Securities Act (Ontario) -- Application to vary a decision of the Commission -- Issuance of trust interests pursuant to a reorganization completed for tax purposes, and subsequent resales of trust interests in connection with the resale of corresponding residential condominium units included in a rental pool program, are not subject to section 25 or 53 provided that prospective 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), 144.
Condominium Act, R.S.O. 1990, as am.
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c. S.5, AS AMENDED (the Act) AND IN THE MATTER OF TORONTO STANDARD CONDOMINIUM CORPORATION #1703
ORDER (Section 144 of the Act)
WHEREAS the Ontario Securities Commission granted an exemption order on November 22, 2004 (the Original Exemption Order), pursuant to subsection 74(1) of the Act, that the sale by 1 King West Inc. (the Original Applicant) of condominium units within a condominium project built by the Original Applicant on a site located at 1-5 King Street West, Toronto, Ontario, will not be subject to sections 25 and 53 of the Act;
AND WHEREAS the Ontario Securities Commission granted a variation order on May 28, 2013 (the Amended Exemption Order), pursuant to section 144 of the Act, amending the Original Exemption Order such that the resale of Condo Units (as defined below) at 1 King West will not be subject to sections 25 and 53 of the Act;
AND WHEREAS Toronto Standard Condominium Corporation #1703 (TSCC 1703 or the Applicant) has filed an application pursuant to section 144 of the Act for a variation of the Amended Exemption Order such that the issuance of the Trust Interests (as defined below) to holders of Condo Units (as defined below), and any subsequent transfers thereof in connection with the transfer of a corresponding Condo Unit, will not be subject to sections 25 and 53 of the Act (the Variation Sought);
AND WHEREAS the Applicant has represented to the Commission that:
1. The Applicant was created by a Declaration under the Condominium Act 1998 (Ontario) (the Condominium Act) registered on September 9, 2005.
2. 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.
3. The Applicant acts on behalf of the owners of 575 condominium units (the Condo Units) at 1 King Street West, Toronto, Ontario (the Lands); manages the common elements of the condominium corporation; and it controls the activities of Toronto Standard Condominium Corporation #1726 (TSCC 1726) and its wholly-owned subsidiary, Events at One King West Ltd. (Events), which in turn manages the Hotel Program (as defined below) and the food-and-beverage, housekeeping, valet parking, and other services (collectively, the Hotel Services) that, in combination, function in the manner of a conventional hotel carrying on business as One King West Hotel and Residence. Events owns the non-real property assets relating to the Hotel Services and the revenues and net income arising therefrom.
4. The Applicant currently owns all of the voting common shares of Events and effective January 1, 2016, shall reorganize Events (the Reorganization) by creating a new class of non-voting preferred shares (the Preferred Shares), which Preferred Shares shall be distributed to a newly formed trust (the Trust). The Preferred Shares shall have a discretionary entitlement to non-cumulative dividends up to the entire annual net income and any retained earnings of Events. In connection with the Reorganization, a separate class of "frozen" non-voting shares of Events with a discretionary dividend entitlement will be issued to TSCC 1703 for tax purposes.
5. Following the Reorganization, each holder of Condo Units from time to time shall be deemed to hold an interest in the Trust (a Trust Interest) as the beneficiaries thereof. For greater certainty, the Trust Interests shall not be alienable from the Condo Units to which they relate. The trustees of the Trust shall be comprised of one director of TSCC 1703 and two lawyers from the legal counsel to TSCC 1703, in accordance with the terms of the trust indenture governing the Trust (the Indenture), and the holders of Trust Interests shall not have the right to directly appoint trustees or otherwise manage the affairs of the Trust.
6. The net income generated by Events from the Hotel Services has been historically accrued to the benefit of TSCC 1703. Following the Reorganization, any net income generated by Events from the Hotel Services that is distributed as a dividend on the Preferred Shares will continue to accrue to TSCC 1703, but indirectly, as such amounts will be distributed to the Trust and then automatically, pursuant to the terms of the Indenture, be paid to TSCC 1703 on behalf of the Trust Interest holders.
7. The majority of the Lands are occupied by the Condo Units. The remaining portions are occupied by non-residential condominium units of TSCC 1726, common elements of the condominium corporations TSCC 1703 and TSCC 1726 and freehold spaces that will be owned by Events following the Reorganization.
8. Each owner is entitled to use a Condo Unit for any of the following purposes: personal residence, residential tenancy for a minimum lease period of one year, business activities as permitted by the City of Toronto by-laws, or, if it is a Condo Unit that is properly furnished, finished, and equipped, participation in short-term rentals (the Hotel Program) through the terms of the optional rental management agreement (the Rental Management Agreement) with Events.
9. In accordance with the Condominium Act, each owner of a Condo Unit is responsible for expenses, such as real property taxes, that are directly attributable to the Condo Unit and is also responsible for the Condo Unit's proportionate share of utilities, maintenance, and various expenses related to the common property of the condominium corporation, which are collected by TSCC 1703 monthly (what are commonly known as "condo fees").
10. Each owner of a Condo Unit is optionally entitled to enroll such unit in the Hotel Program, provided that the furnishings, finishes, and equipment are at least equivalent to the then-current standard for units in the program as determined by Events, and that the owner signs the then-current Rental Management Agreement.
11. For units that participate in the Hotel Program, Events is entitled, but not obligated, to pay condo fees on behalf of unit owners; these amounts are deducted from the Hotel Program's distributions, which are paid monthly to Participating Suite Owners (PSOs). Events provides, at the expense of the Hotel Program, insurance to cover liability and all perils at a level that will cover replacement of the unit's contents to the current standard of furnishings, finishes, and equipment.
12. Revenues derived from the short-term rental of an owner's unit in the Hotel Program are pooled and then allocated on the basis of unit type and the number of days during the calculation period that the applicable unit is enrolled. Each PSO is then paid the unit's share of aggregate revenue, less the actual expenses, the contributions to the replacement reserve fund, and a fixed management fee per participating unit. Net revenues are calculated and paid on a monthly basis. Events is entitled to a bonus of 5% (five per cent) of the difference between revenues and expenses on an annual basis, in addition to a monthly fee that recovers costs of management from the PSOs.
13. The Rental Management Agreement obligates Events to send to each PSO:
(a) audited annual financial statements for the rental program that have been prepared in accordance with Canadian generally accepted accounting principles, certified and delivered with the applicable provisions of the Act and National Instrument 51-102 Continuous Disclosure Obligations as if the Hotel Program was a reporting issuer for the purposes of the Act; and
(b) monthly unaudited financial reports for the Hotel Program, along with the management's discussion and analysis.
14. In addition, TSCC 1703 sends the following materials to each Condo Unit owner:
(a) audited annual financial statements for Events that have been prepared in accordance with Canadian generally accepted accounting principles, certified and delivered with the applicable provisions of the Act and National Instrument 51-102 Continuous Disclosure Obligations as if Events was a reporting issuer for the purposes of the Act; and
(b) monthly unaudited financial reports for Events, along with the management's discussion and analysis.
15. The Condominium Act imposes strict requirements on the condominium corporation to make full disclosure to all owners of its revenues, expenses, long-term liabilities, and budgets. Such disclosure is also made to prospective purchasers by way of the statutorily-defined Status Certificate.
16. A majority (320 of 575, as at the date hereof) of the Condo Units in the building currently participate in the Hotel Program, and it is the policy of Events to seek to maintain or increase the number of participating Condo Units.
17. As a provision of the condominium's statute-mandated Declaration, no owner of any Condo Unit is entitled to rent such unit on a short-term basis other than through the Hotel Program. Long-term leases for a minimum of one year, including the identity of all residents, must be formally registered with TSCC 1703. Any violations of this policy are strictly prohibited, and are subject to rigorous enforcement including the denial of access to the unit by unregistered tenants.
18. Both before and after the Reorganization, control of the entire property rests with the democratically-elected board of directors of TSCC 1703.
19. Prospective purchasers of Condo Units are not 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 Hotel Program, the Hotel Services, or the sale of Condo Units, other than:
(a) examples of financial calculations solely for the purpose of better explaining to prospective purchasers how hotel pooling proceeds are calculated; and
(b) the annual budget for TSCC 1703 and Events.
20. Every owner of a Condo Unit of TSCC 1703 offered for sale shall, regardless of the current usage of the unit, provide to every prospective purchaser copies of the following information, which shall be available at no cost from TSCC 1703:
(a) this Order;
(b) an explanation, in plain English, of the Declaration's restrictions on the use of units within TSCC 1703, particularly the prohibition of short-term rentals, along with the rights and obligations of participation in the optional Hotel Program;
(c) the Indenture;
(d) an example of financial calculations solely for the purpose of better explaining to prospective purchasers how hotel pooling proceeds are calculated;
(e) audited financial statements in respect of each of the Hotel Program and Events for the most recent full year, with comparative figures for the previous year;
(f) unaudited financial reports to PSOs in respect of each of the Hotel Program and Events for the period since the end of the last year covered by the audited statements; and
(g) budgetary data required to be delivered pursuant to the Condominium Act.
21. The Rental Management Agreement imposes an obligation on each PSO to provide Events with reasonable notice of a proposed sale of the Condo Unit. Obligations under the Rental Management Agreement (including the obligations set out in paragraph 14 above) shall continue in force regardless of any change in ownership of the Condo Unit.
22. The Rental Management Agreement shall not require an owner of a unit to give any person an assignment of any of his, her or its right to vote on any matter relating to the affairs of TSCC 1703.
AND UPON considering the application and the recommendation of staff of the Commission;
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED, pursuant to Section 144 of the Act, that the Variation Sought is granted, provided that:
(a) the prospective purchaser receives all of the documents and information referred to in paragraph 20 prior to entering into a Purchase Agreement;
(b) the notice referred to in paragraph 21 is given by the seller to Events of the seller's intent to sell his, her, or its Condo Unit and the corresponding Trust Interest;
(c) the Applicant and Events comply with paragraph 19; and
(d) the seller, or an agent acting on the seller's behalf does not advertise, market, or promise any guaranteed or committed economic benefits of the Hotel Program or Hotel Services to the prospective purchaser.
DATED at Toronto on this 18th day of December, 2015.