Her Majesty the Queen in Right of the Province of British Columbia as represented by the Minister of Technology, Innovation v. Citizens’ Services, 2015 BCSC 1047

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: British Columbia (Technology, Innovation and Citizens’ Services) v. Columbus Real Estate Inc., 2015 BCSC 1047 Date: 20150622 Docket: S139472 Registry: Vancouver Between: Her Majesty the Queen in Right of the Province of British Columbia as represented by the Minister of Technology, Innovation and Citizens’ Services Plaintiff And Columbus Real Estate Inc., Columbus Real Estate, Limited Partnership, Axor Group Inc. and Arca Investments Inc. Defendants Before: The Honourable Mr. Justice Kelleher Reasons for Judgment Counsel for the plaintiffs: M.B.

Morgan Counsel for the defendants Columbus Real Estate Inc., Columbus Real Estate, Limited Partnership and Axor Group Inc.: D.E. Gruber M.W. Pierce Counsel for the defendant Arca Investments Inc. R. Spigelman Place and Date of Hearing: Vancouver, B.C. May 4 - 8, 2015 Place and Date of Judgment: Vancouver, B.C. June 22, 2015 [ 1 ] This is an application by the plaintiff (the “Province”) for a declaration concerning the proper

interpretation of an option to purchase which it holds. The application is made pursuant to the

summary trial provisions of the Supreme Court Civil Rules , Rule 9-7. [ 2 ] The option to purchase (the “Option”) was one aspect of a transaction involving British Columbia Buildings Corporation (“BCBC”) and a predecessor to the defendant Axor Group Inc. (“Axor”). The Province is the assignee of BCBC. [ 3 ] The defendants Columbus Real Estate Inc. and Columbus Real Estate, Limited Partnership (“Columbus”), are entities related to Axor.

The defendant Arca Investments Inc., (“Arca”) is the mortgagee of the defendants. [ 4 ] The Province seeks a declaration: (a) …[T]hat it is either an express or an implied term of the Option to Purchase registered in the Victoria Land Title Office on May 28, 1996 under registration number EK056587 (the “Option”) that the purchase price of $11,000,000 may be satisfied by any of the following: (

i) by payment of $11,000,000 in cash, including payment by way of solicitors’ trust cheque or money order, or (ii) by the Province being responsible for a Mortgage balance of a principal amount of $11,000,000, or (iii) by a combination of the Province Applicant being responsible for a Mortgage balance in a principal amount of less than $11,000,000 and payment in cash, including by way of a solicitors’ trust cheque or money order, of an amount such that the total consideration equals $11,000,000.... [ 5 ] The only issue before me is the

interpretation of the Option. If I find in favour of the plaintiff, that is the end of the matter (subject, of course, to appeal). If I find in favour of the defendants, there are two alternative arguments of the plaintiff which would have to be subsequently resolved. First is whether the Option can be rectified to reflect what the plaintiff says is the true agreement between the parties. The second issue is whether the defendant Arca can disturb or foreclose the rights of the Province in any event. Background

[ 6 ] BCBC was a Crown corporation that managed real estate acquisitions, dispositions, and properties for the Government of British Columbia. In approximately 1992, BCBC began to consider developing property on Jutland Road in Victoria. [ 7 ] In November 1993, BCBC acquired the land for development from Jawl Properties Ltd. The site was identified for the construction of two office buildings (collectively, the “Property”). [ 8 ] BCBC’s initial intention was to own the buildings which were to be constructed and to populate the buildings with various government ministries.

By 1994, BCBC had entered into contracts with an architect and an engineer and had obtained a development permit. [ 9 ] However, at the time, the Province was under review by various debt rating agencies. The Province decided it did not wish to add to its debt. Therefore, other options for developing the Property were considered. [ 10 ] The provincial government made the decision that the development would be pursued as a form of public private partnership: BCBC would sell the Property, the purchaser would construct the two office buildings and enter into a long-term lease with BCBC.

BCBC would receive an option to purchase the buildings, land, and associated improvements on the land at the end of the lease. BCBC would also have the right of first refusal. [ 11 ] This concept required that the project not incur nor involve any long-term debt. For that reason, the lease would have to be characterized as an “operating lease”, not a “capital lease”. This is because if a lease is characterized as a capital lease, it is debt.

That is, a capital lease is simply a form of financing. [ 12 ] An important factor in determining whether a lease is an operating lease or a capital lease is whether there is a “bargain purchase price” at the end of the lease. If the option to purchase is at a bargain price, the lease would be considered a capital lease and the whole purpose of the transaction would be frustrated. [ 13 ] BCBC engaged a consultant to determine what would constitute a bargain purchase price. The consultant advised BCBC that anything under $10 million would be considered a bargain price.

BCBC then prepared a Request for Proposal in order to find a purchaser.

Section 2.6.3 of the Request for Proposal provides as follows: 2.6.3 Both the RFR [right of first refusal] and the OP [option to purchase] will be registered against title to the property in priority to any financial charges the Proponent may wish to register against the Land. Once the RFR and OP are registered, the Corporation will not grant priority to any financial charges the successful Proponent may wish to register against the Land. [ 14 ] BCBC received a number of proposals, including one from a company associated with Axor. [ 15 ] Four of the proponents were shortlisted.

One of those was Axor. [ 16 ] The first preferred proponent did not satisfy BCBC. BCBC was concerned with the ability of the proponent to obtain financing. Axor was the next proposal considered. [ 17 ] In early February 1996, a telephone conference between representatives of Axor and BCBC took place. In that conversation the corporation expressed the desire that the Option to Purchase price be $11 million. Axor advised that this was acceptable. [ 18 ] There were further phone calls, discussions, and correspondence.

There were negotiations about lease rates, but there was no further discussion concerning the $11 million price of the Option to Purchase. [ 19 ] Negotiations took place in Victoria in February 1996 to settle some of the finer details. Following the February meetings, a Memorandum of Understanding (“MOU”) was entered into between the parties. [ 20 ] The eventual Option to Purchase was registered in the Victoria Land Title Office in May, 1996.

The Option provides in relevant part: The Vendor grants to the Purchaser an exclusive option to purchase (the “Option") the lands (together with all buildings, structures, improvements and fixtures thereon, if any) (collectively the ‘Lands’) situate in the City of Victoria, British Columbia and legally described in

Schedule “A", free and clear of all liens, charges excepting only those charges set out in

Schedule “B" and all upon the terms and conditions hereinafter set forth:…. [ 21 ] These conditions included: 1. Purchase Price - if the Purchaser exercises the Option, the purchase price (the “Purchase Price”) of the Lands shall be $11,000,000.00 of lawful money of Canada, subject to adjustments as set forth in paragraph 11 hereof. … 6. Payment of Purchase Price - The Purchase Price, subject to adjustment as provided herein, shall be paid by the Purchaser to the Vendor on the Closing Date. … 12.

Possession - The Purchaser shall have possession of the Lands subject to the Permitted Encumbrances at 11:59 p.m. on the Closing Date provided the Purchaser has paid the Purchase Price to the Vendor. [ 22 ]

Schedule “B” of the Option contained a list of “Permitted Encumbrances”. In addition to such encumbrances as undersurface rights, statutory rights-of-way, easements, and so on,

Section 9 provided:

Mortgages and encumbrances securing Vendor’s financing PROVIDED HOWEVER the Vendor may not grant and/or permit to beregistered any mortgage, mortgages, collateral mortgage or collateral mortgages which in their totality provide for the principal balanceupon all such mortgages and collateral mortgages to be in excess of $11,000,000.00 at the end of the initial 20 year term of the lease, normay the Vendor hypothecate or pledge the Lands as security for any debt or debts, the totality of which provides for a principal balanceto be in excess of $11,000,000.00 at the end of the initial 20 year term of the Lease. [23] On May 23, 1996 Axor assigned to the defendant Columbus Real Estate, Limited Partnership, all the interests of Axor in theLease, the Memorandum of Understanding, and the Purchase Agreement.

Subsequently, BCBC sold the land and transferred title to thedefendant Columbus Real Estate Inc. in trust as trustee for Columbus Real Estate Limited Partnership. [24] Columbus granted to the defendant Arca a first mortgage over the land, securing a loan in the principal amount of $29 million. [25] The Option to Purchase may be exercised between April and September, 2016.

If it is exercised, the sale will close at the end ofthe 20-year lease, June 30, 2017. [26] Axor’s position is that if the Province exercises the Option the Province must pay $11 million, but in addition, must beresponsible for any mortgages registered on the Property up to a maximum principal amount of $11 million. Therefore, the totalconsideration paid could total $22 million. [27] Resolving this dispute involves the

interpretation of

Schedule “B”. The Province argues that

Schedule “B” means that thepurchase price can be satisfied by paying $11 million in cash or paying out a mortgage of up to $11 million, or by a combination ofpaying out a mortgage and paying the balance to Axor, such that the total consideration is $11 million. [28] Axor, on the other hand, takes the position that what the Province was purchasing was the equity of redemption and Axor'sobligation was to ensure that the mortgage was $11 million or less. [29] I turn to the principles of contractual

interpretation. [30] The first principle is that it is the express wording of the contract which is always paramount. The law is concerned not so muchwith the parties' intentions, but with the words they chose. The policy of the law is that the written contract is the best evidence of whatthe parties intended at the time they committed themselves.

One does not base the meaning of a contract on the subjective thoughtprocesses of the parties in negotiations. [31] The second principle is that where there is uncertainty as to the plain meaning of the words, the court may consider objectiveevidence of the background facts.

This evidence is to be considered for the purpose of understanding the parties' mutual and objectiveintent and not their subjective intentions. [32] There are two central types of evidence admissible in determining the meaning of the contract: first, the express wording of thecontract, and second, the “factual matrix" of circumstances surrounding the execution of the contract. [33] Objective facts do not include prior negotiations and do not include the parties’ subjective state of mind. [34] The most recent discussion of these principles by the Supreme Court of Canada is in Sattva Capital Corp. v.

Creston MolyCorp., 2014 SCC 53. The Court set out at paras. 57- 60 the kinds of surrounding circumstances which may be considered: [57] While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed tooverwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence isto deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.The

interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall atpp. 15 and 30 – 32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviatefrom the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc.(1997), (BC CA), 101 B.C.A.C. 62). [58] The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances" will necessarily vary from caseto case. It does, however, have its limits.

It should consist only of objective evidence of the background facts at the time of the executionof the contract (King, at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledge of bothparties at or before the date of contracting. Subject to these requirements and the parole evidence rule discussed below, this includes, inthe words of Lord Hoffmann, “absolutely anything which would have affected the way in which the language of the document wouldhave been understood by a reasonable man" (Investors Compensation Scheme, at p. 114).

Whether something was or reasonably ought tohave been within the common knowledge of the parties at the time of execution of the contract is a question of fact. …. [59] It is necessary to say a word about consideration of the surrounding circumstances and the parole evidence rule. The paroleevidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, orcontradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53).

To this end, the rule precludes, amongother things, evidence of the subjective intentions of the parties (Hall, at pp. 64 – 65; and Eli Lilly & Co. v. Novopharm Ltd. (SCC), [1998] 2 S.C.R. 129 (S.C.C.), at paras. 54 – 59, per Iacobucci J.). The purpose of the parole evidence rule is primarily toachieve finality and certainty in contractual obligations, and secondarily to hamper a party's ability to use fabricated or unreliableevidence to attack a written contract… [60] The parol evidence rule does not apply to preclude evidence of the surrounding circumstances.

Such evidence is consistent with theobjectives of finality and certainty because it is used as an interpretive aide for determining the meaning of written words chosen by theparties, not to change or overrule the meaning of those words. The surrounding circumstances are facts known or facts that reasonably

ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise. [ 35 ] With those principles in mind, I turn to the contractual language in question. There is no language in the contract requiring the vendor to pay out or discharge the mortgage. The only requirement is that the mortgage does not exceed $11 million. Sections 6 and 12 of the Option provide: 6. Payment of Purchase Price - The Purchase Price, subject to adjustment as provided herein, shall be paid by the Purchaser to the Vendor on the Closing Date. … 12.

Possession - The Purchaser shall have possession of the Lands subject to the Permitted Encumbrances at 11:59 p.m. on the Closing Date provided the Purchaser has paid the Purchase Price to the Vendor. [ 36 ] It is plain that the purchaser (the Province) does not own the lands until it has paid the purchase price and that once it has paid the purchase price it takes the lands subject to the permitted encumbrances. These permitted encumbrances include mortgages. [ 37 ] In 2013 the plaintiff wrote to Columbus seeking an amendment to

Schedule “B”. They wrote the following: We are seeking your confirmation of our

interpretation of certain provisions of the Option to Purchase. The Option to Purchase provides that the purchaser has an option to purchase the Lands and improvements during the Option Period (as defined in the Option to Purchase) “free and clear of all liens, charges, excepting only those charges set out in

Schedule “B" and all upon the terms and conditions hereinafter set forth" for the price of $11,000,000.00.

Schedule “B” includes the following as permitted encumbrances: … The Province is of the view that the mortgage and financial charges should not have been listed as permitted encumbrances that could remain registered on title after the Lands were conveyed under the Option to Purchase.

Rather, it is our view that the parties intended the proceeds of the purchase price of $11,000,000 to be used to discharge all financial encumbrances on closing and that Columbus, as vendor was to transfer title to the purchaser free and clear of all such financial encumbrances. [ 38 ] That communication led to these proceedings: Columbus did not share the Province’s view. Conclusion [ 39 ] The plain meaning of the words in the contract is clear. The express wording of the contract is paramount. The purchase price is $11,000,000.

The purchaser acquires the land, subject to the permitted encumbrances. [ 40 ] If I were to consider the substantial amount of evidence put forward by the parties it would be for the purpose of changing or overruling the meaning of the words chosen by the parties in the contract. That is not permissible: Sattva, at para. 60. [ 41 ] For these reasons, I conclude that the contract has the meaning that Axor advances. The application sought by the plaintiff is dismissed. “Kelleher J.” The Honourable Mr. Justice Kelleher