In a recent case, a British Columbia court granted a receiver the right to disclaim pre-sale contracts for purchased units in a failed real estate development.
Failed Real Estate Development and Receivership
The developer was engaged in constructing a five storey, multi-family condominium project in Burnaby, British Columbia. The development included 27 residential units and one commercial unit.
From July 10, 2016 to May 30, 2017, the developer entered into various pre-sale contracts with purchasers with respect to the units.
In May 2017, construction of the development commenced, but problems with the development began in the fall of 2019.
In September 2019, an investment corporation filed a certificate of pending litigation against the development. The investment corporation claimed approximately $2.4 million under an equitable mortgage.
On November 1, 2019, a first builder’s lien was registered against the title to the development. In December 2019, three further builder’s lien were filed against the development.
On or about December 17, 2019, construction of the development ceased when it was about 85% complete.
By the time construction stopped, the 23 pre-sale contracts had terminated because one of the contracts’ provisions provided that they would automatically terminate if the completion of the purchase and sale of each unit did not occur by either January 31, 2019 or November 30, 2019.
By late 2019, secured creditors had stopped funding the project and began taking action with respect to the development.
On February 5, 2020, a receiver was appointed for the development’s property.
The receivership order empowered the receiver to complete and sell the development and to borrow up to $1.5 million to do so and authorized the receiver to address contracts of the developer. A May 25, 2020 order increased the amount of the advances available to the receiver to $4.35 million for the purposes of completing the development.
Receiver’s Court Application
The receiver brought an application for directions concerning pre-sale contracts that were in place with respect to certain units. The receiver sought directions from the court toward either disclaiming those contracts or entering into a modified sale agreement that would allow the pre-sale purchasers to receive the units.
Court Allows Receiver to Disclaim Contracts and Sell Units
The court began by stating relevant legal principles, including that:
- A receiver has a duty to maximize recovery of assets under its administration;
- One tool of realization is to affirm or disclaim contracts;
- Typically, the court order will empower the receiver to act in respect of contracts and often, a receiver will seek specific directions if circumstances dictate that level of oversight; and
- Any disclaimer of contracts must arise from a receiver’s proper exercise of discretion, including a consideration of its duties and also, all equitable interests involved.
First, the court considered the respective legal priority positions between competing interests. It found that the three major secured creditors held valid and enforceable security against the development and that the interests of the pre-sale purchasers under the contracts did not stand in priority to the legal interests and priority of the secured creditors. As a result, the pre-sale purchasers had no legal remedy against the receiver to force completion of a sale under the contracts. The court found that this factor alone favoured the receiver being in a position to disclaim the contracts in order to maximize recovery for the secured creditors.
Secondly, the court found that a disclaimer would enhance recovery for the secured creditors and that, conversely, not disclaiming the contracts would result in a preference to the pre-sale purchasers for value that would otherwise accrue to the secured creditors; allowing the contracts to complete would likely result in the pre-sale purchasers obtaining a preference in respect of the priority claims held by the secured creditors.
Finally, the court considered the relevant equities in respect of all pre-sale purchasers. While the court acknowledged that some pre-sale purchasers would be negatively impacted by a disclaimer, the court could not conclude that the equities were tipped in their favour in the circumstances.
As a result, the court found that the receiver was at liberty to disclaim the pre-sale contracts and to take steps to remarket and sell the units.
The knowledgeable Calgary construction lawyers and staff at DBH Law understand the complex risks of both multimillion-dollar and smaller construction projects and the expensive disputes that can arise when something goes wrong in such cases. We handle all elements of a construction relationship. We can proactively advise and help draft important documents such as contractor and subcontractor agreements and similar, to make expectations clear and eliminate as much risk as possible. We can also represent you in any litigation or other dispute resolution that may be needed if a dispute arises.
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