Securities Law & Instruments

Headnote

Trades 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.

Applicable Legislative Provisions

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.

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

MUSKOKA WHARF CORPORATION

 

RULING

(Subsection 74(1))

UPON the application of Muskoka Wharf Corporation (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 condominium hotel accommodation suites (the Accommodation Suites) within a Marriott Residence Inn condominium hotel (the Condohotel) that is to be built by the Applicant on certain lands located within the Muskoka Wharf project, at 285 Steamship Bay Road, in the Town of Gravenhurst, Ontario (the Town), 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 incorporation under the Business Corporations Act (Ontario) on June 27, 2003.

2. The Applicant is not a reporting issuer under the Act nor under any other securities legislation in Canada.

3. The Applicant proposes to develop and operate the Condohotel on certain lands located within the Muskoka Wharf project, in the Town of Gravenhurst, Ontario. The Condohotel comprises one five storey condominium complex which will include a total of approximately 106 Accommodation Suites as well as common elements and certain commercial facilities.

4. Each Accommodation Suite will have a living area, a kitchenette, one or two bathrooms and a sleeping area or one or two bedrooms and will be sold fully equipped and furnished.

5. The common elements (the Common Elements) will comprise all property within the Condohotel other than the Accommodation Suites and the commercial facilities and will include: the patio courtyard, exclusive use common element balconies, parking spaces, the pool, hot tub, exercise room, hearth room, lobby, library, breakfast room, pre-function room, mechanical, heating, electrical, laundry, kitchen and housekeeping facilities.

6. The commercial facilities will consist of a hotel management unit (the Hotel Management Unit), two meeting room units and a bar/lounge unit. The Hotel Management Unit will consist of a hotel administration area which will include the front desk and administrative offices.

7. In addition to his or her own Accommodation Suite, each owner (individually, an Owner and collectively, the Owners) will be entitled to a proportionate share of the Condohotel's common property and the Common Elements and other assets of the condominium corporation (the Condominium Corporation) that will be created pursuant to the Condominium Act, 1998, S.O. 1998, c. C.19 (the Condominium Act).

8. The development of the Condohotel is subject to Zoning By-Law No. 94-54 as amended by By-Law No. 2005-80 (the Zoning By-Law) of the Town.

9. As a result of Subsection 599 of the Zoning By-Law (the Accommodation Suite Restriction), each Accommodation Suite must be included in a rental pool, which is defined as the assemblage and collective offering of guest rooms or suites to the travelling or vacationing public for short duration, non-residential use, through a central reservation system.

10. The Town has provided the Applicant with written confirmation that the Owners can use the Accommodation Suites for personal use, as members of the travelling or vacationing public. The Applicant and the Town are engaged in discussions regarding the terms and conditions of a Condominium Agreement (the Condominium Agreement) which will provide that no Owner occupies his or her Accommodation Suite for more than thirty (30) days in each summer season and that the Zoning By-Law's reference to the term travelling or vacationing public includes the Owners of Accommodation Suites, provided that no Owner occupies his or her Accommodation Suite for more than thirty days in each summer season. The Condominium Agreement will confirm an Owner's ability to use his or her Accommodation Suite for vacationing purposes subject to the summer season restriction described above and the other personal use restrictions described in Paragraphs 23 to 29 below.

11. Execution of the Condominium Agreement by the Applicant and the Town may be a condition to be met or fulfilled before the Condohotel can become registered under the Condominium Act. In the event that (i) execution of the Condominium Agreement is imposed as a condition of registration under the Condominium Act; and (ii) if the Applicant and the Town do not enter into the Condominium Agreement, then the Applicant will be unable to complete the sale of any of the Accommodation Suites and each initial purchaser of an Accommodation Suite will be entitled to a full refund of his or her deposit with interest at a prescribed rate in accordance with the Condominium Act.

12. As contemplated by the Zoning By-Law, each Owner will enter into a rental pool management agreement (the Rental Pool Management Agreement) with the Applicant.

13. The Rental Pool Management Agreement will require the Owners of Accommodation Suites to participate in an arrangement whereby revenues derived from, and certain expenses relating to, the rental of Accommodation Suites will be shared by the Owners in accordance with their proportionate interest in the Condohotel (the Rental Pool) and the terms and conditions of the Rental Pool Management Agreement.

14. The Rental Pool Management Agreement will appoint Muskoka Wharf Management Services Inc., a wholly-owned subsidiary of the Applicant, as the exclusive manager (the Rental Pool Manager) of an Owner's Accommodation Suite, 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 be bound by all Accommodation Suite rentals that are booked by the Rental Pool Manager in accordance with the Rental Pool Management Agreement.

15. The Rental Pool Manager will be required to determine the rental rates for Accommodation Suites; to coordinate the rental of Accommodation Suites; to collect all rental payments and room charges (the Gross Rental Pool Revenue); to deposit the Gross Rental Pool Revenue into a trust account or accounts under the exclusive control of the Rental Pool Manager; and generally to operate, supervise, manage, clean and maintain the Accommodation Suites.

16. The Rental Pool Manager will be responsible for all Condohotel operating costs other than certain fees, charges and expenses listed in the Rental Pool Management Agreement (the Fees, Charges and Expenses) that are to be borne by the Owners and payable to third parties in connection with the earning of revenues for the Condohotel. The Rental Pool Manager will be entitled to deduct the Fees, Charges and Expenses from the Gross Rental Pool Revenue on behalf of the Owners. In the event that the Gross Rental Pool Revenue does not cover the full amount of the Fees, Charges and Expenses, then the Rental Pool Manager will be responsible for any deficiency.

17. Following deduction of the Fees, Charges and Expenses from the Gross Rental Pool Revenue, the remaining balance (the 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 Manager will provide, the Rental Pool Manager will be entitled to the payment of a management fee equal to 50% of the Adjusted Gross Rental Pool Revenue. The remaining 50% of the Adjusted Gross Rental Pool Revenue (the 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 Owners as described below.

18. Common expenses and all repair reserve funds in respect of the Common Elements will be determined by the Condominium Corporation and are payable by each Owner based on the square footage of his or her Accommodation Suite. If an Owner's Net Rental Pool Revenue is not sufficient to cover the Owner's share of the common expenses and reserve fund contribution, then the Condominium Corporation will reasonably require that the Owner pay any amount outstanding.

19. Maintenance fees and repair costs for each individual Accommodation Suite, including charges for annual deep cleaning, furniture and appliance repair and normal 'wear-and-tear', will be payable by the Owner of the Accommodation Suite. In the event that an Owner's Accommodation Suite is damaged by a hotel guest who rents that Suite, the Owner will be ultimately responsible for the repair costs but the Rental Pool Manager and the Owner will co-operate in recovering the costs from the guest. Individual expenses incurred in connection with an Owner's personal use of his or her Accommodation Suite, including such items as room service charges and telephone bills, shall be paid after each period of personal use by the Owner. The Rental Pool Manager will deduct any unpaid individual expenses incurred by an Owner from that Owner's remaining Net Rental Pool Revenue. Each Owner will be responsible to the Rental Pool Manager for any shortfall between the Owner's remaining Net Rental Pool Revenue and any of the costs associated with the Owner's Accommodation Suite. The Owner is not responsible for personal use charges incurred by hotel guests of the Rental Pool Manager.

20. The Rental Pool Management Agreement will list the fees and charges payable by the Owner, including a description of how the costs associated with the operation and maintenance of the Accommodation Suites and the Condohotel will be allocated between the Rental Pool Manager and the Owners. Each Owner will give the Rental Pool Manager permission to make additional deductions from the Adjusted Gross Rental Pool Revenue, if and to the extent that the deductions are necessary to ensure that the Condohotel continues to operate to Marriott's hotel standards which are set out in the Hotel Management Agreement (as defined in Paragraph 30 below).

21. The Disclosure Document (as defined in Paragraph 38 below) and Disclosure Document Summary (as defined in Paragraph 45 below) will contain the following risk factor: "Each Owner of an Accommodation Suite will be responsible for a number of costs and charges associated with the ongoing operation of the Condohotel. These costs will be deducted from the Owner's share of adjusted rental pool revenue (the resulting figure being the Owner's Net Rental Revenue, as defined in the Rental Pool Management Agreement) and there is no guarantee that the amount of the Owner's Net Rental Revenue will be sufficient to cover such costs. In the event that an Owner's Net Rental Revenue is insufficient to cover the costs owed by the Owner, the Owner may have to pay additional amounts to the Rental Pool Manager (as defined in the Rental Pool Management Agreement). The Owner, for example, will be responsible for the repair, replacement and upkeep costs for that Owner's Accommodation Suite, including replacement of furniture and annual cleaning costs. Owners will also be responsible for covering the cost of any damage to an Owner's Accommodation Suite as a result of rental of the Accommodation Suite to a third party by the Rental Pool Manager. For complete information on all costs and charges to be levied against Owners, prospective purchasers should carefully read the Rental Pool Management Agreement".

22. The Rental Pool Management Agreement will have an initial term of 25 years, commencing on the later of the date of the execution of the Rental Pool Management Agreement and the opening date of the Condohotel, and it will be subject to extension by the Rental Pool Manager, on the same terms and conditions, for up to two extension terms of 10 years each unless terminated in accordance with its terms by the Owners upon the occurrence of certain events and the approval of more than three-quarters of the Owners.

23. Under the terms of the Rental Pool Management Agreement, each Owner will be entitled to occupy his or her Accommodation Suite for his or her own personal use for a maximum of 5 weeks per year subject to certain Accommodation Suite advanced reservation procedures and certain seasonal and peak period use restrictions which are considered to be essential to the commercial viability of the Condohotel.

24. Subject to the short notice booking procedure described below, an Owner may reserve his or her own Accommodation Suite for his or her own personal use during the summer, fall, winter or spring season by booking the Accommodation Suite at least six months in advance provided the Rental Pool Manager has not accepted any prior reservation of the Accommodation Suite from a member of the public in accordance with the terms and conditions of the Rental Pool Management Agreement.

25. The Rental Pool Management Agreement provides that the Rental Pool Manager may accept Accommodation Suite 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 Accommodation Suites during that season. On any day falling from June 30 to Labour Day during the summer season or within the March break, Christmas break, Easter weekend or Thanksgiving weekend, the Rental Pool Manager may accept Accommodation Suite reservations from the public up to six months in advance for that day, for up to 40% of the Accommodation Suites in the Condohotel.

26. Seasonal use restrictions will limit each Owner's personal use to 14 days during each seasonal quarter of a calendar year.

27. Personal use during each season must include at least one weekly period comprising seven consecutive days but may not exceed 14 days in any of the spring, summer, fall or winter seasons, and cannot exceed 35 days per calendar year. Subject to certain short-notice bookings (Short Notice Bookings), the use of the balance of an Owner's personal use days must involve minimum commitments of two consecutive days which cannot begin or end on a Saturday.

28. In addition to each Owner's seasonal use entitlements, an Owner may also book his or her Accommodation Suite on short notice provided it 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 towards the Owner's annual 5 week personal use allotment. Short Notice Bookings that are made 7 days or less in advance of the date required will not count towards an Owner's 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.

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

30. The Rental Pool Management Agreement contemplates the Rental Pool Manager entering into a number of different agreements with Marriott Hotels of Canada, Ltd. (Marriott Hotels) and International Hotel Licensing Company S.A R.L (IHLC) (Marriott Hotels and IHLC being collectively referred to herein as Marriott) including a hotel management agreement (the Hotel Management Agreement) and an international services agreement (the International Services Agreement) which agreements will appoint Marriott to perform a substantial portion of the obligations of the Rental Pool Manager under the Rental Pool Management Agreement as part of Marriott's general obligation to operate and manage the Condohotel.

31. 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 Management Agreement with the Rental Pool Manager, each Owner will be required to authorize the Rental Pool Manager to delegate some of its obligations, rights and privileges under the Rental Pool Management Agreement to Marriott and he or she will be required to acknowledge that Marriott will have no liability to the Owner under the Hotel Management Agreement and that an Owner's only recourse for non-performance of the Rental Pool Manager's obligations to the Owner will be as against the Rental Pool Manager.

32. As compensation for the services which Marriott Hotels will provide to the Rental Pool by operating and managing the Condohotel, Marriott Hotels will be entitled to the payment of a base royalty fee and an incentive royalty fee. The base royalty fee will be an amount equal to a prescribed percentage of the Gross Rental Pool Revenue. The incentive royalty fee will be an amount equal to a prescribed percentage of available cash flow, calculated as the operating profit less the Owner's priority.

33. Like the Rental Pool Management Agreement, the Hotel Management Agreement and the International Services Agreement will each have an initial term of 25 years, commencing on the date on which it is executed. The Hotel Management Agreement and the International Services Agreement shall each renew automatically, on the same terms and conditions, for up to two consecutive terms of 10 years each, unless terminated in accordance with its terms and conditions.

34. The Accommodation Suites will be offered for sale to the public in Ontario by brokers licensed under the Real Estate and Business Brokers Act, 2002, S.O. 2002, c.30, Schedule C (the Real Estate and Business Brokers Act, 2002), or by full-time salaried employees of the Applicant pursuant to an exemption under Subsection 5(1)(f) of the Real Estate and Business Brokers Act, 2002.

35. The offering and sale of Accommodation Suites will be made in compliance with the Condominium Act.

36. Prospective purchasers will not be provided with any rental or cash flow forecasts or guarantees or any other form of financial projection or commitment on the part of the Applicant or Rental Pool Manager, other than the budget required to be delivered to an initial purchaser of an Accommodation Suite under the Condominium Act.

37. The economic value of an Accommodation Suite will be attributable primarily to its real estate characteristics in the context of the Condohotel setting rather than any future income potential which it might offer. Accommodation Suites will be advertised and marketed as vacation properties and will not be advertised or marketed with reference to any expected economic benefits of the Rental Pool Management Agreement.

38. The Applicant will prepare and deliver to each prospective purchaser of an Accommodation Suite, before an agreement of purchase and sale is entered into, a disclosure document that will be comparable to an offering memorandum (the Disclosure Document). The Disclosure Document will take the form of a disclosure statement required under the Condominium Act and will include additional information in the body of the Disclosure Document relating to the real estate securities aspects of the offering prepared substantially in accordance with the form and content requirements of B.C. Form 45-906F of the Securities Act, R.S.B.C. 1996, c. 418, as amended (Form 45-906F), including, but not limited to:

    • a description of the Condohotel and the offering of Accommodation Suites;

    • a description of Accommodation Suite resale restrictions;

    • a summary of the material features of the Rental Pool Management Agreement to be entered into between a purchaser of an Accommodation Suite, as Owner and the Rental Pool Manager;

    • a summary of the material features of the Hotel Management Agreement, including a description of the Marriott hotel standards set out in that agreement, to be entered into between the Rental Pool Manager and Marriott Hotels;

    • a description of the continuous reporting obligations of the Applicant to Owners of Accommodation Suites as described more particularly in Paragraph 43 below;

    • a description of the risk factors that make the offering of Accommodation Suites a risk or speculation;

    • a description of the contractual right of action available to purchasers of Accommodation Suites as more particularly described in Paragraph 40 below; and

    • a certificate signed by the President or Chief Executive Officer, and the Chief Financial Officer, 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.

39. Under Section 73(1) and (2) of the Condominium Act, an initial purchaser of an Accommodation Suite will be entitled to rescind an agreement to purchase an Accommodation Suite within ten days of receiving the Disclosure Document or any material amendment to the Disclosure Document.

40. Purchasers of Accommodation Suites and each subsequent purchaser of an Accommodation Suite will be provided with a contractual right of action as defined in Commission Rule 14-501 -- Definitions. The contractual right of action will be provided to a purchaser in the agreement of purchase and sale of an Accommodation Suite. The Disclosure Document will describe the contractual right of action, including any defences available to the Applicant, 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.

41. Prospective purchasers of Accommodation Suites will not be provided with rental or cash flow guarantees or any other form of financial projection or commitment on the part of the Applicant or the Rental Pool Manager, save and except for the budget that must be delivered to an initial purchaser of an Accommodation Suite under the Condominium Act.

42. The economic value of an Accommodation Suite will be attributable primarily to its real estate component because Accommodation Suites 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 Management Agreement.

43. The Rental Pool Management Agreement will impose an irrevocable obligation on the Rental Pool Manager or Applicant, as the case may be, to send to each Owner of an Accommodation Suite:

(a) audited annual financial statements for the Rental Pool 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 and Part 4 of National Instrument 51-102 Continuous Disclosure Obligations 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 in accordance with generally accepted accounting principles and otherwise made up, certified and delivered in accordance with the applicable provisions of the Act and Part 4 of National Instrument 51-102 Continuous Disclosure Obligations as if the Rental Program was a reporting issuer for the purposes of the Act.

44. The Rental Pool Management Agreement will impose an irrevocable obligation on the Applicant or Rental Pool Manager to deliver to a subsequent prospective purchaser, upon reasonable notice of an intended sale by the Owner of an Accommodation Suite, 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).

45. The Rental Pool Management Agreement will impose an irrevocable obligation on the Applicant or Rental Pool Manager, as the case may be, to deliver, before an agreement of purchase and sale is entered into:

(a) the Disclosure Document to a subsequent prospective purchaser of an Accommodation Suite upon receiving reasonable notice of a proposed sale of the Accommodation Suite that is to take place either prior to, or within 12 months of, the issuance of permission to occupy the relevant Accommodation Suite; and

(b) a summary of the Disclosure Document (the Disclosure Document Summary) to a subsequent prospective purchaser of an Accommodation Suite upon receiving reasonable notice of a proposed sale of the Accommodation Suite that is to take place at any time following the expiration of a period of 12 months from the date of issuance of permission to occupy the relevant Accommodation Suite.

46. A Disclosure Document Summary that is delivered to a prospective purchaser of an Accommodation Suite will include:

(a) items 1, 2(1), 5, 6, 8(1), (2), (3) and (4), 9(b) and 15 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 11(2), (3) and (4) of Form 45-906F with respect to the Rental Pool Manager under the Rental Pool Management 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 under item 18 of Form 45-906F.

47. The Rental Pool Management Agreement will impose an irrevocable obligation on each Owner of an Accommodation Suite to provide:

(a) the Applicant or the Rental Pool Manager with reasonable notice of a proposed sale of the Accommodation Suite; and

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

48. The Rental Pool Management Agreement will not require a purchaser of an Accommodation Suite 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 Corporation in respect of 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 Accommodation Suite by i) the Applicant; ii) full-time employees of the Applicant under Subsection 5(1)(f) of the Real Estate and Business Brokers Act, 2002; or iii) an agent licensed under the Real Estate and Business Brokers Act, 2002, is exempt from sections 25 and 53 of the Act, provided that;

(i) every purchaser of an Accommodation Suite receives prior to the completion of the purchase transaction all of the documents and information referred to in paragraph 38 above as well as a copy of this Ruling; and

(ii) any subsequent trade of such Accommodation Suite acquired pursuant to this Ruling shall be a distribution, unless;

(A) the seller of the Accommodation Suite is not the Applicant or an agent acting on the Applicant's behalf;

(B) notice is given by the seller to the Rental Pool Manager of the seller's intent to sell his, her or its Accommodation Suite;

(C) the prospective purchaser of the Accommodation Suite receives, before an agreement of purchase and sale is entered into, all of the documents and information referred to in paragraphs 44 and 45 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 Pool Management Agreement to the prospective purchaser of the Accommodation Suite.

DATED at Toronto, this 9th day of May, 2007

"Wendell S. Wigle"
Commissioner
Ontario Securities Commission
 
"Margot C. Howard"
Commissioner
Ontario Securities Commission