This Could Be ‘The One’: Considerations for When a Property Developer Faces Insolvency
A few weeks ago, real estate practitioners, investors, speculators, lenders and aspiring homeowners were all surprised to learn that The One, a monster development at 1 Bloor St. West in Toronto, was being placed into receivership. The project undertaken by Sam Mizrahi and his company, Mizrahi Inc., is slated to be an 85-storey mixed-use residential tower in the heart of the city, comprising retail stores, a restaurant, a hotel and luxury residential suites. It would be an iconic addition to Toronto’s growing skyline…
After years of delay and financial difficulties, including issues arising from the COVID-19 pandemic, supply chain issues and other unplanned disruptions, The One now faces a total of more than $1.6 billion in secured indebtedness. The project as a whole is estimated to cost in excess of $2 billion, which is more than $600 million above the $1.4-billion cost estimated in 2019.
On October 18, 2023, the Ontario Superior Court of Justice (Commercial List) (the “Court”) made an order appointing Alvarez & Marsal Canada Inc. (the “Receiver”) as receiver and manager of all of the assets, undertakings and properties of three companies: Mizrahi Commercial (The One) LP, Mizrahi Development Group (The One) Inc., and Mizrahi Commercial (The One) GP Inc. (together, the “Developer Companies”).
A receivership is a legal remedy typically used by secured creditors to assist in the recovery of amounts owing, once the debtor – in this case, the Developer Companies – defaults on loan obligations, including repayments. Receivers can be appointed privately or by an order of the court and the receiver’s responsibilities and powers are set out by the court. In this case, the Receiver was tasked by the Court with taking possession of and exercising control over The One, in an effort to right the course.
Not much has been said about what the future holds for The One, other than that the Developer Companies and Mizrahi himself will remain on as the developer and general contractor for the project, with a view to completing The One under the oversight of the Receiver. The Court has permitted the Receiver to draw on additional financing, pursuant to a Receivership Funding Credit Agreement, whereby the project will receive $315 million in additional financing by way of an immediate advance of $80 million and monthly advances of up to $30 million, to a maximum of $235 million. This will bring The One’s secured indebtedness to a total of just less than $2 billion.
The situation The One finds itself in is not unique. As in any other project, developers face financial challenges and, in certain cases, it is best for a receivership to be implemented to try and correct course. This course of action will inherently raise questions as to what the impact will be on stakeholders, including but not limited to creditors, subcontractors and other trade suppliers involved in the construction, as well as commercial leaseholders and pre-construction purchasers.
Secured creditors initiated these receivership proceedings on the basis that their loans matured and came due in part on August 30, 2023, and in full on September 29, 2023. Failure to pay constitutes an event of default which entitled the secured creditors to enforce their debt through the appointment of a receiver.
It is the secured creditors’ position that the Developer Companies’ failure to pay their loans by their maturity dates is “symptomatic of the Borrower’s inability to effectively manage the Project,” as per the affidavit sworn in support of the receivership application. This in itself is the basic justification for appointing a receiver, whose intention it is to oversee the project to completion and ensure secured creditors and others are paid out of the proceeds of the project.
The Receiver could seek to commence a sale and investment solicitation process to sell off the project to another developer or developers, such that the existing secured creditors might be paid out sooner (albeit at a potential loss) and the project and requisite debt financing be transferred to new lenders on new terms.
The Receiver will engage professional resources who will provide assistance, oversight and guidance for the project, in an effort to promote its success and achieve the best possible result for the secured creditors and stakeholders.
The nature of the secured creditors’ security is such that the property cannot be sold without satisfaction (in full or by some arrangement) of the debt owing, unless they consent or a court orders otherwise, as the security is registered on title to the land and on the personal property of the Developer Companies. Whether the Receiver sees the project to completion or sells it, they will facilitate the highest possible satisfaction of the secured lenders’ debt.
Subcontractors and Other Trade Suppliers
It is good news for subcontractors, trade suppliers, equipment vendors and rental companies who have been engaged to provide construction services, materials and equipment to the project that the order appointing the Receiver enables the Receiver to access the urgent funding it requires to continue construction. This will allow the Receiver to ensure that construction-related invoices are paid and work continues. Indeed, the order requires these parties to continue to supply goods and services to the project so long as they continue to be paid for same.
Given the uncertainty of the project’s future, construction materials, equipment and services providers must pay close attention to the deadlines set out in the Construction Act, R.S.O. 1990, c. C.30 to register a claim for lien against title to the property, should their invoices go unpaid. While the order provides for a stay of proceedings against the Developer Companies, nothing in the order prevents the registration of a claim for lien.
If it becomes necessary to register a lien, the registration of a legitimate and timely claim for lien elevates the status of construction goods and services providers to secured creditors. That said, if the Receiver later decides to sell off the project to another developer and is required to do so at a price less than the value of the collective secured claims, like the lenders, lien claimants may also be required to accept a reduction on the total amount of their outstanding invoices.
Construction materials, equipment and services providers may also have trust claims or priority claims in respect of certain of the Developer Companies’ assets by virtue of the Construction Act trust and mortgage priority provisions, giving them a priority claim to recover those amounts in the event of a sale.
When a development is mixed-use, as is the case with The One, there are often commercial leaseholders who have signed lease agreements for certain spaces in the building. These can be retail shops, restaurants, hotels or other similar commercial tenants. These lease agreements are often entered into prior to the commencement of construction, and leaseholders thereunder will have the ability to provide input into the space they will be leasing. For example, if a large restaurant wants to occupy a space, they might work with the developer to ensure the space is adequate for their mutual needs and satisfaction.
In the case of The One, Apple had entered into an agreement to build out their flagship store for Canada. As a consequence of extended delays, Apple has since left the project, leaving behind a large vacancy to be filled.
Leaseholders will often have many forms of recourse for breaches to their agreement, but these will depend on the terms of the agreements they entered into. For example, some leaseholders will agree upon specific dates for when they will receive possession of their space. Subject to extension provisions in an agreement (as may be amended from time to time), if this occupation date is not achieved, the leaseholder may be able to terminate the agreement or seek some other remedy under the terms of the agreement.
These remedies can include financial compensation by way of reduction of their leasehold obligations, the addition of other benefits in-kind, or a reimbursement. Again, they can also include the possibility to walk away from the lease.
A commercial leaseholder’s best path forward is very circumstance-specific. Considerations can range from the importance of timeliness, the perceived uniqueness of the completed space, the leaseholder’s financial ability to delay their possession, or other similar factors.
What is important to note in the case of The One is that the terms of the order appointing the Receiver include a stay of any court proceedings that could be initiated to enforce obligations under a commercial lease, without leave of the Court.
Under section 81 of the Ontario Condominium Act, deposits paid in connection with the purchase of pre-construction condominium units must be held in trust, typically by a developer’s lawyer, together with the interest earned thereon. This money must remain in trust until it is properly disposed of to the vendor upon the closing of the Agreement of Purchase and Sale (“APS”), or security is provided for the money, often in the form of excess deposit insurance.
By default, deposits are insured by Tarion (a not-for-profit organization established by the Government of Ontario to provide a home warranty program) up to a maximum of $20,000. If an APS is terminated and the purchaser does not receive a refund on their deposit (plus interest), the purchaser can make a claim to Tarion for up to this amount.
Realistically, and especially in the Greater Toronto Area, deposits far exceed this limit. The Condominium Act’s requirement to hold deposits in trust extends protection to the entire amount, without limit, but assumes compliance. Furthermore, if the developer wants to access the deposits to fund the development, the statute requires that they obtain security for that amount, often in the form of deposit insurance, such that deposits are guaranteed under an insurance policy and the insurer takes security over the real property in an equal amount.
In The One’s case, excess deposit insurance was obtained from Aviva Insurance Company of Canada (“Aviva”), which took security and registered it on title to the real property and under the Personal Property Security Act. As such, purchasers of units in The One project appear to be in a strong position with respect to their deposits, which are protected by Tarion, and under the Aviva insurance, but only up to a maximum of $201,680,000.
There are some potential pitfalls, however:
The Receiver for The One project has said they are still to review the pre-construction purchase agreements. It is possible that the Receiver will appraise the property and determine that some or all of the existing pre-construction purchase agreements were entered at below market value, and that the units can be resold for significantly more.
When this happened in Forjay Management Ltd. v. 0981478 B.C. Ltd., 2018 BCSC 527, the court directed the receiver to disclaim certain of the pre-construction contracts and remarket the units. The original purchasers were entitled to a return of their deposits and a court-directed right of first refusal to enter fresh purchase agreements through the receiver. They were also entitled to bring a claim against the developer for losses (recognizing, of course, that the financial position of the developer did not instil any confidence as to potential for recovery).
Similarly, pursuant to a sale transaction in the 2020 receivership proceedings for the Halo Residences on Yonge in Toronto, all pre-sale contracts were terminated. Deposits paid by pre-construction purchasers were insured by Tarion and Aviva, providing reliable avenues for recovery of deposits. Furthermore, the sale transaction approved by the Ontario Superior Court of Justice (Commercial List) provided that if the purchaser of the development relaunched the Halo Residences as a condominium within two years, pre-construction purchasers would have the opportunity to reinstate their purchase agreement for the same unit at a new price, less a discount of $150 per square foot. Pre-construction purchasers who declined this option would receive, in addition to their refunded deposit, a payment of 2% of the value of that deposit.
In the event existing pre-construction contracts are terminated by the Receiver for The One, purchasers will almost certainly receive a refund of their deposit, plus interest (subject to certain limitations), but they may lose the appreciation in value of their interest since the time of their purchase until termination. Purchasers may then be in a position to make a claim for damages, not only for their lost appreciation value, but also their lost opportunity to have purchased another property in the intervening period.
On the other hand, if the Receiver affirms the APSs, purchasers will remain in a position of uncertainty as to when the project will be completed. Even under the management of a receiver, delays are virtually inevitable in any construction project, and in the case of The One, purchasers have already waited far longer than initially expected.
Outside of the APS, delays can create other issues. Looking at today’s mortgage market compared to 2019 – when many of these contracts were entered into – there’s a marked increase in interest rates, and the usually reliable value increases in real estate are no longer seen as being certain. Further, the demand to purchase homes is decreasing. It is important to acknowledge that it is impossible to predict which direction the markets will trend, or how the global economy will shift, which will impact the marketability of The One.
The difficulty in predicting future markets will not be of much comfort to those who now find themselves in a position where it will be more difficult, or impossible, to close on their pre-construction units. While closing is still years away, this instability may cause pre-construction purchasers to consider their options, including assigning their contracts.
The One was supposed to be completed in December 2022, but is now projected to be completed at some point in spring/summer 2025, which objective may still not be met. We encourage stakeholders to remain involved and up to date on the progress of this receivership.