The big sell-off

The big sell-off
The successful bidder for 11 acres of prized waterfront real estate, near the foot of Yonge Street in downtown Toronto, is expected to be announced later this month. The site is the former location of the head office of the Liquor Control Board of Ontario and what used to be one of its flagship retail outlets.

It is also one of the more high-profile examples of a growing trend right across the country, where cash-strapped governments at all levels, as well as school boards and other public agencies, look to their real estate holdings as a source of much-needed revenue.

The Ontario government estimated nearly two years ago that it could generate at least $200 million in revenue from the sale of the LCBO, as part of a broader plan to sell off various assets to raise money for infrastructure projects. From small land holdings for schools that are no longer needed to some of the most valuable real estate in the country, there is a wide range of properties that the public sector has put up for sale or for which it is in the process of seeking bids.

While government divesting itself of assets, including land holdings, is not a new practice, what has changed is the level of scrutiny and the complexity of these transactions, say lawyers in the commercial real estate field.

“The Crown is an agent, a representative of the public. It is acting on behalf of taxpayers,” says Walter Traub, counsel at Goldman Sloan Nash & Haber LLP in Toronto. “You are a trustee. You have to have accountability and transparency” at every stage of the transaction, says Traub. In contrast to a purely private commercial real estate transaction, the most significant concern for lawyers involved in the sale of government-owned lands is not necessarily litigation. “It is the public at large. The liability comes from the political perspective,” says Traub.

Jamie Klein, a partner in the Real Property and Planning Group at McCarthy Tetrault LLP, says sales of publicly owned lands is likely to continue to be on the rise. “We have seen an uptick in our practice,” says the Toronto-based lawyer.

To try to avoid any potential political controversy from the sale of valuable holdings, it is the front end of the process that is crucial, says Klein. For example, if developers are involved in a potential transaction with a school board, the company may want to address the public officials directly at an early stage. “You can find out how they intend to use the funds, to get the boards on side. You might have a fund set up, to construct something like a community centre, instead of just providing a blank cheque,” Klein says.

“It is a question of getting the right people to sit at the table and hear them out, so it benefits the broader community as a whole,” he says. From the developer’s perspective, “the more work you can do up front, the more likely you will have success,” says Klein.

The public agencies that handle these transactions, such as Infrastructure Ontario, have become increasingly skilled and more open with the Request for Proposal process, he suggests. “They are more experienced, more efficient, and can do it on a very large scale,” Klein says.

Marni Dicker, executive vice president, general counsel and corporate secretary with Infrastructure Ontario, says that before government disposes of property, it undertakes many due-diligence steps.
These vary depending on the characteristics of the property in question. The measures can include:
archaeology, mapping, survey and title review, geotechnical, and cultural heritage.

In addition, the Crown has a duty to consult First Nations groups on activities that have the potential to impact aboriginal rights or treaty rights, including the potential sale/disposition of property.

This responsibility falls onto the Ministry of Economic Development, Employment and Infrastructure, which will assess whether there are any Crown obligations relating to treaty rights and then undertake the necessary level of consultation of lands within their portfolio. The level or scope of consultation varies depending on the specific circumstances of each property.

“The consultation process may involve providing information to the aboriginal community on the proposed sale, gathering information on potentially affected rights, and discussions with the aboriginal community about their concerns, with attempts to minimize the adverse impacts on the aboriginal rights or treaty rights,” says Dicker.

Infrastructure Ontario carries out the consultation based on the MEDEI’s determination.

“Property can only be sold once it’s been determined that there is no government policy or program need for the property. So the property is circulated to other ministries to determine if they or their agencies are interested. If they aren’t, other levels of government and other entities, such as not-for-profit corporations, could be given an opportunity to express interest in acquiring the property,” says Dicker.

As someone who has practiced commercial real estate law for 40 years, Traub says “the process has become more refined, more detailed, and more complex” when it involves sales of government holdings.

It also means that sales of government-owned real estate are going to take longer than a purely private transaction. “This process is a lot more involved, from day one,” says Traub, because of the additional obligations on governments in these transactions. One of the obligations, both Klein and Traub point out, is the requirement for early consultation with any interested party, even before the lawyers managing the transaction are involved.

The consultation could be residents’ groups, other levels of government, environmental organizations, and First Nations, where there is a constitutional obligation to consult. If these responsibilities are not followed, it could lead to litigation and mistrust about the government’s intentions.

One example where the process has not gone smoothly is the Kapyong Barracks, a 160-acre property in the city of Winnipeg. The federal government announced in 2001 that it was closing the military base, and what will ultimately be done with the land is still unclear 15 years later because of what the courts have found to be a failure to engage in legitimate consultations with First Nations.

Agreements were reached in the late 1990s with First Nations in Manitoba to provide funding to purchase certain lands, as a result of broken promises related to Treaty No. 1, signed in 1871, which ceded most of the southern part of the province and all of Winnipeg to the federal government.

The Kapyong Barracks property may currently be worth between $60 million and $90 million, depending on how it is developed. “The Barracks property is unique and important. It is a large parcel of land in an urban area that is available for sale and could be redeveloped by the respondents,” wrote Justice David Stratas, in a unanimous Federal Court of Appeal decision last fall, which upheld a lower court decision about the government’s failure to consult.

The lengthy dispute over the property began after the federal government designated the property as “strategic” land and, in 2005, approved the sale of it to Canada Lands Company, a federal Crown corporation. First Nations that were interested in acquiring the land were not notified of the decision.

In explaining the duty of consultation with First Nations, especially when treaty promises have been broken, the Federal Court of Appeal stated that this must not be interpreted in the way of commercial contracts. “Instead, they must be interpreted in accordance with the objectives of honourable conduct, reconciliation and fair dealing with Aboriginal peoples,” wrote Stratas, on behalf of the unanimous three-judge panel. There are also duties to provide First Nations with sufficient information to make informed decisions about whether it might want to purchase lands to which they have a claim, or an interest, the court said. “As well, Canada cannot contract out of its obligations to act honourably, to deal fairly and to consult with First Nations,” wrote Stratas, in reference to the transfer of the land to an arms-length Crown corporation.

The federal government did not seek leave to appeal this ruling and there are now talks about the future of the property. The decision is important in its findings about what is involved in consultation, says Harley Schachter, who acted for the Long Plain First Nation and Roseau River Anishinabe First Nation in the proceeding. “There must be a capacity to understand what is being offered,” says Schachter, a partner at Duboff Edwards Haight & Schachter in Winnipeg.

First Nations can be “inundated” with letters from governments about decisions involving Crown lands, but it does not mean they always have the resources to decide if it impacts their interests and rights, he explains. “This is where, in my view, the Crown has an obligation to understand the financial interests” of First Nations and to make this clear at the initial stage, says Schachter. He describes the process as a “patchwork quilt” in Manitoba, depending on which level of government is involved.

Unlike the situation involving the Kapyong Barracks, the federal government took another approach with parcels of land in Vancouver and West Vancouver, which is some of the most lucrative real estate in the country.

Canada Lands entered into a joint ownership agreement in the fall of 2014 with a consortium of First Nations to determine what to do with the land, which could ultimately be worth billions of dollars.

One of the parcels is known as the Jericho Lands, a 52-acre parcel in the Point Grey section of Vancouver and near the campus of the University of British Columbia. Residential properties in the area can go for millions of dollars. For example, a 2,400-square-foot detached home on a crowded residential street south of the Jericho Garrison recently listed for $2.8 million.

It may be several years before there is a disposition of the Jericho Lands, which have a military base and mostly park-like setting, but there is still controversy over what the provincial government intends to do with its section of the lands (which was not part of the 2014 agreement).

David Eby, a lawyer and the New Democrat member of the legislature for Vancouver-Point Grey, has been pushing the provincial government for more information about its intentions.

“The first obligation is to talk to First Nations,” says Eby, a former head of the B.C. Civil Liberties Association. “Once First Nations issues are addressed, there are broader obligations in my opinion. This is not simply a property you sell to close up a gap in the budget. Once it is sold, it is gone forever,” Eby states.

The deal between Canada Lands and First Nations related to its section of the Jericho Lands includes a commitment to a multi-year consultation with residents and the city before it is sold to a developer, Eby points out, which is what he says the province should be doing as well.

Given the affordable housing crisis in Vancouver, the potential revenue from a sale of these lands must provide some longer-term benefit, says Eby, who is also the NDP’s provincial housing critic. The obligation on government to consult broadly before any sale “is proportionate to the impact of the land to the community,” Eby suggests.

For its part, the B.C. government has said that it is consulting with First Nations, but the province’s ultimate intention with its share of the land is still not known.

The more lucrative or higher profile the government-owned land that is being sold, the more likely there will be increased scrutiny and a need to ensure the broader public good is reflected in the transaction, says Jamie Klein. “People tend to look at these [public] lands with a keen eye. They feel they have a vested interest” in what happens with the property after there is a disposition, he adds.

As a result, for the public agency involved in the process, it is not simply a matter of seeking the most money for the land, says Traub. “This selection will not necessarily be the highest bidder, but the best purchaser for the property,” he explains. “Governments are so selective” and money is just one of the factors, he adds.

Other factors include possible conditions on any sale so that the development is not out of place within the existing community, or provides some benefit that the current government is not able to provide as a result of budgetary restraints, says Traub. “There are always going to be differences of opinion. You have a political process. But you don’t want to put yourself at risk,” politically or otherwise, he says.

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