A strata wind-up is an excellent way to realize the economic potential of a multi-unit residential property (the "strata") by leveraging the value of each unit in the strata as a whole to a developer that may want to re-develop on the strata's property. This article summarizes the onset and development of this emerging sector in light of recent case law and current events.
Introduction to strata wind-ups
A strata wind-up is a process that allows the owners of the strata corporation to sell a stratified property in its entirety for re-development. Historically, strata wind-ups were not common because unanimous approval of the strata owners was required. In 2016, a change in legislation lowered the approval threshold to 80% of the strata owners, making it easier to wind up and sell stratified properties in British Columbia, and causing an increase in redevelopments of previously stratified property in the Greater Vancouver area.
Years later, and despite the COVID-19 pandemic and its associated economic effects, strata wind-ups are still thriving in today's market.
When to consider a strata wind-up
The strata wind-up and sale can be an attractive option for developers and owners alike. Strata wind-ups can be particularly appealing for aging, low-rise buildings located in a desirable location with the potential to develop more density on the land, especially in instances where the impending maintenance costs of an aging building are significant. This usually results in the value of the land being higher than the sum of the value of the individual strata units.
However, the sequence of steps from start to finish is complex and requires court supervision, and if the process is not strictly compliant with legislation, the court may decline to approve it.
Steps in a strata wind-up
The process typically begins with the owners canvassing interest among each other to sell the strata complex. Real estate brokers, developers, or the unit owners themselves may initiate the process by approaching the strata council in question.
If a critical threshold of owners wish to pursue a wind-up, they will authorize the strata council to retain appraisers, real estate agents, and legal counsel. These advisors will assist with the initial stages of the strata wind-up by, among other necessary steps, determining the value of the strata property, soliciting a bid from a developer, and negotiating a purchase contract with a developer.
The remaining steps in the wind-up process must be supervised by the court pursuant to the Strata Property Act (the "Act"). The Act requires that a resolution to voluntarily wind-up the strata corporation be approved by at least 80% of the owners. If the wind-up resolution reaches the 80% threshold, the owners can apply for court-approval of the voluntary wind-up resolution.
There are two options for effecting the strata wind-up: with a liquidator, or without. Proceeding with a liquidator is often advantageous because the individual strata lots and common property will be vested in the liquidator, who is empowered to sell them on behalf of the owners.
A more in-depth analysis of the strata wind-up process can be found in our previous article and step-by-step infographic.
Opposition to strata wind-ups
If there are owners who oppose the wind-up, they may dispute the process in court. The most recent case where such a dispute occurred involved the Quilchena Park Estates complex. As described below, this case highlights the "majority rules" nature of strata wind-ups. Specifically, once the procedural and substantive components (e.g. the 80% approval threshold) of the regime are complied with, it cannot be easily blocked by minority owners who wish to obtain a better deal for their respective units.
Quilchena Park (2020 BCSC 670)
Quilchena Park Estates was a 68-unit townhome strata complex in Richmond. The complex was built in 1976 and was facing $7 million in repairs – or $100,000 per unit owner. Instead of repairing the building, the majority of owners favoured selling the entire complex to a developer for $68 million. At a special general meeting, a resolution was brought to wind up the strata corporation and cancel the strata plan with the assistance of a liquidator so that Quilchena Park Estates could be sold to the intended purchaser. The resolution passed the required 80% threshold in the Act.
With their successful resolution in hand, the majority owners applied for court approval of the wind-up resolution. Upon receiving such an application, a court is required to consider the "best interests of the owners" as well as the "probability and extent of…(i) significant unfairness to one or more owners and (ii) significant confusion and uncertainty in the affairs of the strata corporation or the owners".
Majority rule and unfairness
The court application was opposed by two owners who resided together in one of the units (the "Minority Owners"). The Minority Owners raised the concern that the intended purchaser may seek to reduce the current proposed purchase price from $68 million to $50 million. They argued that if Quilchena Park Estates was sold for less than $68 million, the Minority Owners would receive less for their unit than if they individually sold their unit to a purchaser after repairs to Quilchena Park Estates were completed.
The court rejected their complaints, and approved the wind-up resolution. This resolution met the "best interests of the owners" test, and there was no evidence of "significant unfairness" or "significant confusion and uncertainty in the affairs of the strata corporation or the owners". By contrast, the court found that the process was transparent and fair. The court noted that, in order to stop the court from confirming a wind-up resolution, minority owners need to establish something more than just their respective individual views of why the sale would not be in their perceived best interests.
80% for wind-up, 75% for sale
The Minority Owners also argued that was it was unfair to them that a resolution to wind up a strata corporation requires an 80% approval threshold of owners, while the subsequent resolution to sell the property only requires a 75% approval threshold. The court rejected this concern in short order, holding that these thresholds are clearly outlined in the Act. The court also speculated that the difference in threshold may be attributable to a "cold feet factor". Namely, the drafters of the legislation may have wanted to prevent a strata corporation from successfully navigating the complex, multi-step regime, only to be blocked at the last moment by an owner who changed their mind. Therefore, the slightly lower threshold may have been installed to encourage the successful completion of the strata wind-up.
Impact of COVID-19 on strata wind-ups
The COVID-19 pandemic has caused significant disruption to global economies, and it is not clear whether BC's real estate market will experience any negative effects or a slowdown in strata wind-ups. However, at the time of writing, the strata wind-up market continues to be alive and well, and the BC real estate market is thriving, showing no signs of disruption due to the pandemic.