Condominiums and the concept of strata title have now been in existence in BC since 1966 when the Strata Titles Act was enacted. Given rising property values and increased densification, strata properties are likely to continue to be a significant part of the Lower Mainland real estate market. The issue currently facing many strata developments is their age and the rising maintenance and repair costs. Strata buildings constructed 30 to 50 years ago (usually wooden structures) require more and more care to remain usable and waterproof. Meanwhile, the zoning for the land beneath the buildings is frequently now for a far greater density than when the strata was built. Many strata owners question the wisdom of paying ongoing maintenance costs when the more economical course might be to tear down the old strata and build a new development. The difficulty is that winding-up a strata and selling the entire complex to a developer requires 100% agreement of all strata unit owners.
On October 8, 2015, the provincial government announced that it was considering changes to the Strata Property Act (“SPA”) in order to make it easier to wind-up and sell a strata, a topic which was covered in an earlier blog post by members of our real estate group. If passed, this legislation will reduce the current requirement for unanimity to a “super majority” of 80% of the owners. This initiative follows recommendations made by the BCLI in February 2015, which reviewed the provisions of the SPA regarding winding-up.
Whether and when the legislature will make this change is presently unknown. Until then, stratas that wish to sell their complex to a developer will have to do so in accordance with the SPA. To date, the wind-up provisions of this statue have been little used. However, with more stratas facing increased costs, declining unit values, necessary remedial work and developers willing to pay a premium for the underlying land, this is going to change.
So how do you wind-up and sell a strata corporation under the current SPA?
The Court Process and a Strata Wind-Up Order
The SPA gives the courts a discretion to wind-up a strata “if the court is of the opinion that the winding-up would be in the best interests of the owners, registered charge holders and other creditors.” In making that decision, the judge must consider:
(a) The scheme and intent of the SPA;
(b) The probability of unfairness to one or more owners, registered charge holders or other creditors, if winding up is not ordered; and
(c) The probability of confusion and uncertainty in the affairs of the strata corporation or the owners if winding up is not ordered.
To obtain a wind-up order, a petition must be commenced in the B.C. Supreme Court (the “BCSC”). The parties to that petition will be:
(a) The registered owners of all the strata units; an
(b) All registered charge holders on title to any of the strata units. This includes mortgagees, judgment creditors, etc.
The necessary steps to achieve a strata wind-up include:
1. Holding a Special General Meeting (“SGM”) to vote on a resolution to wind-up the strata. To pass, that resolution must be unanimous;
2. If unanimity is not achieved, then a petition to the BCSC will be required seeking a wind-up order. The exact nature of the petition depends on the outcome of the SGM vote, though the end result is effectively the same. The two alternatives are:
a. If the SGM vote is 95% in favour of winding-up, an application can be made to treat the SGM vote as “unanimous” for the purposes of a voluntary winding-up with liquidator; or
b. If the SGM vote is less than 95% in favour of winding-up, an application can still be made for a court ordered winding-up. This also requires the appointment of a liquidator;
3. If successful, both applications will result in the court granting a “vesting order” which:
a. Confirms the appointment of the liquidator;
b. Vests in the liquidator the ownership of:
i. The land shown on the strata plan (i.e., all the strata units and common property);
ii. Any other land held in the name of or on behalf of the strata; and
iii. All the personal property of the strata (i.e., movable assets, contingency fund, etc.).
4. The vesting order is then filed with the Land Title Office (the “LTO”) and results in the original strata plan being cancelled and title to the land being registered in the liquidator’s name.
5. The liquidator then undertakes the task of winding-up the strata and negotiating a sale of the entire complex to a third party.
6. The terms of any proposed sale must be voted on and accepted at an SGM by a ¾ majority of all strata unit owners.
7. Any sale of the strata land will likely also require court approval after the ¾ majority vote, particularly if the court application is made under s.284 of the SPA.
8. If court approval of a proposed sale is granted, the liquidator then assumes responsibility for closing the sale and winding-up the affairs of the strata.
In winding-up a strata corporation, the liquidator’s role is effectively to take over the responsibilities of the strata corporation and council and to manage the land and property in the best interests of all owners. The liquidator must manage the strata corporation’s funds, pay its creditors and insurers, arrange for necessary repair work and undertake other duties that would otherwise be done by the strata council. A liquidator may hire others to assist (i.e., accountants, lawyers, realtors, etc.). Once the liquidator finishes winding-up the strata’s affairs, they need to apply to court to be discharged.
Distribution of Sale Proceeds
Once the sale of the strata is completed, the liquidator must pay all the necessary expenses and then distribute the net sale proceeds to the owners. The entitlement of each owner is determined either by a formula in the SPA based on assessed values or, if an interest schedule was filed in the LTO as part of the original strata plan, then pursuant to that interest schedule.
If you are considering a sale of your strata complex to a developer in order to benefit from the development value of the underlying land, then it would be a good idea to seek legal assistance in the process. There are many legal and practical issues that need to be considered in this process. The assistance of professional advisors and legal counsel to avoid pitfalls will be well worth the expense.
Our Real Estate Law Blog provides brief commentary on current legal trends and developments affecting your business. The topics addressed in Lawson Lundell’s Real Estate Law Blog are of interest to commercial real estate developers, real estate and strata agents, investors, landlords and tenants, as well as a variety of industry groups.