September 24, 1999

To: Administration Committee

From: City Solicitor

Subject: Property Houses - Resale Restrictions

Purpose:

To report on the appropriate means to ensure evidence that the person(s) claiming the right as tenants to purchase the Property Houses are, in fact, tenants, and further to report on methods of imposing restrictions on "flipping" properties for a five year period from the date of transfer by the City.

Funding Sources, Financial Implications and Impact Statement:

The imposition of resale restrictions for a five year period on properties to be sold at market value would likely depress the net sale proceeds which the City would otherwise receive and transfer to Toronto Housing Company Inc. ("THCI"). THCI would, therefore, likely receive fewer funds than contemplated by the business plan contained in the report (March 11, 1999) of the Chief Executive Officer, THCI, contained in Clause 3 of Corporate Services Committee Report No. 4, adopted by City Council, without amendment, at its meeting of April 13, 14 and 15, 1999. The City would also have to pay registration fees for each Repurchase Agreement, as well as on the annual renewal of each. In addition, funds would have ultimately to be made quickly available from non-budgeted sources to enable the repurchase of properties in a timely manner in those situations in which repurchase rights are exercised.

Recommendations:

It is recommended that:

(1) the tenancies of the Property Houses, for the purpose of giving to tenants the first right to negotiate purchases, be determined in accordance with the procedures described in this report;

(2) resale restrictions not be imposed on the sales of any of the Property Houses to tenants; and

(3) the appropriate City and THCI officials be authorized and directed to take the necessary actions to give effect to the foregoing.

Council Reference/Background/History:

At its meeting of July 13, 1999, the Administration Committee had before it a letter dated July 9, 1999 from the Chief Executive Officer ("CEO") of THCI setting out the resolutions adopted by the THCI's Board of Directors at its meeting of June 24, 1999 with respect to the Property Houses and enclosing a copy of the CEO's report (June 21, 1999) to the Board entitled "Property Houses Transfer" which was the basis for the said resolutions. The Administration Committee deferred consideration of the matter to its meeting of November 2, 1999 and, further, requested the City Solicitor to submit a report to its meeting of October 5, 1999 "on the appropriate means to ensure evidence of past residential tenancy up to the current time, and to impose restrictions on flipping the properties by way of Option or First-Refusal Agreement or otherwise, to be in effect for a five year period from the date of transfer".

Comments and/or Discussion and/or Justification:

A. Proof of Tenancy

The Administration Committee's request for a report relates to the fifteen properties which are intended to be offered first for sale to their respective tenants. It is therefore necessary to determine that the persons who purport to take advantage of the privilege of that first entitlement to purchase are, in fact, the bona fide tenants of the premise in question.

The situations in which it is easiest to determine the identity of the tenants are those in which the occupants of a unit are named tenants under a written lease. In such cases, the existence of the lease will constitute evidence of the tenancy. In order to substantiate such evidence, it is recommended that tenants under written leases who wish to enter into purchase negotiations with the City should first be required to sign a Statutory Declaration which contains a statement as to (i) the date when the tenancy commenced; (ii) the names of all of the tenants of the unit; and (iii) the tenants living in the unit as their principal residence on a full time basis.

There may be other situations in which formal leases cannot be found but other written materials exists in the THCI's file which provide evidence of the occupants' tenancy, such as an Offer to Lease or an Application to Lease signed by the current occupants. It is recommended that statutory declarations substantiating the evidence of tenancy should be obtained in these cases as well.

On the other hand, there may be unusual situations in which there is no documentary evidence in the THCI's files showing the current occupants to be the tenants of a unit, yet the THCI has accepted rent payments from the current occupants over a period of time. This could happen, for example, in a situation in which a tenant takes in one or more people to share the unit without THCI's consent and subsequently moves out, leaving the other occupants in possession. In such cases, if THCI knew or had ample opportunity to determine that it had never approved of the remaining occupants as tenants, but nevertheless accepted regular rent payments and otherwise treated them as tenants, these occupants are, in effect, tenants due to THCI's acquiescence. Because the facts are not definitive in such cases, it is particularly important that the occupants, if they wish to negotiate a purchase from the City, provide Statutory Declarations substantiating the evidence of tenancies that have been acquiesced to.

There will be situations which will not fall clearly into any of the categories described above. For example, a tenant may have originally signed the Lease when single, but is now occupying the unit with a spouse. It is recommended in such a case that, upon providing the City with adequate proof of spousal status in accordance with applicable law, such person, with the original tenant's consent, be recognized as a tenant and given the same rights to purchase as any other married tenant(s). The potential variations in factual situations is great and each such case will have to be dealt with according to its facts. As in the above cases, we recommend that appropriate substantiating Statutory Declarations be obtained.

B. "Anti-Flipping" Measures

Generally, where a property is bought at full market value, the purchaser expects to acquire all attendant rights of property ownership along with that purchase (often legally referred to as the entire "bundle of sticks"), one of which is the entitlement to enjoy any increase in the value of the property over time due to market forces. Conversely, what a purchaser also buys is the risk of a decrease in that value, again due to market forces.

Accordingly, if the properties are to be sold at fair market value, it would be inconsistent with normal sales and conveyancing practices to impose on title to such lands an entitlement for the City to re-purchase the properties at the initial sale price, which may be far less than that which the open market might disclose at the time of the re-sale.

The corollary, of course, is that should Council determine to proceed with such a restriction, since the purchaser would not then be acquiring the entire "bundle of sticks" referred to above, such decision would likely have a downward influence on the initial selling price, (i.e., as the purchaser would be precluded, during the term, from realizing any potential capital appreciation). That is, the purchaser would not pay "full price" as the "stick" representing the normal entitlement to sell the property at increased market value would not form part of the bundle of entitlements being purchased.

The City's right to repurchase would be triggered by the occurrence of an event indicating the owner's intention to sell the property, usually in response to receiving a favourable Offer to Purchase. However, such a repurchase arrangement is fraught with practical difficulties and costs. The very existence of the arrangement may, in fact, deter the making of offers and thus operate unfairly to owners attempting to sell their property. The arrangement is also difficult to enforce, as it is only triggered by an event in which the City has no involvement. If the City determines to proceed with this type of arrangement, it will incur the cost (in addition to the cost of staff time) of the individual registration of the Option or Right of First Refusal Agreements and of the required registration of an annual renewal of each such Agreement during the term. In the event that City ultimately determines not to re-acquire the property (in situations, for example, where the market value has fallen below the City's initial selling price), those amounts are not recoverable, and simply become money "thrown away".

The imposition of this type of restriction may also well inhibit or deter mortgage lenders from becoming involved with the acquisitions by the tenants. The reluctance of mortgage lenders to become involved would likely be compounded by the fact that certain of these transactions will, in any event, be more complex than is usual insofar as they will involve joint forms of ownership by two or more persons. Any lenders who do wish to become involved in spite of such a repurchase arrangement with the City will undoubtedly wish to negotiate different terms, most notably a higher interest rate.

If City Council decides, notwithstanding the recommendations contained herein, to impose resale restrictions on the sale of Property Houses to tenants who exercise a first entitlement to purchase, it should do so by requiring such tenants to enter into agreements, in a form and content satisfactory to the City Solicitor, which give the City the right to repurchase the property in the event that the owner has indicated its intention to sell. As part of any such decision, City Council should also decide that the repurchase price should be the original sale price.

Conclusions:

There will likely be cases in which proof of tenancy will not be ascertainable from the existence of a formal Lease. These tenancies will have to be established upon a review by the THCI of the relevant facts, and the basis of all decisions in this regard will be contained in the reports recommending the individual sales.

To date, there has been no Council directive to sell the properties in question at any value less than fair market value. Accordingly, for sales which are transacted at market value, the imposition of resale controls is inappropriate because the purchaser expects to be purchasing the right to freely dispose of the property. Such controls would reduce the return that could be obtained from the proposed sales and would most likely reduce the ability of purchasers to obtain financing. However, if the City decides to impose such restrictions, it should do so through a right to repurchase.

Contact Name:

Stanley Emerson

Telephone: 392-8736

Fax: 397-5624

H.W.O. Doyle

City Solicitor

Legal Services

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