B.C. Court Clarifies Law on Appointment of a Receiver Over Real Estate Assets

Introduction

On January 11, 2024, the British Columbia Supreme Court released its reasons in Bank of Montreal v. Haro-Thurlow Street Project Limited Partnership, which clarified the approach of British Columbia courts when asked to appoint a receiver over real estate assets. This decision provides important guidance to lenders with security in real estate projects and other stakeholders in real estate ventures. 

Background

The debtors in this case owned a mixed commercial and residential rental building in Vancouver (Property). In May 2023, the debtors attempted to sell the Property but were unsuccessful. They defaulted on their loan obligations in July 2023. In December 2023, the bank sought appointment of a receiver with conduct of sale of the Property. 

In bringing its receivership application, the bank relied on the commonly applied multi-factor test of whether it is “just and convenient” to appoint a receiver.

In resisting the bank’s application, the debtors argued the application to appoint a receiver was more accurately characterized as a foreclosure on real property, to which different rules and considerations apply. They argued that standard foreclosure procedure in British Columbia entitled the debtors to an automatic six-month redemption period, during which no steps to market or sell the Property could be taken. Their position was that an application to appoint a receiver could not circumvent foreclosure practice and this six-month right of redemption afforded to debtors. 

The Court’s Decision

The Court rejected the debtors’ argument that British Columbia foreclosure practice dictates that all real property owners are entitled to an automatic six-month right of redemption when the appointment of a receiver is sought. Instead, the Court confirmed that secured lenders have two different paths when seeking to enforce their security over real estate assets — receivership and foreclosure. 

In foreclosure, the general practice is that a six-month redemption period will be set unless special circumstances justify a shorter period. The onus of proving the existence of special circumstances is on the secured creditor, which in most cases will arise from a lack of equity or some jeopardy to the property that requires immediate attention.

In receivership, which the Court recognized as a more flexible procedure, similar principles apply whereby the creditor must justify the appointment of a receiver, recognizing that it is “extraordinary relief which should be granted cautiously and sparingly.” While the Court disagreed than an automatic six-month redemption period will apply in receivership, it emphasized that the debtor’s equity of redemption continues to exist regardless of which of the two available enforcement paths is taken. The right of the debtor to redeem will accordingly be one of the factors a court considers when deciding whether to appoint a receiver under the “just and convenient” test and the scope of the receiver’s powers, including the presence and timing of the power to market a property for sale. When considering the impact of the right of redemption on the proposed receivership being sought, the fundamental question for the court is what amount of time the borrowers should be afforded to try to redeem the property in question before the court will consider an application for an order approving a sale of the property.

In this case, the Court found that it was just and convenient to appoint a receiver immediately, subject to certain limitations (discussed below). The Court found that the debtors already had time to refinance their secured debt or sell the Property and failed to do so, militating in favour of appointment of a receiver and an order for conduct of sale in a period of less than six months. Another important factor in the Court’s decision was that delaying the conduct of sale for the six months sought by the debtors would increase the risk to the bank in its ability to realize on its security given the information provided to the Court about the Property’s value. It also considered the nature of the property, being an operating business with commercial and residential tenants, and the specialized expertise required to sell it.

The Court’s decision was to appoint the receiver immediately to enable the receiver to investigate the Property and consider how to implement a sales process. However, in light of the factors discussed above, the Court ordered that the receiver’s sales process was not to begin for six weeks and an application to sell the Property could not be brought until April 2024. This approach balanced the need for expedient action while giving the debtors a reasonable chance to refinance the Property.

Key Takeaways

This case clarifies the legal test to be applied when a secured creditor seeks to appoint a receiver over real estate assets and confirms that the right to appoint a receiver is one of two paths available to lenders (in addition to the remedy of foreclosure). While the debtor’s right to the equity of redemption will be considered, lenders and borrowers should not assume that there is a presumption of an automatic six-month period of redemption (which is the standard in British Columbia) granted in every receivership proceeding as there is in the foreclosure context. In its holistic analysis of whether the appointment of a receiver is just and convenient, the court will consider the equity of redemption as one of the factors. However, lenders seeking appointment of the receiver must be mindful of the debtor’s right to redemption and be prepared to provide the court with evidence and explanation as to why the immediate appointment of a receiver is necessary. 

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