraph at issue in this litigation, states:

4. (a) All decisions of and/or in respect of the Property and/or things relating thereto shall be made by a majority of the Parties, and shall require the approval of a majority of the Parties. Further, the decision of the majority of the Parties on and/or as to any Dispute(s) shall be binding on all Parties and not subject to appeal or review.

[13] Paragraph 6 of the agreement sets out the process for a party to sell or transfer their interest. Paragraph 6 (c) (i) (B) states that a transfer of the property to another party may be made for “no more than fair market value” and in the absence of an agreement of the fair market value, the majority shall determine fair market value as per the dispute resolution mechanism set out in paragraph 4 of the agreement. The remainder of the agreement addresses a variety of other aspects of the management of the property.

The Position of the Parties

[14] The applicants submitted that the agreement does not address the issues that are before the court, namely a mechanism for determining fair market value of the property and any tax liability that would accrue from a sale or transfer of a party’s interest in the property.

[15] The applicants also allege that paragraph 4 of the agreement is not satisfied as it pertains to this litigation because there is no majority of the parties that seeks to either retain the property or sell the property because the defaulting parties have not taken a position.

[16] The responding parties argued that four of the six parties agreed on the fair market value of the property in the fall of 2019. They submitted that they had therefore satisfied the requirements of paragraph 4 of the agreement and take the position that all parties are therefore bound by the decision of a majority of the parties, without a right of appeal.

Discussions Between the Parties

[17] In the summer of 2019, the parties had several meetings to discuss the future of the property and whether it should be retained or sold. After several meetings, they were unable to agree on how to move forward.

[18] In October of 2019, without any professional advice as to the value of the property, the parties discussed that the value of the property might be around $30,000.00. Upon receipt of legal advice, they were informed that a formal valuation of the property was required to satisfy s. 116 (5.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp.) pertaining to Non-Resident Tax disposition of property. In November 2019, instead of obtaining a formal valuation (a valuation by a certified property appraiser), the parties obtained an opinion of value from a local realtor who suggested the property was worth $55,000.00.

[19] The responding parties and the defaulting parties refused to accept the opinion of value and took the position the fair market value was $30,000.00 as all parties had previously discussed. They referred to paragraph 4 of the agreement that in the event of a dispute, a decision of the majority of the parties (the responding parties and the defaulting parties) is binding and not subject to appeal.

[20] An impasse occurred because the applicants refused to sell their interest in the property for one-sixth (each) of $30,000.00 when they believed the value was greater. Further delays ensued because of the Covid 19 pandemic and travel restrictions between the US and Canada in 2020 and 2021.

[21] In November of 2020 the applicants retained counsel to assist with attempting to resolve the dispute between the parties. They learned that the requirements of s. 116 of the Income Tax Act required an up-to-date, formal valuation of the property (less than one year old) when assessing the fair market value for income tax purposes. An appraisal (as opposed to an “opinion of value”) of the property was obtained on July 9, 2021. The appraisal determined the value of the property at $150,000.00.00.

[22] The responding parties and the defaulting parties refused to accept the appraised value for purposes of purchasing the applicants’ interest in the property. They insisted that the fair market value remained the value the majority of the parties had agreed upon ($30,000.00) as per the requirements of paragraph 4 of the agreement.

[23] If the applicants were to transfer their respective one-sixth interest in the property to the remaining owners they will be deemed by the Canada Revenue Agency to have sold their interest at fair market value as determined by the Income Tax Act, being a recent formal valuation of the property. They will be taxed upon that amount, regardless of the actual sale proceeds. In this case they would pay tax on a value of one-sixth of $150,000.00 or $25,000.00 (assuming the value has not changed since July of 2021), notwithstanding they would have only received $5,000.00 if they agreed to use $30,000.00 as the property value; or $9,167.67 if they agreed to use $55,00.00 as the property value.

[24] The applicants refused to transfer their interest in the property for less than the fair market value, as defined by the Income Tax Act and upon which they would be taxed. The responding parties and the defaulting parties refused to purchase the applicants’ interest in the property for anything greater than one-sixth of $55,000.00.

[25] Due to this continuing impasse, the applicants commenced this application for partition and sale of the property.

Analysis and the Law

[26] The only issue argued in this hearing was whether the property should be ordered sold, or alternatively, whether the Court should exercise its discretion to decline such relief.

[27] The Court has the discretion to order the sale of property as set out in the Partition Act, (ss. 2 and 3). Those sections provide that all parties interested in land in Ontario, including tenants in common, "may be compelled to make or suffer partition or sale of the land.", upon an application to this Court, and under “the directions of the court if such sale is considered by the court to be more advantageous to the parties interested.”

[28] The jurisprudence provides guidance on when the Court should exercise its discretion to compel the sale of property and when a sale should be refused.

[29] The starting point, as agreed by the parties and set out in the jurisprudence, is that every tenant in common has a prima facie right to sale, and the Court should compel a sale if no sufficient reason appears why such an order should not be made.

[30] Factors for consideration include: a) Whether the parties have a written, co-owners’ agreement or other contractual obligation regarding the sale of the property. A sale should not be ordered where to do so would conflict with an agreement between the parties. (997897 Ontario Inc. v 926260 Ontario Ltd. [2001] OJ No. 3960 at para 10, 108 ACWS (3d) 922 and Krizans v Skurdelis, 2020 ONSC 4386 at para 56). b) The onus is on the party opposing partition or sale to persuade the court that partition or sale should not be ordered. Here that onus falls on the responding parties. (Brienza v Brienza, 2014 ONSC 6942 at para 23). c) There must be exceptional circumstances that exist for a sale to be denied. The Court’s discretion to refuse a sale, absent the provisions of a valid co-owners’ agreement, is narrow and limited to circumstances of malice, oppression, and vexatious intent. (Brienza, supra para 24, 25) and, d) An application for partition or sale should be refused where the applicant has acted in bad faith, oppressively, or with a vexatious intent towards the respondents. (Bouffard v Bouffard at paras 10, 12; Krizan v Skurdelis, supra, at para 4; and Gartree Investments Ltd v Cartree Enterprises Ltd at para 28.)

[31] Notwithstanding the position of the respondents, the agreement has proven to be inoperable regarding the issues before the court. There is no majority of the parties before the court in this application to determine the future of the property (paragraph 4 of the agreement). Two are seeking a sale, two wish to retain the property and two have taken no position.

[32] Similarly, there is no agreement on the fair market value of the property. The applicants, rightly, take the position that the fair market value should be assessed in accordance with its ordinary meaning. In this case, fair market value is the value upon which they will be taxed upon the disposition of the property as set out in s. 116 (5.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp.) pertaining to Non-Resident Tax disposition of property.

[33] The responding parties argue that the appraised value is irrelevant to the amount they should pay for the applicants’ interest in the property because a majority of the parties agreed that the fair market value is $30,000.00. As such, this value is binding as per the provisions of paragraph 4 and paragraph 6 (c)(i)(B) of the agreement. The responding parties have suggested they would consider increasing the amount to $55,000.00 as per the opinion of value obtained from a local realtor in 2019.

[34] The responding parties also submitted that the applicants have acted in bad faith by commencing this application in the face of a valid co-owners’ agreement that sets out the mechanism for resolving disputes. They argue that they have abided by the terms of the agreement regarding the purchase of the applicants’ interest in the property and the applicants are in violation of the agreement.

Conclusion

[35] I disagree with the respondents’ position. The agreement is silent on how fair market value is to be assessed. It is referred to in paragraph 6 of the agreement where a mechanism for the sale or transfer of one party’s share of the property is set out and a dispute in determining fair market value is referred to the majority rules provisions of paragraph 4.

[36] While it would have been preferable for a definition of fair market value to have been set out in the agreement, the absence of a definition does not confer a right to assign an entirely arbitrary value that does not accord with the ordinary meaning of fair market value.

[37] The evidence was undisputed that none of the parties considered the tax effects of a sale or transfer of the property when they entered into the agreement nor when they first discussed the value of the property in 2019 or in 2020.

[38] It is also apparent that the parties never contemplated a situation where a majority of the parties might abuse their majority in order to force an unreasonable result on the minority of the parties.

[39] The respondents rely heavily on paragraph 4 of the agreement as being the only mechanism by which disputes may be resolved. The respondents have not considered the interaction between paragraph 4 and paragraph 2 of the agreement. Paragraph 2 requires the parties to “generally agree to work reasonably with one another at all times and treat each other with respect and courtesy.”

[40] It is not reasonable for a majority of the parties to arbitrarily determine the fair market value of the property at something substantially lower than the true fair market value, without considering either the usual and accepted meaning of fair market value or the negative tax implications of selling the property below fair market value.

[41] It is the respondents who are not acting reasonably, nor are they acting in good faith. They are using paragraph 4 of the agreement to manipulate the value of the property to their advantage, while ignoring the ordinary meaning of fair market value.

[42] I find therefore that this is a case where the court should exercise its inherent jurisdiction to order the sale of the property under the provisions of the Partition Act.

[43] The applicants’ application seeking a sale of the property under the Partition Act is therefore granted.

Costs

[44] If the parties are unable to agree on costs, they may make written submissions to me within 30 days of their receipt of these reasons. Submissions are limited to 4 pages together with Bills of Costs and supporting documentation.

Regional Senior Justice B. R. Warkentin Released: January 4, 2023