A real estate developer went into default on a $12 million mortgage. A receiver was appointed, and the receiver undertook a marketing plan which included obtaining proposals from several realtors who were experienced in the sale of similar development properties.
Prior to implementation of the marketing plan, the receiver obtained an unconditional all-cash offer to purchase the property for $14 million, which amounted to 90% of the appraised value. On the basis of the appraisals that had been obtained this was considered to be a good offer, but it was premature in the sense that the property had not yet been advertised publicly for sale. The receiver advised the mortgagors to use the offer as a “stalking horse” offer, which would allow the marketing process to continue with the assurance that a substantial offer was on the table and could be accepted if no other offer was received. Under the stalking horse agreement, the offeror would be paid a termination fee of $400,000 if the offer was not accepted.
In the end, seven offers were received, and the mortgagor concluded the sale for over $22 million. As considerable time had passed, and interest and other charges had accumulated, this left a shortfall under the original mortgage of just over $500,000.
The mortgagors sued for the shortfall, and on a motion for summary judgment the judge concluded that the mortgagors had fulfilled their duty to take reasonable care in pursuing the power of sale process. The payment of a $400,000 termination fee was reasonable in that it served as insurance to preserve the substantial offer that had been received before the marketing process began. The court found that there was no genuine issue requiring a trial and that the plaintiffs were entitled to judgment as asked.
Link: Bank of Montreal et al. v. Baysong Developments Inc. et al. CanLII – 2011 ONSC 4450 (CanLII)
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