REAL ESTATE LAW UPDATE: Can the Court Refuse a Remedy Under the Partition Act?

In a past article, it was discussed that under the Partition Act R.S.O. 1990 (the “Act”) one has a prima facie right to partition or sell a co-owned property in which they have legal and or an equitable interest in.  The presumption is in favour of a partition rather than a sale, however, a sale can be ordered if partition is impossible and if a sale is more advantageous to the parties.  The courts cannot refuse a partition or sale as long as the intent of compelling such is not vexatious, oppressive or malicious.  A recent case from the Ontario Court of Appeal examined what constitutes oppressive conduct in relation to when the remedy available under the Act may be denied.

Garfella Apartments Inc. v. Chouduri et. Al. 2010 ONSC 3414 (“Garfella”) is an interesting case in that it deals with an apartment building with a peculiar ownership arrangement.  In Ontario, most apartment buildings are owned by a company (or perhaps several companies) and each unit is rented to tenants.   Another common form of apartment building ownership is a condominium whereby every apartment unit is completely owned by a person(s) and the condominium corporation would manage the entire building but the building is not owned by a single entity.   A co-operation is another form of ownership whereby ownership of the building is split into shares and the members of the co-operation own a certain amount of shares, typically one share per one dwelling unit.  In a co-operation like a condominium there is a board of directors that manages the day-to-day business and affairs of the building and its members.  In Garfella ownership was held through tenancy in common, meaning that each owner of an apartment unit owned one percent (1%) interest in the entire apartment building, resembling a co-operation structure.  Much like a condominium or co-operation, the co-owners would share in the costs and operations of the building.

At the time of the trial, Garfella Investments Inc. (“Garfella Investments”) owned 124 of 148 of the apartment units and sought to acquire the remaining apartment units so that it could convert the entire building into a conventional apartment building with one owner.  However, there were a few co-owners that were unwilling to sell their units because doing so would create hardship for those objecting co-owners.  Garfella Investments brought an application under the Act seeking an order to sell the entire building so that it could bid on the whole property and acquire it in its entirety.  The trial judge denied the sale under the Act finding that Garfella Investments did not have to force a sale under the Act because it could sell their interest in the apartment building on the open market without the requirement of a remedy under the Act.  Partition was simply unavailable because that would in effect create a condominium with separate parcels in the apartment building which would be illegal because a condominium can only be created under the relevant condominium legislation.  Citing the principles of previous case law on the matter, the trial judge reiterated that the purpose of the remedy under the Act was not to further the interests of one over another but to remedy the problem of co-owners who can no longer exist in such an arrangement.  Garfella Investments appealed.

The Court of Appeal came to the same conclusion as the trial judge in finding that Garfella Investments could not rely on the Act for the remedy they were seeking, however, the Court of Appeal disagreed with the trial judges assessment because ability or inability to sell the properties is “not a legal requirement before a court will order a sale [paragraph 21]”.  Because the respondents had demonstrated that they would suffer hardship should the sale remedy be granted, the Court went to some length to define “hardship” in the context of remediation under the Act.

Given the lack of jurisprudence of the Act in the commercial context, the Court canvassed the term “oppression” in the field of corporate law and found that “oppression” includes “hardship” to a co-owner.  Finally, the Court formulated their own test to determine whether the remedy of sale or partition under the Act was available when a co-owner alleges oppression and or hardship:

“…in considering whether to exercise its discretion not to grant a remedy under the Partition Act, the court should take a contextual approach, rather than looking at the allegedly oppressive conduct of the applicant in isolation.  Determining whether there is hardship or oppressive conduct requires examining the relationship between the parties and how it arose, and the reasonable expectations of the parties as well as the nature of the conduct and its impact on the person seeking to avoid a sale [paragraph 60].”

In summation, it is clear that if there is alleged hardship to a co-owner if a sale or partition is awarded under the Act, the courts will: (1) take a contextual approach, meaning they will consider all the circumstances of the particular case; (2) Examine the relationship of the parties and how the relationship first arose; (3) The reasonable expectations of the parties (such as the intention of the co-ownership arrangement) and the parties conduct; and (4) the impact on the person trying to avoid the sale.

Applying the above criteria to the facts of the case, the Court held that the co-owners who were refusing the sale met the test for oppression because: Originally every purchaser buying into this co-ownership structure was aware of it, including Garfella Investments, and bought the apartments for the principle residence or to rent out; The reasonable expectation was that the purchasers would not have their homes sold from under them; Garfella Investments was trying to force a sale for purely financial gain; A sale would force the objecting co-owners to uproot their families causing children to have to move to other schools and cause further financial and emotional hardship on the families;  There was evidence that Garfella Investments was acting in bad faith by trying to discourage other potential purchasers of individual units while trying to acquire the entire building for itself.

Although denying a remedy under the Act could only be done so in very limited circumstances, this case illustrates that a remedy can be denied under the Act if the objecting co-owners establish hardship within the above contextual framework.  This case also illustrates the importance of making sure co-ownership arrangements are done properly through appropriate agreements such as shareholder agreements and co-ownership agreements, so that the intentions and expectations of the parties is clear and everyone knows what they are getting into and how to get out of.

If you and a co-owner are having issues with a property, or you are thinking of entering into a co-ownership arrangement, call one of the lawyers at Levy Zavet for a free consultation in order to avoid the common pitfalls of co-ownership and to make sure your interests are protected.