Fowler Enterprises Limited and 1108827 Ontario Inc. - ss. 74(1)

Headnote

Trades by developer, rental pool manager 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. Note that reference to the Condominium Act, R.S.O. 1990, c. 26, should read the Condominium Act, 1998, S.O. 1998, c. 19.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1), 77, 78, 79.

Condominium Act, R.S.O. 1990, c. 26, as am.

Real Estate and Business Brokers Act, R.S.O. 1990, c. R.4, as am.

Securities Act, R.S.B.C. 1996, c. 418, as am.

Rules Cited

Ontario Securities Commission Rule 14-501 Definitions.

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")

AND

IN THE MATTER OF

KEN FOWLER ENTERPRISES LIMITED

AND

1108827 ONTARIO INC.

RULING

(Subsection 74(1))

UPON the application (the "Application") of Ken Fowler Enterprises Limited ("Fowler Enterprises) and 1108827 Ontario Inc. (the "Developer") to the Ontario Securities Commission (the "Commission") for a ruling pursuant to subsection 74(1) of the Act that the sale of residential condominium units (the "Condohotel Units") within a J.W. Marriott luxury resort condominium hotel (the "Condohotel") that is to be built by the Developer on certain lands owned by the Developer which are located on the west side of Lake Rosseau in Muskoka (the "Project Lands") 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 Fowler Enterprises and the Developer having represented to the Commission as follows:

1. Fowler Enterprises is a private firm established in 1974 that is engaged in the acquisition and ownership of operating businesses in a number of different sectors which include the food and beverage, hospitality, petroleum, education, consumer retail, manufacturing, real estate, resort development, home building, entertainment, forest management, internet and applied technology sectors.

2. The Developer is 80% owned and controlled indirectly by Fowler Enterprises.

3. The Developer proposes to develop a year round resort (the "Resort") on the Project Lands which will consist, in part, of the Condohotel, approximately 72 single owner residential cottages (the "Cottages"), certain Resort amenities and a Nick Faldo golf course.

4. The Condohotel will be a condominium complex which will consist of approximately 220 self-contained Condohotel Units as well as the common areas and common facilities of the Condohotel and certain commercial facilities.

5. Each Condohotel Unit will have a living area, a kitchen or kitchenette, a bathroom, one or more bedrooms and will be sold fully furnished.

6. The common areas and common facilities of the Condohotel will comprise all property within the Condohotel, other than the Condohotel Units, a hotel management unit, the commercial facilities and the Resort amenities, and will include an exercise room and one or more swimming pools.

7. The commercial facilities will include a lobby lounge, dining rooms, a grill, a café, a spa and a retail store.

8. In addition to his or her own Condohotel Unit, each Owner (an "Owner") will be entitled to a proportionate share of the Condohotel's common area and the common facilities and other assets of the residential condominium that will be created pursuant to the Condominium Act, R.S.O. 1990, c.26 (the "Condominium Act").

9. Resort amenities will be available for use by the Owners and other occupants of Condohotel Units and will include a beach, docks and a boathouse.

10. The development of the Resort is subject to Comprehensive Zoning By-Law 87-87 (the "Zoning By-Law") of the Corporation of the Township of Muskoka Lakes (the "Township").

11. For purposes of the Zoning By-Law, each Condohotel Unit will be considered either an Accommodation Unit or a Housekeeping Unit and, as such, will have to be included in a rental pool in accordance with subsection 87-700 (vii) of the Zoning By-Law which also provides that a "rental pool means one or more Accommodation Units or Housekeeping Units which are available at all times for rental by the travelling or vacationing public, or which have been rented to the travelling or vacationing public."

12. The Developer has discussed the intended scope of subsection 87-700 (vii) of the Zoning By-Law with the Township and the Township has confirmed its willingness to enter into an agreement with the Developer (the "Condominium Agreement") which will confirm the Township's understanding that the reference to the "travelling or vacationing public" in subsection 87-700 (vii) includes the Owners of Condohotel Units provided no Owner occupies his or her Condohotel Unit for more than 30 days during the summer season which runs from June 15 to September 15 of each calendar year (the "Summer Season Restriction"). The Condominium Agreement will therefore serve to confirm an Owner's ability to use his or her Condohotel Unit for vacationing purposes subject to the Summer Season Restriction and the other personal use restrictions described in paragraphs 21 to 27, inclusive, below which have been negotiated with Marriott Lodging (Canada) Ltd. and its affiliates (collectively, "Marriott") and which are considered by Marriott to be essential to the commercial viability of the Condohotel.

13. Execution of the Condominium Agreement by the Developer and the Township is one of a number of conditions which must be met or fulfilled before the Condohotel may become registered as a condominium under the Condominium Act and sales of Condohotel Units may not be completed unless and until the Condohotel becomes so registered. Accordingly, if the Developer and the Township do not enter into the Condominium Agreement, the Developer will be unable to complete any sales of Condohotel Units and each initial purchaser of a Condohotel Unit will be entitled to a full refund of his or her deposit with interest at a prescribed rate in accordance with the Condominium Act.

14. As contemplated by the Zoning By-Law, each Owner of a Condohotel Unit will be required to enter into a rental pool agreement (the "Rental Pool Agreement") with an affiliate of the Developer that will be established for the purpose of managing the Rental Pool (the "Rental Pool Manager").

15. The Rental Pool Agreements will require the Owners of Condohotel Units to participate in an arrangement whereby revenues derived from, and certain expenses relating to, the rental of Condohotel Units by the Rental Pool Manager will be shared by the Owners in accordance with their proportionate interests in the Condohotel (the "Rental Pool") and the terms and conditions of the Rental Pool Agreement.

16. The Rental Pool Agreement will appoint the Rental Pool Manager as the exclusive manager of an Owner's Condohotel Unit, it will grant the Rental Pool Manager the right to use and enjoy, and to allow guests to use and enjoy, all of the Owner's rights to the use and enjoyment of the common elements and it will require the Owners to accede to all Condohotel Unit rentals that are booked by the Rental Pool Manager in accordance with the Rental Pool Agreement.

17. As manager of the Rental Pool, the Rental Pool Manager will be required to determine the rental rates for Condohotel Units; to co-ordinate the rental of Condohotel Units; to collect all rental payments and room charges (the "Gross Rental Pool Revenue"); to deposit all money so received into a trust account or accounts under the exclusive control of the Rental Pool Manager; and generally to operate, manage, clean and maintain the Condohotel Units.

18. In keeping with its responsibilities, the Rental Pool Manager will be responsible for all Condohotel operating costs other than certain fees, charges and expenses prescribed by the Rental Pool Agreement ("Prescribed Fees, Charges and Expenses") which are paid or incurred in connection with the earning of Gross Rental Pool Revenue and which will be borne equally by both the Rental Pool Manager and the Owners to the extent there is sufficient Gross Rental Pool Revenue available to cover the Prescribed Fees, Charges and Expenses. If there is insufficient Gross Rental Pool Revenue to cover the Prescribed Fees, Charges and Expenses, the Rental Pool Manager will be responsible for any shortfall.

19. Once the Prescribed Fees, Charges and Expenses have been deducted from the Gross Rental Pool Revenue, the remaining balance ("Adjusted Gross Rental Pool Revenue") will be allocated between the Rental Pool Manager and the Owners as follows. As compensation for the services which the Rental Pool Manger will provide to the Owners pursuant to the Rental Pool Agreement, the Rental Pool Manager will receive a management fee equal to 50% of the Adjusted Gross Rental Pool Revenue. The other 50% of the Adjusted Gross Rental Pool Revenue ("Net Rental Pool Revenue") is payable pro rata to each Owner, to the extent of his or her participation in the Rental Pool, net of certain fees and charges that are payable by the Owner in respect of his or her own Condohotel Unit.

20. The Rental Pool Agreement will have an initial term of 25 years, commencing on the opening date of the Condohotel, and it will be subject to renewal by the Rental Pool Manager, on the same term and conditions, for up to 4 additional consecutive terms of 10 years each unless terminated in accordance with its terms upon the occurrence of certain events and the approval of not less than 66 2/3% of the Owners.

21. In accordance with the terms of the Rental Pool Agreement, each Owner will be entitled to occupy his or her own Condohotel for his or her own personal use for at least 56 days per year subject to the Summer Season Restriction and certain Condohotel Unit advanced reservation procedures and certain seasonal and peak period use restrictions which are considered by Marriott to be essential to the commercial viability of the Condohotel.

22. In addition to the short notice booking privileges described below, an Owner may reserve his or her own Condohotel Unit for his or her own personal use during the summer, fall, winter or spring season, by booking the Condohotel Unit at any time up to six months in advance of the beginning of the relevant season provided the Rental Pool Manager has not accepted any prior reservation of the Condohotel Unit from a member of the public in accordance with the terms and conditions of the Rental Pool Agreement.

23. The Rental Pool Agreement provides that the Rental Pool Manager may accept Condohotel Unit reservations from the public at any time more than six months in advance of the fall, winter and spring seasons for up to 40% of the total number of days available for all Condohotel Units during that season. On any day falling within the summer season or within the March break, Christmas break, Easter weekend or Thanksgiving weekend, the Rental Pool Manager may accept Condohotel Unit reservations from the public for that day for up to 40% of the Condohotel Units in the Condohotel.

24. Seasonal use restrictions will limit each Owner's personal use of his or her Condohotel Unit to 14 days during each seasonal quarter of a calendar year and it will require any personal Unit occupation during a seasonal quarter to include at least one weekly period comprising 7 consecutive days.

25. Peak period use restrictions will permit an Owner to occupy his or her Condohotel Unit for his or her own personal use for a minimum of 3 days which includes either, but not both, of Christmas or New Years. Such restrictions will also limit an Owner's personal use to one statutory holiday weekend during the summer season and either, but not both, of the Thanksgiving weekend or the Easter weekend.

26. In addition to each Owner's seasonal use entitlements, an Owner may also book his or her Condohotel Unit for his or her own personal use on short notice provided his or her Condohotel Unit has not already been reserved for use by a member of the public. Short notice bookings cannot be made more than 30 days in advance of the date required. Short notice bookings that are made more than 7 days in advance of the date required will count toward an Owner's annual 56 day personal use allotment. Short notice bookings that are made 7 days or less in advance of the date required will not count toward an Owner's annual personal use allotment. The Rental Pool Manager reserves the right to refuse to accept a short notice booking if at the time of an Owner's request, the Condohotel has a vacancy rate of 20% or less for the dates required.

27. If an Owner's Condohotel Unit is not available at the time the Owner seeks a personal use booking, the Rental Pool Manager may offer the Owner a substitute Condohotel Unit which is similar to the Owner's Condohotel Unit and the Owner may either accept or reject the Rental Pool Manger's offer.

28. The Rental Pool Agreement contemplates the Rental Pool Manager entering into a hotel operating agreement (the "Hotel Operating Agreement") and related agreements with Marriott which will appoint Marriott to perform a substantial portion of the obligations of the Rental Pool Manager under the Rental Pool Agreement as part of Marriott's general obligation to operate and manage the Condohotel.

29. As the operator and manager of the Condohotel, Marriott will be acting as an independent contractor only and not as an agent of the Rental Pool Manager. Accordingly, when entering into the Rental Pool Agreement with the Rental Pool Manager, each Owner will be required to authorize the Rental Pool Manager to delegate some or all of its obligations, rights and privileges under the Rental Pool Agreement to Marriott and he or she will also be required to acknowledge that Marriott will have no liability to the Owner under the Hotel Operating Agreement and that his or her only recourse for non-performance of the Rental Pool Manager's obligations to the Owner will be as against the Rental Pool Manager.

30. As compensation for the services which Marriott will provide to the Rental Pool by operating and managing the Condohotel under its name, Marriott will be entitled to receive a base royalty fee and an incentive royalty fee. The base royalty fee will be an amount that is equal to a prescribed percentage of the Gross Rental Pool Revenue. The incentive royalty fee will be an amount that is equal to a prescribed percentage of the amount by which actual Condohotel net operating income exceeds a threshold amount of Condohotel net operating income that has been negotiated with Marriott.

31. Like the Rental Pool Agreement, the Hotel Operating Agreement will have an initial term of 25 years, commencing on the opening date of the Condohotel, and it will be subject to renewal by Marriott, on the same terms and conditions, for up to four additional consecutive terms of 10 years each unless terminated in accordance with its terms and conditions.

32. Condohotel Units will be offered for sale in Ontario by one or more of the Developer, the Rental Pool Manager, or an agent thereof licensed under the Real Estate and Business Brokers Act, R.S.O. 1990, Chapter R.4 ("Licensed Agents").

33. The offering of Condohotel Units will be made in compliance with the Condominium Act.

34. The Developer, the Rental Pool Manager or a Licensed Agent will deliver to an initial purchaser of a Condohotel Unit, before an agreement of purchase and sale is entered into, an offering memorandum (the "Disclosure Document") in the form of a disclosure statement required under the Condominium Act which will also include additional information in the body of the disclosure statement relating to the real estate securities aspects of the offering prepared substantially in accordance with the form and content requirements of BC Form 45-906F under the Securities Act (British Columbia) R.S.B.C. 1996, c. 418, as amended ("Form 45-906F"), including, but not limited to:

(a) a description of the Resort and the offering of Condohotel Units by the Developer;

(b) a summary of the material features of the Rental Pool Agreement;

(c) a description of the continuous reporting obligations of the Developer and the Rental Pool Manager to Owners of Condohotel Units as more particularly described in paragraph 39 below;

(d) a description of the risk factors that make the offering of Condohotel Units a risk or speculation;

(e) a description of the contractual right of action available to purchasers of Condohotel Units as more particularly described in paragraph 36 below; and

(f) a certificate signed by the president or chief executive officer and chief financial officer of the Developer 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".

35. An initial purchaser of a Condohotel Unit will have a statutory right under the Condominium Act to rescind an agreement to purchase a Condohotel Unit within 10 days of receiving the Disclosure Document or a material amendment to the Disclosure Document.

36. Initial purchasers of Condohotel Units will be provided with a contractual right of action as defined in Commission Rule 14-501 -- "Definitions". The Disclosure Document will describe the contractual right of action, including any defences available to the Developer, the limitation periods applicable to the exercise of the contractual right of action, and will indicate that the rights are in addition to any other right or remedy available to the purchaser.

37. Prospective purchasers of Condohotel Units will not be provided with rental or cash flow guarantees or any other form of financial projection or commitment on the part of the Developer or the Rental Pool Manager, save and except for the budget that must be delivered to an initial purchaser of a Condohotel Unit pursuant to the Condominium Act.

38. The economic value of a Condohotel will be attributable primarily to its real estate component because Condohotel Units will be advertised and marketed as resort properties and will not be advertised or marketed with reference to the expected economic benefits of the Rental Pool Agreement.

39. The Rental Pool Agreement will impose an irrevocable obligation on the Developer or Rental Pool Manager to send to each Owner of a Condohotel Unit:

(a) audited annual financial statements for the Rental Pool that have been prepared and delivered in accordance with sections 78 and 79 of the Act as if the Rental Pool was a reporting issuer for purposes of the Act; and

(b) interim unaudited financial statements for the Rental Pool that have been prepared and delivered in accordance with sections 77 and 79 of the Act as if the Rental Pool was a reporting issuer for purposes of the Act.

40. The Rental Pool Agreement will impose an irrevocable obligation on the Developer or Rental Pool Manager to deliver to a subsequent prospective purchaser of the Condohotel Unit, upon reasonable notice of an intended sale by the Owner of the Condohotel Unit, and before an agreement of purchase and sale is entered into, the most recent audited annual financial statements (which include financial statements for the prior comparative year) and, if applicable, the most recent interim unaudited financial statements for the Rental Pool (collectively, the "Financial Statements").

41. The Rental Pool Agreement will impose an irrevocable obligation on,

(a) the Developer or Rental Pool Manger to deliver the Disclosure Document to a subsequent prospective purchaser of a Condohotel Unit upon receiving reasonable notice of a proposed sale of the Condohotel Unit that is to take place either prior to, or within 12 months of, the issuance of permission to occupy the relevant Condohotel Unit, and

(b) the Developer or Renal Pool Manager to deliver a summary of the Disclosure Document ( the "Disclosure Document Summary") to a subsequent prospective purchaser of a Condohotel Unit upon receiving reasonable notice of a proposed sale of the Condohotel Unit that is to take place any time following the expiration of a period of 12 months from the date of issuance of permission to occupy the relevant Condohotel Unit,

and it will also require the Disclosure Document or the Disclosure Document Summary, as the case may be, to be delivered to a subsequent prospective purchaser before an agreement of purchase and sale has been entered into.

42. A Disclosure Document Summary that is delivered to a prospective purchaser of a Condohotel Unit will include:

(a) items 1, 3(1), 6, 7, 9(1), (2), (3) and (4), 10(b) and 16 of Form 45-906F with respect to the proposed sale, modified as necessary to reflect the operation of the Rental Pool and the form of disclosure; and

(b) items 12(2), (3) and (4) of Form 45-906F with respect to the Rental Pool Manager under the Rental Pool Agreement modified so that the period of disclosure runs from the date of the certificate attached to the Disclosure Document Summary.

and will be certified by the Rental Pool Manager in the form of the certificate required pursuant to item 19 of Form 45-906F.

43. The Rental Pool Agreement will impose an irrevocable obligation on each Owner of a Condohotel Unit to provide:

(a) the Developer or Rental Pool Manager with reasonable notice of a proposed sale of the Condohotel Unit; and

(b) a subsequent prospective purchaser of a Condohotel Unit with notice of his, her or its right to obtain from the Developer or Rental Pool Manager, the Financial Statements and either the Disclosure Document or the Disclosure Document Summary, as the case may be.

44. The Rental Pool Agreement will not require purchasers of Condohotel Units to give any person any assignment of their right to vote in accordance with the Condominium Act or condominium by-laws, or to waive notice of meetings of the Residential Condominium Corporation in respect of the Resort and the Condohotel.

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 the distribution of a Condohotel Unit by the Developer, the Rental Pool Manager or a Licensed Agent is exempt from sections 25 and 53 of the Act, provided that:

(i) every purchaser of a Condohotel Unit receives prior to the completion of the purchase transaction all of the documents and information referred to in paragraph 34 above as well as a copy of this Ruling; and

(ii) any subsequent trade of a Condohotel Unit acquired pursuant to this Ruling shall be a distribution unless:

A. the seller of the Condohotel Unit (the "Seller") is not the Developer or an agent acting on the Developer's behalf;

B. notice is given by the Seller to the Developer or Rental Pool Manager of the Seller's intent to sell his or her Condohotel Unit;

C. the prospective purchaser of the Condohotel Unit receives, before an agreement of purchase and sale is entered into, all of the documents and information referred to in paragraphs 40 and 41 above; and

D. the Seller, or an agent acting on the Seller's behalf, does not advertise or market the expected economic benefits of the Rental Pool Agreement to the prospective purchaser of the Condohotel Unit.

April 13, 2004.