Executive Summary: Key Legal and Evidentiary Issues

• Central dispute involved interpretation of a $422 million construction loan agreement and whether the lender's syndication condition entitled it to terminate funding obligations

• Appellants successfully challenged on appeal the trial judge's finding that Romspen could cease funding when syndication failed, establishing a contrary interpretation of the Lender Commitment

• Remaining liability issues were remitted to trial court, including whether Romspen could rely on alternative funding conditions such as the fixed-price contract requirement

• GEC was found to have breached the Standstill Clause (s. 7) of the Subordination Agreement by seeking relief that would set aside the priority it had agreed to grant

• Trial costs for all parties were left to the trial court's discretion given that ultimate liability remains unresolved

• Questions of repudiatory breach and acceptance of repudiation were also remitted to the trial court for determination

Background of the dispute

In 2017, the appellants 0989705 B.C. Ltd., Alderbridge Way Limited Partnership, and Alderbridge Way G.P. Ltd. (the "Developers") became involved in an ambitious $726 million development of seven residential and commercial towers covering an entire city block in Richmond (the "Project"). The appellants Gatland Development Corporation, REV Investments Inc., REV Holdings Ltd., South Street (Alderbridge) Limited Partnership, South Street Development Managers Ltd., Samuel Hanson, and Brent Hanson are guarantors of the Developers' indebtedness (the "Guarantors"). In 2018, GEC (Richmond) GP Inc. and Global Education City (Richmond) Limited Partnership (collectively "GEC") pre-purchased two towers and some retail office space in the Project for over $100 million. GEC paid a $60 million deposit pursuant to a purchase and development agreement with the Developers, which it secured by way of a mortgage over the lands on which the Project was to be built. GEC is not a lender; it is in the business of providing housing and other facilities for students.

The loan agreement and syndication condition

Romspen Investment Corporation ("Romspen") is not a conventional lender; it generally charges interest and fees at a rate double that of conventional institutional lenders. Romspen began providing construction financing for the Project in February 2019. In November 2019, the Developers and Guarantors entered into a construction loan agreement (the "Loan Agreement"), pursuant to which Romspen agreed to provide a "Construction Loan Commitment Amount" defined as $422 million subject to the terms and conditions of the Loan Agreement. Romspen would have until March 31, 2020 to use "commercial reasonable efforts" to acquire participations in the $422 million credit facility (the "Construction Facility")—i.e., to syndicate the loan. Its portion of the Construction Loan Commitment Amount was defined as $212 million (the "Lender Commitment"), leaving an aggregate $210 million to be raised through syndication. On the same day the Loan Agreement was signed, GEC entered into an agreement to subordinate its security to Romspen's (the "Subordination Agreement").

Termination of funding and subsequent litigation

Romspen advanced draws totaling $143.6 million. On March 31, 2020, Romspen sent a letter to the Developers advising that it would suspend all further draws and advances under the Loan Agreement because Romspen had not been able to obtain commitments from other lenders to make up the full Construction Facility of $422 million—the syndication condition. The Developers were unable to secure alternative financing to continue with the Project, which at that point was only at the excavation stage. Eventually, the Developers sought restructuring of their substantial debt in proceedings under the Companies' Creditors Arrangement Act.

Multiple claims followed: GEC commenced an action against Romspen alleging that Romspen's decision to stop funding the Project was a breach of the Subordination Agreement, and seeking a declaration of priority over Romspen's security, equitable subordination, and damages for the tort of unlawful means. Romspen started an action seeking judgment against the Developers and Guarantors for the outstanding debt owed under the Loan Agreement and guarantees, including interest accruing at $1.5 million per month. The Developers and Guarantors commenced an action against Romspen alleging that Romspen's decision to stop funding the Project on March 31, 2020 was a breach of the Loan Agreement, and in the alternative that Romspen breached its duty of good faith and honest performance in relation to its syndication efforts. The Guarantors sought a declaration that the guarantees were unenforceable because Romspen's breaches had materially increased their risk.

The appeal court's findings

The trial judge agreed with Romspen's interpretation of the contract, finding it had a right to cease funding on March 31, 2020. On appeal, the Court came to a contrary interpretation, concluding that the syndication provisions did not entitle Romspen to stop funding in respect of its $212 million Lender Commitment. The Court found that Romspen breached the Loan Agreement when it refused to advance further funding after March 31, 2020 on the basis of the syndication condition.

However, the Court noted this finding does not provide a straightforward path to the recovery of damages by the appellants. Romspen also argued at trial that it was entitled to suspend funding on March 31, 2020 based on funding conditions other than the syndication condition. In particular, Romspen relied on the fixed-price contract funding condition set out in ss. 3.01(q) and 3.03(d) of the Loan Agreement, which requires the Developers to enter into a fixed-price construction agreement with the general contractor for the entirety of the first phase of the Project.

Clarifications in supplementary reasons

The supplementary judgment addressed three points raised before the order was entered. First, regarding whether Romspen had breached the Loan Agreement, the Court clarified that the syndication condition did not entitle Romspen to terminate funding on March 31, 2020. However, Romspen's entitlement to cease funding under other terms of the Loan Agreement remains to be resolved and has been remitted to the trial court. If Romspen establishes that it had a right to terminate funding on March 31, 2020 under other grounds, it would not be in breach of its contractual obligations.

Second, concerning certain paragraphs of the trial order, the Court set aside those paragraphs because they relate to matters remaining to be determined by the trial court. The Court also remitted the question of whether terms from the Loan Agreement could be implied into the Subordination Agreement, as the trial judge had not made the necessary findings of fact about the parties' intentions.

Third, the Court concluded that GEC breached s. 7 of the Subordination Agreement—referred to as the Standstill Clause—by seeking relief that would set aside the priority it had agreed to grant to Romspen. The Court found the Standstill Clause was not contrary to public policy.

Ruling and outcome

The appeals were allowed in part. Paragraphs 1(ii)-(iv), 2(ii)-(iii) and 3(ii)-(iv) of the order were set aside, and the outstanding matters were remitted to the trial court for determination. The Developers and Guarantors are entitled to one set of appeal costs from Romspen in relation to CA50098, CA50099, and CA50100. GEC and Romspen are to bear their own costs in relation to the Romspen/GEC appeals CA50094 and CA50095. The question of ultimate liability remains unresolved, and the issue of the appellants' trial costs was left to the trial court to determine as it sees fit. No specific monetary award was determined in this supplementary decision, as the remaining liability defences raised by Romspen must be resolved in the continuation of the liability phase of the trial.