DHLP Management Inc. – s. 74(1)
Headnote
Trades by applicant or licensed real estate agents in residential condominium units included in a rental pool program are not subject to section 25 or 53 provided that purchasers receive certain disclosure prior to entering into an agreement of purchase and sale.
Statutes Cited
Securities Act, R.S.O. 1990, as am., ss. 25, 53, 74(1).
Condominium Act, R.S.O. 1990, as am.
Real Estate and Business Brokers Act, R.S.O. 1990, as am.
Securities Act, R.S.B.C. 1996, as am.
Rules Cited
Ontario Securities Commission Rule 14-501 Definitions.
National Instrument 51-102 Continuous Disclosure Obligations.
British Columbia Instrument 45-512 Real Estate Securities.
B.C. Form 45-906F Offering Memorandum -- Real Estate Securities.
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")
AND
IN THE MATTER OF
DHLP MANAGEMENT INC.
RULING
(Subsection 74(1))
UPON the application of DHLP Management Inc. (the "Applicant") to the Ontario Securities Commission (the "Commission") for a ruling pursuant to subsection 74(1) of the Act that the sale by the Applicant of residential condominium units within a certain condominium project being built by the Applicant on a site located at 64 Main Street East, Hamilton, Ontario, will not be subject to sections 25 and 53 of the Act;
AND UPON considering the application and the recommendation of the staff of the Commission;
AND UPON the Applicant having represented to the Commission as follows:
1. The Applicant was established by articles of incorporation under the Business Corporations Act (Ontario) (the "OBCA") as Stinson Real Estate Corporation, on November 9, 2007, as amended by Articles of Amendment dated January 25, 2008.
2. The Applicant is in the business of developing a condominium and mixed-use real estate project on the lands municipally known as 64 Main Street East, Hamilton, Ontario (the "Lands").
3. The registered head office of the Applicant is located at 5 Bull's Lane, Hamilton, Ontario L9A 1C7.
4. The Applicant is not a reporting issuer under the Act or under any other securities legislation in Canada and has no present intention of becoming a reporting issuer under the Act or any other securities legislation in Canada.
5. The Applicant will acquire ownership of the Lands from Shell Canada Products, by its managing partner, Shell Canada Limited, pursuant to an Agreement of Purchase and Sale dated April 16, 2009. The date of closing will be dependant on the timing of results of certain environmental assessments and it is intended that the purchase will not be completed earlier than June 30, 2009.
6. The Applicant has undertaken to develop the Lands by constructing a mixed-use residential/commercial condominium development with various amenities at 64 Main Street East, Hamilton (the "Project"). The Project will be comprised entirely of new construction comprising twelve (12) stories and containing a total of one hundred and sixty-one (161) residential dwelling condominium units on levels 5 through 12, inclusive (the "Residential Units"); thirty-nine (39) office suites on level 4 (the "Office Units"), one hundred (100) underground parking spaces in the basement (the "Parking Units"), as well as common elements (the "Common Elements") and certain commercial facilities (the "Commercial Units") on levels 1, 2, 3 and 12. The Lands are currently zoned to permit the Project and the Applicant will be seeking the necessary building permits. Due to the number of permits that will be required, obtaining the necessary permits will be an ongoing process throughout the course of the Project and no delay to the commencement of construction is anticipated as a result of any permit requirements.
7. The Common Elements will comprise all property within the Project other than the Residential Units, the Office Units, the Parking Units and the Commercial Units and will include: an entrance lobby, a rooftop garden and patio area, a gym, lounge, banquet and kitchen facilities, mechanical, heating, electrical and related utility facilities, and laundry and housekeeping facilities, which will be located throughout the Project.
8. Each Residential Unit will have a living area, a kitchen area, one or two bathrooms and a sleeping area or two (2) bedrooms and will be sold fully furnished and equipped, with all Residential Units providing roughly equivalent accommodations, including with respect to size and layout, save and except for seven (7) Residential Units located on level twelve (12), which will provide larger, two bedroom penthouse layouts.
9. All of the Residential Units, the Office Units, the Parking Units, the Common Elements will be operated by a condominium corporation (the "Residential Condominium"), which will be created pursuant to the Condominium Act, R.S.O. 1990, c. C.26 (the "Condo Act").
10. The Commercial Units shall include a hotel management unit (the "Management Unit"), a café unit, a bar and restaurant unit, banquet facilities, retail units, a spa unit and a service elevator, all of which will be located on levels 1, 2, 3 and 12 of the Project. The Management Unit will consist of an administration area including a lobby front desk and concierge desk and administrative offices on level 1 of the Project. The Commercial Units will be contained in a condominium plan separate and apart from the Residential Condominium, which will be operated by CDHO Corporation (the "Commercial Condominium").
11. In addition to his, her or its Residential Unit, each owner of a Residential Unit will be entitled to a proportionate share of the Common Elements and all other assets of the Residential Condominium.
12. In accordance with the Condo Act, each owner of a Residential Unit will be responsible for expenses related to his, her or its Residential Unit, including real property taxes directly attributable to the Residential Unit. Each owner of a Residential Unit will also be responsible for his, her or its proportionate share of certain utilities and other expenses related to the Common Elements.
13. The Applicant will cause the Residential Condominium to enter into a permanent property management agreement (the "Property Management Agreement") with CDHO Corporation (in such capacity, the "Property Manager"). The Property Manager will manage and administer the Common Elements, the Parking Units and the Office Units and will be paid a management fee for its services. The Property Management Agreement will be terminable on sixty (60) days prior notice by the board of directors of the Residential Condominium, which will be elected by the owners of the Residential Units.
14. In addition, the Applicant will cause the Residential Condominium to enter into a lease and operating agreement with the Commercial Condominium, pursuant to which the Commercial Condominium is inter alia appointed the exclusive leasing agent for the owners of the Residential Units for the purpose of engaging in the permitted leasing of the Residential Unit. The lease and operating agreement shall be for a term of fifty (50) years and shall be terminable by the Residential Condominium, in addition to any other remedies, upon:
(a) a default by the Commercial Condominium, which continues for at least forty-five (45) days following notice of default, unless default is not capable of being cured within forty-five (45) days and the Commercial Condominium diligently and continuously attempts to cure such default; or
(b) the Rental Manager (as defined below) making an assignment of its property for the benefit of its creditors.
15. Each owner of a Residential Unit will be entitled, but not required, to enter into a rental management agreement (the "Rental Management Agreement") with the Commercial Condominium or such other manager as may be appointed by the Commercial Condominium (in such capacity, the "Rental Manager"). By entering into a Rental Management Agreement, the owners of the Residential Units will become entitled to participate in a rental management program (the "Rental Program"). Based on the experience of the principals of and individuals involved with the operations of the Applicant, it is anticipated that most, if not all, owners of the Residential Units will participate in the Rental Program. It is anticipated that the Commercial Condominium shall appoint the Property Manager to also act as the Rental Manager.
16. As currently proposed, the Rental Program is an arrangement whereby the revenues derived from:
(a) the rental of the Residential Units by the Rental Manager;
(b) food and beverage revenues generated by the Commercial Units, such as the café, bar and restaurant and retail space, or lease revenue in the event that such operations are leased to a third party operator;
(c) parking revenues from the Parking Units that are not owned by owners of Residential Units who are not participating in the Rental Program, and/or offsite and/or valet parking arrangements, or lease revenue in the event that the operations are leased to a third party operator;
(d) room service and any similar guest services;
(e) in-suite entertainment, international telephone calls and any other technology-related revenue streams;
(f) rental or other income, if any, derived from the Commercial Units (or leasing and a percentage of gross operating revenues if such facilities are sub-contracted); and
(g) spa services, if offered (or leasing and a percentage of gross operating revenues if such a facility is sub-contracted),
shall be pooled and all such revenues (the "Aggregate Revenues") then allocated to the owners of the Residential Units on an entirely equal basis. Each owner of a Residential Unit shall be paid his, her or its share of the Aggregate Revenues, less the operating expenses incurred by the Rental Manager to operate the Rental Program and a fixed administration fee per Residential Unit representing compensation to the Rental Manager. Aggregate Revenues and applicable expenses and fees will be calculated and paid on a monthly basis. It is currently proposed that the Rental Manager also be entitled to an annual bonus payment equal to 10% of the net profits of the Rental Program.
17. The Rental Manager will determine the rental rates for the Residential Units; coordinate the rental of Residential Units, collect all rental payments and charges; deposit the gross Rental Program revenues into a trust account or accounts under the exclusive control of the Rental Manager; and generally to operate, supervise, manage, clean and maintain the Residential Units.
18. The Rental Manager will be responsible for all operating costs of the Residential Condominium other than certain fees, charges and expenses listed in the Rental Management Agreement (the "Fees, Charges and Expenses") that are to be borne by the owners of the Residential Units and payable to third parties in connection with the earning of revenues for the Residential Condominium. The Rental Manager will be entitled to deduct the Fees, Charges and Expenses from the Aggregate Revenues on behalf of the owners of Residential Units. In the event that the Aggregate Revenues do not cover the full amount of the Fees, Charges and Expenses, then the Rental Manager will be responsible for any deficiency.
19. Following deduction of the Fees, Charges and Expenses from the Aggregate Revenues, the remaining balance (the "Adjusted Revenues") will be allocated between the Rental Manager and the owners of the Residential Units who are participating in the Rental Program as follows:
(a) As compensation for the services which the Rental Manager will provide, the Rental Manager will be entitled to the payment of a management fee equal to 10% of the Adjusted Revenues; and
(b) The remaining 90% of the Adjusted Revenues (the "Net Revenues") is payable, pro rata, to each owner of a Residential Unit, to the extent of his, her or its participation in the Rental Program, net of certain fees and charges that are payable by the owners of Residential Units, as described below.
20. Common expenses and all repair reserve funds in respect of the Common Elements will be determined by the Residential Condominium and are payable by each owner of a Residential Unit, Office Unit and/or Parking Unit. If the allocation of the Net Revenues of a particular owner of a Residential Unit, Office Unit or Parking Unit is insufficient to cover that owner's share of the common expenses and reserve fund contribution, then the Residential Condominium will reasonably require that such owner pay any amount outstanding.
21. Maintenance fees and repair costs for each individual Residential Unit which participates in the Rental Program, including charges for annual deep cleaning, furniture and appliance repair and normal "wear-and-tear", will be payable by the owner of the Residential Unit. In the event that a Residential Unit is damaged by a guest who rents that Residential Unit, the owner will be ultimately responsible for the repair costs, but the Rental Manager and the owner will co-operate in recovering such costs from any guest which may have caused such damage. Individual expenses incurred in connection with an owner's personal use of his, her or its Residential Unit, including such items as room service charges and telephone bills, shall be paid after each period of personal use by the owner. The Rental Manager will deduct any unpaid individual expenses incurred by an owner from that owner's remaining allocation of Net Revenues. Each owner of a Residential Unit will be responsible to the Rental Manager for any shortfall between the owner's remaining allocation of Net Revenues and any of the costs associated with the owner's Residential Unit. The owner of a Residential Unit is not responsible for personal use charges incurred by guests of the Rental Manager.
22. The Rental Management Agreement will list the fees and charges payable by the owner of a Residential Unit, including a description of how such costs associated with the operation and maintenance of the Residential Units and the Residential Condominium will be allocated between the Rental Manager and the owners of the Residential Units. Each owner of a Residential Unit will give the Rental Manager permission to make additional deductions from the Adjusted Revenues, if and to the extent that the deductions are necessary to ensure that the Residential Condominium continues to operate hotel standards set forth in the Rental Management Agreement.
23. The Disclosure Statement (as defined in paragraph 26 below) and the Rental Management Disclosure Memorandum (as defined in paragraph 31 below) will contain the following risk factor: "Each owner of a Residential Unit will be responsible for a number of costs and charges associated with the ongoing operation of the Residential Condominium. These costs will be deducted from the owner's share of Adjusted Revenues and there is no guarantee that the amount of the owner's share of the Adjusted Revenues will be sufficient to cover such costs. In the event that an owner's share of the Adjusted Revenues is insufficient to cover the costs owed by the owner, the owner may have to pay additional amounts to the Rental Manager (as defined in the Rental Management Agreement). An owner will, for example, be responsible for the repair, replacement and upkeep costs for that owner's Residential Unit, including replacement of furniture and annual cleaning costs. Owners of Residential Units will also be responsible for covering the cost of any damage to a Residential Unit as a result of the rental of the Residential Unit to a third party by the Rental Manager. For complete information on all costs and charges to be levied against owners of Residential Units, prospective purchasers should carefully read the Rental Management Agreement".
24. The Residential Units are being offered for sale in Ontario through Harry Stinson Realty Corporation ("HSRC") or such other agent of the Applicant licensed under the Real Estate and Business Brokers Act, R.S.O. 1990, c. R.5. The Applicant, through HSRC (or such other agent), will actively market the Residential Units for sale, including by advertisements published in print media as well as on television, radio and on the internet.
25. To date, marketing activities have commenced with respect to the Project and the Rental Program to the extent that such marketing activities were permitted by the previous Ruling of the Commission dated December 23, 2008; however, all marketing and sales activities have ceased pending the Ruling requested herein.
26. The Applicant shall cause a disclosure statement (the "Disclosure Statement") to be delivered to each person who enters into an agreement for the purchase of a Residential Unit (an "Agreement of Purchase and Sale"). The Disclosure Statement will comply with the requirements of the Condo Act.
27. Pursuant to Section 52(3) of the Condo Act, any initial purchaser (an "Initial Purchaser") who enters into an Agreement of Purchase and Sale with the Applicant for the purchase of a Residential Unit shall be entitled to rescind his, her or its Agreement of Purchase and Sale by notice to the Applicant given within ten (10) days after the Initial Purchaser receives a copy of the Disclosure Statement or any material amendment to the Disclosure Statement. Pursuant to the Condo Act, such rescission may be exercised by giving written notice to the Applicant or the Applicant's solicitors at their respective address for service noted in the Agreement of Purchase and Sale.
28. None of the advertisements or other marketing materials for the sale of the Residential Units shall make reference to the Rental Program, save for:
(a) the references made in the Disclosure Statement; and
(b) information disclosing the existence of the Rental Program and its benefits for the efficient operation of the Residential Condominium for owners and guests.
29. Prospective purchasers of Residential Units will not be provided with any form of rental, cash flow or deficiency guarantees or any other form of financial commitment or projection by or on behalf of the Applicant respecting the Rental Program, other than:
(a) examples of financial calculations solely for the purpose of better explaining to prospective purchasers of Residential Units how the revenue pooling proceeds are calculated, which sample calculations will be included in the Rental Management Disclosure Memorandum described in paragraphs 31 and 32, below; and
(b) the budget required to be delivered to an Initial Purchaser of a Residential Unit pursuant to the Condo Act.
30. The purchase price for which the Applicant shall offer the Residential Units for sale to Initial Purchasers is not derived from the existence of the Rental Program such that there will not be a premium or discount to the sale price of the Residential Units as a result of the Rental Program.
31. In addition to the delivery of the Disclosure Statement pursuant to the Condo Act, the Applicant will deliver to each prospective Initial Purchaser, prior to entering into an Agreement of Purchase and Sale with any such prospective Initial Purchaser subsequent to the date of this Ruling, a disclosure memorandum (the "Rental Management Disclosure Memorandum") certified by the Applicant and the Rental Manager in the form of the certificate required pursuant to item 19 of B.C. Form 45-906F of the Securities Act, R.S.B.C. 1996, c. 418 (as amended) ("Form 45-906F").
32. The Rental Management Disclosure Memorandum will include the following information relating to the Rental Program prepared substantially in accordance with the form and content requirements of the following sections of Form 45-906F:
(a) items 1, 3(1), 5, 7, 9(1), 9(2), 9(3), 9(4), 10(b) and 16 (including the reporting obligations of the Rental Manager to purchasers as more particularly described in paragraphs 36 and 37 below), modified as necessary to reflect the operations of the Rental Program;
(b) items 12(2), 12(3) and 12(4) of Form 45-906F with respect to the Applicant and the Rental Manager, as applicable, modified so that the period of disclosure runs from the date of the certificate attached to the date of the Rental Management Disclosure Memorandum.
(c) a description of the Residential Condominium, the Rental Program and the offering of Residential Units;
(d) a description of Residential Unit resale restrictions;
(e) a summary of the material features of the Rental Management Agreement to be entered into between a purchaser of a Residential Unit and the Rental Manager;
(f) a description of the continuous reporting obligations of the Applicant to owners of the Residential Units, as more particularly set forth in paragraphs 35 and 36, below;
(g) a description of the risk factors that make the offering of Residential Units a risk or speculative;
(h) a description of the contractual right of action available to purchasers of a Residential Unit as more particularly described in paragraphs 33 and 34, below; and
(i) a certificate signed by the President of the Applicant in the following form:
"The foregoing contains no untrue statement of a material fact and does not omit to state a material fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made."
33. Initial Purchasers of Residential Units and each subsequent purchaser of a Residential Unit will be provided with a contractual right of action as defined in Ontario Securities Commission Rule 14-501 Definitions with respect to the disclosure contained in the Rental Management Disclosure Memorandum, save and except only that such right of action shall:
(a) be for damages and not include a right of action for rescission; and
(b) be exercisable on notice against the certifying entity not later than 180 days after the earlier of the date the purchaser closes his, her or its purchase transaction or takes possession of its Residential Unit.
34. The Rental Management Disclosure Memorandum shall describe the contractual right of action, including any defences available to the certifying entity, the limitation periods applicable to the exercise of the contractual right of action, and will indicate that the contractual right of action is in addition to any other right or remedy available to the purchaser.
35. The Rental Management Agreement shall impose an irrevocable obligation on the Rental Manager to deliver to each owner of a Residential Unit participating in the Rental Program:
(a) audited annual financial statements for the Rental Program that have been prepared in accordance with generally accepted accounting principles and otherwise made up, certified and delivered in accordance with the applicable provisions of the Act as if the Rental Program was a reporting issuer for the purposes of the Act; and
(b) interim unaudited financial statements for the Rental Program that have been prepared in accordance with generally accepted accounting principles and otherwise made up, certified and delivered in accordance with the applicable provisions of the Act as if the Rental Program was a reporting issuer for the purposes of the Act.
36. The Rental Management Agreement shall impose an irrevocable obligation on the Rental Manager to deliver to a prospective subsequent purchaser (a "Subsequent Purchaser"), upon reasonable notice of an intended sale by the owner of a Residential Unit participating in the Rental Program, and before an Agreement of Purchase and Sale is entered into with a Subsequent Purchaser:
(a) the most recent audited annual financial statements (which include financial statements for the prior comparative year, if applicable) and, if applicable, the then most recent interim unaudited financial statements for the Rental Program (the "Financial Information");
(b) the Rental Management Disclosure Memorandum certified by the Rental Manager in the form of the certificate required pursuant to item 19 of Form 45-906F; and
(c) the Disclosure Statement or a summary thereof.
37. The Rental Management Agreement shall impose an irrevocable obligation on each owner of a Residential Unit participating in the Rental Program to provide:
(a) the Rental Manager with reasonable notice of a proposed sale of his, her or its Residential Unit; and
(b) a Subsequent Purchaser of a Residential Unit with notice of his, her or its right to obtain from the Rental Manager, the Financial Information and the Rental Management Disclosure Memorandum.
38. The Rental Management Agreement will not require an owner of a Residential Unit to give any person an assignment of any of his, her or its right to vote in accordance with the Condo Act or condominium corporation by-laws, or to waive notice of meetings of the Residential Condominium.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
IT IS RULED, pursuant to subsection 74(1) of the Act, that:
1. the distribution of a Residential Unit by the Applicant, HSRC, or such other licensed agent who is licensed under the Real Estate and Business Brokers Act, R.S.O. 1990, c. R.5, is exempt from sections 25 and 53 of the Act, provided that:
a) every Initial Purchaser and every Subsequent Purchaser receives all of the documents and information referred to in paragraphs 26 and 31 to 36, above, and a copy of this Ruling, prior to entering into an Agreement of Purchase and Sale; and
b) every Initial Purchaser receives the ten (10) day "cooling off" period for rescission described in paragraph 27 above; and
2. any subsequent trade of a Residential Unit shall be deemed to be a "distribution" for the purposes of the Act, unless:
a) the seller of the subject Residential Unit is not a developer or an agent acting on such developer's behalf;
b) the seller of the subject Residential Unit provides written notice to the Rental Manager of his, her or its intention to sell his, her or its Residential Unit;
c) the seller of the subject Residential Unit provides the prospective purchaser of such Residential Unit, prior to completion of the purchase and sale transaction, all of the documents and information referred to in paragraph 35 and 36 above; and
d) the seller, or an agent acting on the seller's behalf, does not advertise, market, promise or otherwise represent any projected economic benefits of the Rental Program to any prospective purchaser.
DATED at Toronto, this 10th day of July, 2009.