Unit owners sell boutique buildings to developer

Transaction marks first condo corporation in Ontario to terminate by vote
Thursday, March 23, 2017
By Michelle Ervin

The sale of a property in midtown Toronto that closed in January marks Ontario’s first case of unit owners terminating a condo corporation by vote, confirmed Greg Marley, partner at Deacon, Spears, Fedson and Montizambert, who acted as legal counsel for the corporation and owners.

“Some condos have terminated through a different section of the [Condominium] Act,” said Marley. “Using this section 124, this is the first time it’s happened in Ontario, [and it’s happened] only once before in Canada, as well, through similar provisions, so it’s pretty rare.”

Under section 124 of the Condominium Act, at least 80 per cent of both mortgage holders and unit owners must agree to the sale of a condo property for this type of transaction to proceed. Most of the 27 unit owners at 39 Roehampton Ave. voted in favour of accepting an offer from a group of investors including a developer with plans to intensify the site.

The transaction showed what the process of terminating a condo corporation could look like for others in the select circumstances where it might make sense for unit owners to sell collectively.

Metropia is proposing to erect a 48-storey condo building on properties now occupied by the six- and eight-storey condo buildings at 39 Roehampton Ave., constructed circa 1990, as well as a two-and-a-half-storey house and a parking lot. The site is located immediately northeast of a major redevelopment occurring on the corner of Yonge Street and Eglinton Avenue.

Metropia is also involved in that redevelopment, which is currently under construction. The neighbouring project, known as E condos, consists of a 58-storey condo building on the northeast corner of Yonge Street and Eglinton Avenue and a 36-storey rental building on Roehampton Avenue.

The E condos project paved the way for the developer to connect any new building to a planned underground path to Eglinton subway station, making the opportunity to acquire the property at 39 Roehampton Ave. especially attractive, said David Speigel, president and chief operating officer of Metropia. But he left it up to the condo board to canvass unit owners to see if there was enough interest for the transaction to move forward.

The unit owners of 39 Roehampton Ave. had fielded two offers from different prospective purchasers before receiving the third offer that ultimately succeeded, said Marley. The unit owners dismissed the first offer for being too low, after which the condo board had the property appraised to get a sense of its fair market value. The unit owners considered the second offer, which came through a cold-calling broker, but it failed to clear due diligence.

Condo boards are not obligated to present unit owners with offers to purchase their property, said Marley, but the board believed the third offer represented fair market value. The condo board notified the unit owners and hosted a series of information meetings to discuss how the process and the payout would work if the owners voted to accept the offer.

Unit owners would get a share of the proceeds of the sale based on their proportionate interest in the condo corporation, as outlined in the declaration, after closing costs, legal fees and real estate commissions, he explained. Following the information meetings, the condo board put the proposed deal to a vote of unit owners, enough of whom consented to accepting the offer for the sale to proceed.

In addition to seeing that the condo board had the support of 80 per cent of unit owners, the purchasers required a commitment that the property would be turned over free and clear at close. In other words, Metropia wanted to be certain that it wouldn’t face legal challenges from holdouts.

“Great, you got 80 per cent; as far as we’re concerned, it should be 100 per cent,” explained Speigel, adding as an example: “We don’t want to find out later that we bought the building [and] there are 12 units that won’t move.”

Before the deal closed, the condo corporation struck settlements with two unit owners who had voted against accepting the offer, said Marley. Section 125 of the Condominium Act entitles unit owners who object to selling a condo property to a mediation process to argue that an offer to purchase was below fair market value. If dissenters succeed in their argument, the condo corporation may be ordered to pay those owners their proportionate share, as set out in the declaration, of the difference between the purchase price and what has been determined to be fair market value.

The condo corporation also had to collect written consent to the sale from mortgage holders for units in the building, with a promise that debtors would pay off their balances owing after the deal closed. This was one of the most challenging aspects of the process, said Marley, because section 124 of the Condominium Act neglects to spell out what happens to any outstanding claims against a condo property once the title changes hands.

“The banks had no idea what was going to happen, and frankly we didn’t either,” he said. “It wasn’t until the day of closing when the land registrar said, ‘We’re creating a new pin, so all the mortgages are going to disappear.’”

Metropia also wanted to be certain that it would be able to simultaneously close on all three properties that would be required to get the planning permissions for its proposed redevelopment, said Speigel. In order to achieve the necessary setbacks, or “elbow room,” to intensify the site, the purchasers had to acquire a neighbouring house owned by the Kohai Educational Centre and a portion of a parking lot owned by Bell.

Metropia asked for a few extensions on its deadline for due diligence, as it faced the tricky task of assembling adjacent lands, which is an exercise that would likely be a pre-requisite for the redevelopment of any existing condo building, Speigel said. Another time-consuming aspect of the due diligence process was the fact that the purchasers needed both the condo corporation and individual unit owners to sign off on certain documents, said Adam Lebow, associate at Owens Wright, which represented the purchasers.

Normally, in this type of transaction a purchaser would either buy a whole building from a single owner or buy individual units from multiple owners. In a small condo corporation, with just a handful of units, a purchaser might take the latter approach, said Lebow, because one dissenting unit owner could be enough to scuttle a deal pursued under section 124 of the Condominium Act, which sets the 80-per-cent threshold for support. In the case of 39 Roehampton Ave., which proceeded under that provision, the transaction had to be approached from both angles.

“We had to treat it as individual unit sales, but we also had to treat if as we’re buying the whole building at the same time,” he said.

For example, the purchasers sought declarations that neither the condo corporation nor the unit owners were subject to any litigation, said Lebow. He also conducted searches to verify this fact for the condo corporation as a whole and unit owners as individuals.

During this time, regular communication with the unit owners was critical, said Greg Evans, executive vice president of The Behar Group Realty, who brokered the deal. Unit owners were left in limbo during the due diligence period because the conditional sale recorded on the condo corporation’s declaration essentially prevented them from selling their units individually.

“At the beginning of the process, there was real uncertainty as to why things took so long with the planning process and commercial negotiations,” said Evans. “It’s not the same as buying a house, where the negotiation starts at six o’clock and finishes at 11 o’clock that night.”

Negotiated non-refundable deposits reassured the unit owners that the purchaser had an incentive to close the deal, he said. He also credited the condo board with playing a major role in effectively rallying and representing the unit owners to be able to see the transaction through to completion.

There may be some, albeit limited, opportunities in the Toronto market for other condo corporations with similarly boutique-sized, transit-proximate buildings to sell their properties as a whole, said Evans.

“It fundamentally comes down to the location and the specific property,” he said. “You need to look at whether the highest and best use — the underlying value of the land — is higher than the collective value of the units on the open market.”

Even under those circumstances, it takes patience from the condo corporation and transparency from the purchaser, who must work collaboratively for such a sale to succeed, said Evans. Based on his experience at 39 Roehampton Ave., he recommended that condo corporations considering this path look into what planning challenges a prospective purchaser may face upfront.

The due diligence process in the sale of 39 Roehampton Ave. stretched nine months. The deal was finalized last October, after which there was a 90-day closing period.

The unit owners authorized the members of the condo board to continue acting as their representatives during the closing period, from which point the condo corporation ceased to exist, said Marley. Unit owners continued to pay maintenance fees to cover operating costs and reserve fund contributions for the remaining three months of their tenure in the buildings.

When the sale closed this January, the remaining balances in the operating and reserve funds were transferred to a trust account, said Marley. The trust account will be paid out to the unit owners based on their proportionate interest in the condo corporation, as outlined in the declaration, after the corporation’s last utility and other bills have been settled.

While the process of selling the condo property went relatively smoothly in this case, Marley predicted that the use of section 124 in the Condominium Act will remain rare. A unique set of factors facilitated this particular transaction: The more than 25-year-old buildings at 39 Roehampton Ave. were dated, faced major upcoming expenses and surrounded by sweeping redevelopment.

“You’re going to have to have a relatively small building,” Marley suggested, “because getting over 100 units would be unwieldy to try to get over 80 per cent of owners to vote in favour and all the mortgagees to consent as well.”

Michelle Ervin is the editor of CondoBusiness.

Pictured above: A rendering by TACT Architecture shows the podium level of Metropia’s development proposal for 39 Roehampton Ave.

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