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.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1)
Condominium Act, 1998 S.O. 1998, c. 19
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.
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)
IN THE MATTER OF
1 KING WEST INC.
UPON the application of 1 King West 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 (the Residential Units) within a certain condominium project being built by the Applicant on a site located at 1-5 King Street West, Toronto Ontario, will not be subject to section 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 amalgamation under the Business Corporations Act (Ontario) on September 21, 2001. the Applicant's predecessor corporations, 1 King West Inc. and 5 King West Inc. were incorporated under the Business Corporations Act (Ontario) on May 10, 2000 and April 18, 1995 respectively.
2. The Applicant is in the business of developing a condominium and mixed-use real estate project on the lands municipally known as 1-5 King Street West, Toronto, Ontario (the Lands).
3. The Applicant is not a reporting issuer under the Act nor under any other securities legislation in Canada and has no present intention of becoming a reporting issuer under the Act.
4. The Applicant has undertaken to develop the Lands by constructing a 51 story condominium building (the Project) which will consist of approximately 572 residential dwelling units the (Residential Units) and other various common areas and common facilities, including a business centre and recreational facilities, that will be available for use by residents and guests of the Residential Units.
5. Each Residential Unit will be sold either as an unfurnished or fully-furnished unit, at the purchaser's option. The Residential Units will consist of a wide variety of accommodation, ranging from small studio to large two-level units.
6. In addition, to his, her or its own Residential Unit, each owner of a Residential Unit will be entitled to a proportionate share of the common property and the common facilities and other assets of the residential condominium corporation (the Residential Condominium) that will be created pursuant to the Condominium Act, S.O. 1998, c. C 19 (the Condominium Act) and successor legislation.
7. Certain amenities of the Project, including a front desk service area, a dedicated service elevator, and offices for a general manager and assistant shall form the common property and common facilities of a separate Commercial Condominium (the Commercial Condominium) that will be created pursuant to the Condominium Act. Certain common areas of the Residential Condominium and the Commercial Condominium will be required to support the Rental Program described in paragraphs 11 to 14.
8. In accordance with the Condominium Act, each owner of a Residential Unit will be responsible for expenses, such as real property taxes, that are directly attributable to the Residential Unit and will also be responsible for his, her or its proportionate share of certain utilities and other expenses related to the common property of the Residential Condominium.
9. The Applicant will cause the Residential Condominium to enter into a property management agreement with Stinson Management Ltd. The property manager will manage and administer the Residential Condominium's common property 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. The board of directors of the Residential Condominium will be elected by the owners of the Residential Units.
10. The Applicant will cause the Residential Condominium to enter into a lease operating agreement with the Commercial Condominium, pursuant to which the Commercial Condominium is inter alia appointed the exclusive leasing agent for Residential Unit owners desirous of engaging in permitted short-term leasing of the owner's Residential Unit. The lease operating agreement shall be for a term of ten (10) 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 45 days following notice of default, unless the default is not capable of being cured within 45 days and the Commercial Condominium diligently and continuously attempts to cure such default; or
(b) The Rental Manager makes an assignment of its property for the benefits of its creditors.
11. Each owner of a Residential Unit will be entitled but not obligated, 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 Condominium Corporation (in such capacity, the Rental Manager). By entering into a Rental Management Agreement, owners of Residential Units will become entitled to participate in a short-term rental management program (the Rental Program).
12. As currently proposed, the Rental Program is an arrangement where revenues derived from the short-term rental of an owner's Residential Unit by the Rental Manager are pooled with the revenues derived from the rental of all other Residential Units located in the Project and participating in the Rental Program. All such pooled revenues are allocated to the owners of Residential Units participating in the Rental Program on the basis of unit type and the number of days during the calculation period that the applicable unit is enrolled in the Rental Program. Each owner of a Residential Unit participating in the Rental Program is then paid his, her or its share of aggregate revenue, less expenses relating to the rental of the owner's Residential Unit, general operating expenses incurred by the Rental Manager to operate the Rental Program, and a fixed administration fee per participating unit representing compensation to the Rental Manager. Net revenues and applicable fees are calculated and paid on a monthly basis. It is also currently proposed that the Rental Manager also be entitled to a 5% bonus based on the difference between Gross Rental Revenue and Gross Operating Expense during the calculation period.
13. It is anticipated that most owners of Residential Units will participant in the Rental Program.
14. No owner of any Residential Unit will be entitled to rent his, her or its Residential Unit on a short-term basis other than through the Rental Program. However, owners of Residential Units will be free to rent their Residential Units directly to the general public for lease terms of one (1) year or greater. Also, owners enrolled in the Rental Program may terminate their Rental Management Agreement on four (4) months prior written notice to the Rental Manager.
15. Residential Units are being offered for sale in Ontario through Harry Stinson Realty Corp., an agent of the Applicant licensed under the Real Estate and Business Brokers Act, R.S.O. 1990, c.R.5. The Applicant, through its agent, has actively marketed and is continuing to actively market the Residential Units for sale, including by advertisements published in television, internet and print media.
16. To date, numerous Agreements of Purchase and Sale have been entered into by the Applicant with unit purchasers (the Existing Purchasers). No closings have been completed under any of those agreements. In addition, no Rental Management Agreements have been entered into between the Rental Manager and any of the Existing Purchasers.
17. The Applicant has caused a disclosure statement (the Disclosure Statement) to be delivered to each Existing Purchaser and will cause the Disclosure Statement to be delivered to each person who enters into an Agreement of Purchase and Sale. The Disclosure Statement complies with the requirements of the Condominium Act.
18. Pursuant to Section 52(3) of the Condominium Act, any initial purchaser who enters into an Agreement of Purchase and Sale with the Applicant (an Initial Purchaser), is 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.
19. None of the advertisements or other marketing materials for the sale of the Residential Units currently make reference to the Rental Program save for:
(a) the references made in the Disclosure Statement;
(b) information disclosing the existence of the Rental Program, and its benefits for the efficient operation of the Residential Condominium for owners, residents and guests.
20. 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 how rental pooling proceeds are calculated, which sample calculations will be included in the Rental Management Disclosure Memorandum described in paragraphs 23 and 24 below; and
(b) the budget required to be delivered to an initial purchaser of a Residential Unit pursuant to the Condominium Act.
21. Notwithstanding the foregoing, the Applicant acknowledges that:
(a) Trades to Existing Purchasers of Residential Units have been made in contravention of the prospectus and registration requirements of the Act, as there was no available exemption to such requirements and no discretionary relief from such requirements had been obtained pursuant to section 74(1) of the Act; and
(b) previous advertisements or other marketing materials for the sale of the Residential Units, including marketing materials delivered to Existing Purchasers, have made reference to the Rental Program and have made certain representations as to the expected economic benefits of the Rental Program.
In order to correct any prejudice which may thereby have been caused to Existing Purchasers the Applicant is proposing the remedy stated in paragraph 25.
22. The purchase prices for which the Corporation offers Residential Units for sale to Initial Purchasers will not change as a result of the Rental Program such that there will be no premium or discount to such sale prices for Initial Purchasers who participate in the Rental Program.
23. In addition to the delivery of the Disclosure Statement pursuant to the Condominium Act, the Applicant shall deliver:
(a) to each Existing Purchaser, on or before the 60th day next following the date of this Ruling and, in any event, at least 10 days before the earliest to occur of: (i) the date a Rental Management Agreement is entered into with the Existing Purchaser; (ii) the date the Existing Purchaser takes possession of the Residential Unit; and (iii) the date the purchase transaction is completed; and
(b) to each prospective Initial Purchaser, prior to entering into an Agreement of Purchase and Sale with any such prospective 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 Form 45-906F of the Securities Act, R.S.B.C. 1996, c. 418, as amended (Form 45-906F).
24. 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 BC Form 45-906F:
(a) items 1, 3(1), 5, 7, 9(1), (2), (3) and (4); 10(b) and 16 (including the reporting obligations of the Rental Manager to purchasers as more particularly described in paragraphs 2.26 below) of Form 45-906F, modified as necessary to reflect the operations of the Rental Program; and
(b) items 12(2), (3) and (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 Rental Management Disclosure Memorandum.
25. The Applicant undertakes that Existing Purchaser receiving the Rental Management Disclosure Memorandum pursuant to paragraph 24(a) shall be afforded the ten (10) day cooling off period under the Condominium Act described in paragraph 18 above.
26. 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 Commission Rule 14-501 Definitions with respect to the disclosure contained in 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;
(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 the Residential Unit.
27. The Rental Management Disclosure Memorandum will 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.
28. A Rental Management Agreement will impose an irrevocable obligation on the Rental Manager to send 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 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.
29. A Rental Management Agreement will impose an irrevocable obligation on the Rental Manager to deliver to a prospective 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:
(a) the most recent audited annual financial statements (which include financial statements for the prior comparative year) and, if applicable, the then most recent interim unaudited financial statements for the Rental Program (the Financial Information); and
(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.
30. A Rental Management Agreement will 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 the Residential Unit; and
(b) a subsequent prospective 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.
31. A 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 Condominium 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:
(a) the distribution of a Residential Unit by the Applicant, Harry Stinson Realty Corp. or another Licensed Agent from the date of this Ruling is exempt from sections 25 and 53 of the Act, provided that;
(i) every Existing Purchaser receives:
(A) all of the documents and information referred to in paragraph 23 above, and a copy of the Ruling, within the time period set out in paragraph 23, and
(B) the ten (10) day "cooling off" for rescission set out in paragraph 25; and
(ii) every other Initial Purchaser receives all of the documents and information referred to in paragraph 23 above, and a copy of this Ruling, prior to entering into a Purchase Agreement; and
(b) any subsequent trade of a Residential Unit shall be a distribution, unless:
(i) notice is given by the seller to the Rental Manager of the seller's intent to sell his, her or its Residential Unit;
(ii) the prospective purchaser of the Residential Unit receives, prior to the completion of the transaction, all of the documents and information referred to in paragraphs 27 and 28 above; and
(iii) 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 the prospective purchaser.
November 22, 2004.
"Paul K. Bates"
"Robert L. Shirriff", Q.C.