SLS Meeting Wednesday

TWO ISSUES KEY IN THE STRATA VOTE
Sharon Yandle, Marine Mews

Hundreds of False Creek South strata leaseholders are expected to vote by proxy or attend an online Extraordinary General Meeting on September 21, called to decide whether or not to accept the Memorandum of Understanding (MOU), a tentative agreement worked out between City negotiators on behalf of its Real Estate and Facilities Department (REFM), and the Strata Leaseholders Society. (SLS is a legal entity separate from the False Creek South Neighbourhood Association and RePlan.)

Prior to negotiations with the City, the SLS had extensively informed its members (the majority of strata leaseholders in the Creek) about “The Simple Plan” – a proposal to extend the current leases by 39 years on the reasoning that the City, in setting a 60 year term for FCS leases at the outset in 1976, had created an anomaly in that subsequent COV leases that quickly followed (such as Champlain Heights) were set at 99 years.

The Simple Plan required nothing more from the City than to exercise a unilateral right it already has to extend existing leases, and any disagreement between City and leaseholder about the cost of that extension can be resolved by binding arbitration by a neutral third party.

Of course, setting a bargaining goal is not the same as achieving it – as they say, it take two to tango – and at a certain point in the negotiations that began last November, SLS reported that the Simple Plan was “off the table”.

Clearly, the negotiators devoted a great deal of time and energy to the negotiation effort and can’t be blamed for not achieving a goal that is essentially aspirational. You can’t always get what you want. However, they provided no further information because at the outset of negotiations, the SLS either advanced or aceded to a Non-Disclosure Agreement that prohibited revealing any information involving those negotiations.

The leaseholders’ principal bargaining goal was no longer in play but an extension of strata leases – the longer the better – seemed uppermost in the minds of most leaseholders. Although negotiations were held in camera from beginning to end, there’s no reason to believe that City staff at the table did not receive that message loud and clear.

But if that’s what leaseholders wanted, what did the City want?

Whatever may have been made known to the negotiators at the outset, SLS members could not be informed about it. The SLS faithfully reported to its members but the Non-Disclosure Agreement forestalled its ability to say much. Reporting that the “Negotiating Position Working Group continue considering the information that can be communicated at appropriate times as negotiations unfold” may be entirely accurate, but not very informative.

Stated or not, the City’s key negotiating goal can be traced through the years-long efforts of REFM to change the language of existing leases. As significant as a lease extension is to leaseholders, lease end value – what the City must pay if and when it terminates the leases – is just as significant to the City. Perhaps more so.

This is the question that has stalled many years of discussions with the City: What do the words in the Strata Property Act (SPA), echoed in each strata lease mean in requiring the City, if and when it terminates the leases, to pay each strata leaseholder “fair market value”? And what does it mean to require that that payment must be evaluated “as if the lease did not expire”?

Underscoring the importance REFM attaches to the lease end value is its five separate attempts over seven years to define what that means through specific reference to the “New South Wales methodology”.

1. In 2015 REFM first presented its proposed formula for deciding lease end value. It was to be the New South Wales methodology, that is, the “bricks and mortar” interpretation. In this view, the City owns the land and leaseholders own only their share of the “improvements” to that land – mainly the building(s), but including also the walkways, gardens and any structures therein, parking garage, etc The value of those “improvements” is the “fair market value” and is all the City is obliged to pay at lease end.

Legal advice provided to the stratas at that time, and since, is that the City’s interpretation repeats “an oft-stated misunderstanding of the nature of leasehold ownership”. In this view, the City not only owns the land but also owns everything on it. What the leaseholders are entitled to is the “exclusive possession of both during the term of the leases”; that is what the buyer of a leasehold strata unit is purchasing. Not the land, not the building. During the life of the lease, that right to exclusive possession is bought and sold at market value. Calculating its value at lease end is set out in the SPA: fair market value as if the lease did not expire. (emphasis added)

In the result, leaseholders rejected the New South Wales methodology and the lease issue remained unresolved.

2. Subsequently, REFM made a second effort through a request to the Province to enact regulations to specify what the words meant in accordance with its interpretation. The Province responded that it would be improper for it to interpret the language the City had put into its own leases, or alter an agreement freely entered into by others unless the parties themselves jointly requested the Province to do so.

3. A third City effort at securing preferred lease end language is worth reviewing at some length as it’s specifically referenced in the proposed settlement coming before strata leaseholders this week.

In 2017, several leaseholders at Harbour Terrace asked the City for a lease extension as their building required significant and costly renovations and the cost of borrowing within an ever-shrinking timeline to lease end in 2040 was becoming prohibitive.

The City responded positively and exercised its right to unilaterally extend the Harbour Terrace lease by 10 years to 2050. As per the existing lease, all other terms must remain intact save the new end date and the cost of the extension. Any disagreement about that cost can be resolved through binding arbitration by a neutral third party. Payment for the extension falls due at the end of the existing, unextended lease – 2040 – although the City may agree to pre-payment options (and it did propose a voluntary pre-payment system with windows for discounts for early payment; the sooner a leaseholder signed on, the greater the discount).

However, accessing the pre-payment option carried a significant proviso: it was conditional on the leaseholder’s agreement that the existing lease end language (“fair market value as if the lease did not terminate”) be deleted and replaced by the New South Wales methodology. At a well-attended on site informational meeting, REFM staff strongly urged broad acceptance of the proposed revised lease but faced considerable resistance.

In the result, there were only two leaseholders (of 58) who took up the pre-payment offer and accepted the change in lease end language. After that, the City did not extend lease end dates for any other False Creek South strata.

Although the present tentative settlement cites Harbour Terrace, it is significantly different in two important ways. First, the Harbour Terrace lease extension was not conditional upon accepting the loss of the lease end value language and substitution of the New South Wales methodology. And secondly, unlike the MOU now before leaseholders, the cost of the Harbour Terrace 10 year extension does not fall due until the end of the existing lease; in that case, 2040.

4. The City’s fourth involvement toward a change in lease end language was not an attempt but a declaration. In October 2019 it advised the real estate industry in writing that the lease end language meant “bricks and mortar” (as per the New South Wales methodology) and it had the right to interpret it as it sees fit. Both assertions were challenged by SLS legal counsel who said that the City’s stance was “at best self-serving and at worse, false or misleading”; that is, first, that the meaning of the language is in dispute, and that the legal resolution of that dispute, as stated in the Strata Property Act, is not up to City decree but a neutral third party arbitration board.

5. The fifth and most recent City attempt to replace lease end language is in the present MOU, and here there is no ambiguity at all as to what it means. It specifically says that the changes to the leases “will be the New South Wales methodology as articulated in the lease modifications previously offered by COV in relation to Harbour Terrace”.

The importance of this agreement can’t be overstated. An agreement voluntarily, lawfully and freely negotiated between two parties, whether a landlord and tenant, an employer and union, a buyer and seller or any analogous relationship, is the absolute gold standard for determining the validity of whatever deal is struck. Such an agreement is virtually unassailable.

Apart from the “How” of these five efforts, the question remaining is “Why?” Why doesn’t the City extend the leases until a full, new False Creek South Community Plan can be in place – especially since the City has shown through the Harbour Terrace extension its willingness since 2018 to extend leases to at least 2050?

REFM is charged with managing the city’s property and finances and, like any business of any size, requires as much certainty as can be had. But the existing lease end language prevents the City from knowing the cost of ending the leases; a looming liability of unknown proportions, not only in False Creek South but in its other properties, like Champlain Heights.

Further, the existing language calls for dispute resolution through arbitration, and while the outcome of an arbitration can’t be predicted by either side, that uncertainty weighs much more heavily on the City; the idea of allowing a third party to determine its costs and liabilities is the nightmare of any large enterprise.

REFM is often identified, with good reason, as the “real” power at City Hall and is governed, ultimately, by an elected City Council that may or may not accept or reject or modify its recommendations. Council’s ability to do so was demonstrated by its unanimous decision to accept, but significantly amend, REFM’s report on The Future Of False Creek Lands last October. That said, Council has given the green light to advance the current tentative agreement to SLS members themselves and await their decision.

Their acceptance of the content of the MOU will solve a major problem for REFM. It will be up to the leaseholders themselves to decide whether the settlement solves their problems as well. Or add to them.

Sharon Yandle, a strata leaseholder (Marine Mews), worked in labour relations for many years as a negotiator and arbitration advocate.