Write Your Exam Code Here

_______________

Attachments:

Return this exam question paper to your invigilator at the Two Newspaper Articlesend of the exam before you leave the classroom.It —.

—— t —— — — —.— _____,.a__ —‘ ——— — r_J_

THIS EXAMINATION CON8I8TS 0511 PAGES (includIng this page)PLEASE t I THTYOUI1AVA ccMpi..ETE PAPER

THE UNYERSITY OF BRrnsHC0LUMrnAFACU.TYOFI.AW

FINAL EXAMINAT!QN December 2018

LAW 447Bs.QO1Topics In Commercial Law corporate FnançelFlnanclnq Trans;ctlons

Section 001Professor Fine

TOTAL MARKS: 100

TIME ALLOWED; 3.0 HOURS

TIIS EXAM CONSISTS OFT QUESTIONS

NOTE: 1. ThIs Is an open book exam and open notes examination.Candidates may make use of all reforqnco material including dictionaries.

ANSWER ALL QUESTIONS

THI5 EXAMINATION CONSISTS 057 QUESTIONS

Law 447B.O0l Page 2 of 11

QUESTION ONE: 10 Marks

Preliminaries and Onick Definitions

(a) During the course we talked a lot about the terms and conditionsincluded in loan documents However, decisions needs to bemade by a lender before even entertaining a loan facility. Pleaselist and BRIEFLY discuss the 5 C’s of credit decision-making.

(al))A developer must first find a piece of land he wants to develop.His first consideration will be what the current permitted use ofthe land is; or what he thinks it can potentially be used for. Inorder to find out the answer to the use issue he will need to checkwith city hail on the

_________________

of the land.(b) As a general rule there will be at least two lenders in a typical

project. These two lenders are called (1) lender and (2)the. lender. Briefly explain their functions aslenders.

(c) The first document between a lender and developer will likely bethe

___________

letter. Please explain why the name of thisdocument misleading.

(d). During the draw process for a development project the lenderwill send someone to inspect the physical property (amongstother steps) before the lender will make a project advance/drawto the borrower. This person is called the

______

(e) Sometimes a municipality may allow the developer extra floorspace and or relaxations for a project in return for the developerproviding accouterments that may serve civic purposes.. Pleasename some examples of what a developer may be asked toprovide.

(I) There are two basic mechanisms a lender can choose in puttingin place the person a Receiver. What are the ways and what isthe title of said person depending on how he is installed?(continued on next page)

Law447B..OO1 Page3ofll

(g) There is a cap on what interest rate a lender can charge for aloan. In addition to the face rate of interest name two othercosts a lender may charge the borrower that may be included forthe purposes of determining whether a lender is over the legalrate of interest that can be charged.

(h) Often when there are more than one lenders to a project the firstlender may ask the secondary lender to execute a

_____________

agreement. Included in this agreement there will also more thanlikely be a term called a

_______________

clause. Briefly explainthe purpose of this term.

(I) In addition to the lenders to a construction project there arealso other participants. Please name two others in the “cast ofcharacters” involved in a construction project.

END OF PAGE

Law 447B. 001 Page 4 of 11

QUESTION TWO: 10 Marks

Section 347 of the Criminal Code

Please answer the following questions related to s.347 of the CriminalCode of Canada

(a) What is the actual rate expressed on a per annum basis in the sectionat which number it becomes a criminal rate of interest?

(b) s. 347 of the Criminal Code was likely not directly intended tospecifically target commercial lending commerce. What did we discusswas the real target of the legislation? What other amounts charged bythe lender besides the face rate of interest will be included in thecalculation to determine if s.347 has been breached. (You should be ableto name at least 3).

(c) In the past courts have held that if s347 was breached a lender maybe disentitled wholly to receiving any interest at alL However, in aseries of Ontario cases which cases were ultimately referred to by theSupreme Court of Canada, a number of factors were isolated indeciding whether a lender could still receive interest in the face of abreach of s347. Please discuss these factors.

(d)There is a clause that is generally included in a lender’s document inthe interest provision section of the contract in an attempt to alleviateany adverse consequences of breaching s.347. What is the explanatoryheading of this clause and briefly explain its intent and operation.(continued on next page)

\Law 447B. 001 Page 5 of 11

(e) Do you think the law should provide for a maximum interest ratethat can be contracted for between lenders and borrowers and why orwhy not. (Your opinion is being asked for) Finally, if a lender wants tohave a return greater than the maximum allowable interest under s.347briefly describe a method he can legally employ to obtain such a return.

QUESTION THREE: 10 Marks

Corn mitment Letters

(a) The commitment letter sets the tone for the relationship between alender and borrower. One of the first steps is to adequately describe theparties to the contract as well as the purpose of the relationship(description of the project). Please discuss the importance of theseseemingly obvious necessary terms. (Hint: they relate to consequencesshouldpost the commitment letter otherparties become partners in theproject with the borrower and to potential default consequences under themortgage relating to the intended description of thepurpose oftheproject).

(b) A commitment letter will always have, inter alia, conditionsprecedent before the lender will be required to fund. The list will varydepending on the type and nature of the project. However, there aremany usual standard type conditions precedent that will almost alwaysbe in the list of conditions precedent, in particular when it is for aconstruction project. Please list at least 4 conditions precedent tofunding that a lender will likely insist on and a brief discussion as towhy a lender would insist on them. (Hint 4fyou are totally stuck: Wediscussed that a lender may at some point have to “take over” a projectand thus build it himself, albeit through a receiver. To do so the lender orits agent will need to be able to “step into the shoes” ofthe developer somay require amongst other things assignments ofnecessary maters).

Page 6 of 11

(c) A commitment letter is often intended to survive through the entirerelationship between the parties. Accordingly, the commitment letterwill almost always be incorporated by reference into what document?

END OF PAGE

Law447B.001 Page7ofll

QUESTION FOUR: 20 Marks

Construction Mortaa

(a) If the parties are now operating under a construction mortgage itmeans that all the terms and conditions precedent in the commitmentletter have been satisfied and the actual project is underway. Let usassume a $10,000,000 loan construction budget has been arrangedand that the developer was required to have at all times a minimumof $1,000,000 of his own money in the project (i.e. he bought theoriginal land for $1,000,000 with his own $ and the lender is loaningthe rest to build the structure). Let us further assume the developerhas in his budget an excavation cost of $1,000,000. Let us say he isone month into the project and that excavation was supposed to taketwo months and the cost budgeted to be evenly spread over the twomonths. He has incurred in month 1 $500,000 in excavation costand wishes to submit a request (draw) to the lender so he can pay hissub trade excavator. Please describe the process which will befollowed so that the developer/borrower can obtain his $500,000from the lender. (Hint: this processisfollowedfor each and eveiydraw).

(b) Let us assume that our developer is now at the end of month two.All excavation is completed and it turns out that the excavation billfor the work done in month 2 is $520,000 for a total cost over the twomonths of $1,020,000 ($20,000 over budget). The original budget ofthe developer, which the lender based his approval upon, is now offside. List two alternate thIngs the developer can do to deal with thissituation to account for this $20,000 so he is still within theparameters of the over all budget and thus stay onside with hislender. (hint: the budget itselfwas likely not inflexible).(continued on next page)

\Law 447B. 001 Page 8 of 11

(c) Let us assume that the lender discovers a lien against the propertyat some point through the construction period. Why would a lenderbe reluctant to advance any further funds under his constructionmortgage?

(d) Let us assume that part way through the construction of thestructure it is destroyed by fire. What would the lender have likelyhave included in the construction mortgage (and the commitmentletter) to assist him in protecting his security in such an event.

(e) In certain circumstances a lender may feel obliged to take theproject away from the developer. The construction mortgage willoften contain the right of the lender to “step right in” and take itover for breach of the contractual terms; making him a mortgagee inpossession. If a mortgagee does not go through the courts but simplythrows the developer off the site and takes it over himself through hiscontractual right to do so; what is one of the main risks the lenderfaces in proceeding in this manner.

(f) Let us assume that our budget of $10,000,000 turns out to be low.Let us further assume that the project is not finished and that thereare liens on the property amounting to $2,000,000. Our constructionlender has already advanced $9,000,000 prior to these liens beingregistered so the $9M ranks ahead of the liens. However, $2M moreis required to finish the project so that it can be sold in order for thelender to get back his $9M. In addition, the developer/builder hasdisappeared. Discuss how the lender should proceed so that he canadvance money to the project so it can be finished and be assuredthat this additional money will be secured in priority to the liens hehas now discovered.

Law 447B. 001Page 9 of 11

QIJEST1ON FiVE: 10 Marks

Olympic Village and Sophia Development

During the year we discussed the situations that presented themselves inthe course of these two projects. Please answer the following questionswith respect to them:

(a) The two projects had many pre sales prior to construction and tofinishing construction. What is the reason for a pre salerequirement and who most likely would have insisted that thedeveloper obtain pre sales?

(b) A pre sales requirement can consist of one or more componentelements. Please discuss

(c) In the Sophia project what ultimately was the havoc caused byhaving so many pre sales?

(d) In respect of the Olympic Village, what was unusual about thepurchase of the land component of the project? Who stood togain the most by ths circumstance?

(e) As you know, in the Sohpia project a “divorce” took placebetween the lender and the developer. What action did thelender take to manage the completion of the project? What wasthe dilemma faced by this person. What parties were beingaffected/most affected by the entire situation and bow were theybeing affected.

Page 10 of 11

(I) Dealing specifically with the pre sale purchasers in developmentprojects, do you think there should be a mechanism forprotecting their rights? If so, what method(s) do you thinkshould/could be adopted to provide them with more rights?

END OF PAGE

Law447B. 001 Page 11 ofli

QUESTION SIX:

COURSE MATERIAL; 20 Marks

Throughout the term we went through the various documents necessarybetween a developer/borrower and a lender in order to take an emptypiece of land and turn it into a project of one type or another. Along theway we discussed issues and situations, which occur through the life of aproject; how unseen difficulties can impact a borrower or lender andwhat can be done to minimize exposure to each party, etc.

Please discuss and outline what you learned in this course, if anything,about the practical as well as the legal considerations involved in thedevelopment/construction process. (This question, while there may besome overlap with your answers to the questions above, is meant toelicit a more general overall response to what you learned rather thanthe specifics of various issues which were covered in the exam).

QUESTION SEVEN: 20 Marks

You received two articles with this exam paper; “Development ofVancouver’s Olympic Village trapped in vicious, hollow circle andWESTCOAST HOMES KS THE VANCOUVER SUN, SATURDAY,MARCH 8,2008

Please pick one of the articles (please identify which one you havechosen) and discuss any practical, legal and general principles whichyou see at work in the article that we learned during the term. Also,discuss how this course (I hope!) helped you in understanding thesearticles more clearly. Also, during your discussion tie in your commentsto one or all of the 5 C’s of credit granting.

Development of Vancouver’s Olympic Vifiage trapped in vicious,hollow circle

Frances BuipVANCOUVER — Special to The Globe and MailPublished Thursday, Feb. 10, 2011 8:47PM ESTLast updated Thursday, Aug. 23, 2012 5:02PM EDT

The receivers for Vancouver’s Olympic Village are looking to rent some condos - at a loss - to help fill up theproject and make sure that retailers move in.

The 112-page plan, outlined by Ernst & Young and filed Thursday in B.C. Supreme Court, notes that one ofthe several reasons the marketing effort last year only attracted 30 buyers was because of the lack ofshopping in the nine-block development.

London Drugs, the Urban Fare grocery store, and a Mark James brew pub were supposed to be part of theVillage’s attractions.

Those spaces remain vacant and the receivers were warned that “if occupancy levels remained near the lowlevels, the major proposed tenants had advised the receiver that opening for business in their proposedlocation would not be feasible.”

And, if the large stores don’t come in, neither will the smaller ones, they noted.

As a result, the plan recommends renting out up to 127 of the higher-end condos (though none valued atover $1-million) even though Vancouver, which is on the hook for the $740-million owing on the project, islikely to see a loss. Not because the rents will be low. They won’t be.

But, because of a complicated situation inherited from the previous private developers who didn’t apply tostratify the units by the required deadline, the city will have to pay HST on the value of any condo that getsrented out. It would take o months of renting to recover that.

As well, those previously rented condos will likely sell for less at some future date or need to be refurbishedin order to get a good sale price.

In spite of those “adverse considerations,” the receiver’s plan says it is worth it in order to accelerateoccupancy at the Village.

The receivers envision seeing the Village 70 per cent occupied by the summer, compared to the 32 per centit stood at in mid-November.

However, it’s anticipated that it could take as long as three years to sell everything in the project. And thereceiver says it has no prediction on whether the city will get back all of its money.

The rental issue is just one of the many complications the receiver has had to grapple with to come up witha plan for the Village, as the city tries to get back as much as possible on the money it is still owed for landand construction costs after the private developer, Millennium Development Corp., agreed to have it placedin receivership.

That plan currently envisions putting 230 ofthe condos up for sale through a marketing re-launch nextweek, with prices reduced about 30 per cent from what they were last May. The most expensive condoswould be held off the market for now, while up to 127 might be rented.

Some of the other dilemmas:

The prices needed to be reduced, but not so much that it would damage the equity of people who alreadybought in. So the plan emphasizes that the pricing due to be announced next week “is not intended torepresent a ‘fire sale’ or drastic discount in order to accelerate sales.” Instead, it says, the prices are meantto reflect actual market value.

* The market can’t absorb all 480 units at once, so the receiver is holding back about 250 units. But thatcosts money. Not only does the city have to pay interest on the loan that goes unpaid while those condos sitempty, but it has to pay the strata fees on the empty units.

Besides figuring out future sales and rentals, the receivers have also had to deal with current problems - allof which are adding up to more bills for the city.

When the cold snap hit in December and the project’s unusual capillary-mat system didn’t functionproperly, the receiver had to arrange to have electric heaters delivered to some units as well as get theexisting system repaired.

The heat also had to be turned up to a minimal level in some of the empty apartments in order to preventthe cold from permeating the occupied units. The receiver has had to hire extra security to make sure thatthe high number of vacant buildings and units are protected.

&port Typo! Error

Follow Frances Bula on Twitter: fabulavaricouver flittps://titft’r.coJn/@fabuk1uczncouutr]

More related to this story

• Vancouver’s 01 .iij3ap1nns decpdscQjjj2sondo sale

• !teli2i1ftts HuI2mpie JIQS mJqrr says• 01’ nic” -o’hTiouver mivor’s DOjjtv

Nextsto1y;::?

C’,

---4

0i

___ho

2

Sophia more than a buyer, seller drama: All of us are players We can learn,for example, about pre-completion caution

WESTCOAST HOMES K8 THE VANCOUVER SUN, SATURDAY,MARCH 8, 2008

ASI was driving to BC Place two Saturdays ago, my thoughts were focusedon the final two days of the home show. The sun was shining, the air wasstill — ideal conditions for many outdoor activities revered by folks here inLotusland-by-the-Sea, but not so good for attendance at indoor shows. As Ineared the stadium, storm clouds appeared, via my celiphone. ShannonPatterson, a hard-working reporter from CTV, called to ask if I had heardthat Sophia, an 8 1-unit condo project in Vancouver’s Mount Pleasantneighbourhood, was placed in receivership. No, I told her. When I returnedhome that evening I discussed the issue with my wife, telling her I wasfeeling quite disconcerted. I said if I am that gloomy, I can’t imagine whatthose 81 purchasers were feeling. They, too, found out about thereceivership that day, most of them long after I was informed of it. 85-percent built An attractive eight-storey building, Sophia now sits idle, 85-percent complete, more than two years after the first sales were achieved in2005. David Bowra of the Bowra Group is the courtappointed receiver, thesame guy who was receiver for the ill-fated Riverbend development lastyear. Just after this column was filed (darned editorial deadlines), Bowrasubmitted his recommendations to the B.C. Supreme Court for itsconsideration and judgement. A court date has yet to be set. Developer BillEden of the Eden Group said he ran out of viable options, attributing thereceivership to ongoing problems with higher-thananticipated labour costs, athree-month strike by Vancouver civic workers, delays in the city’sapprovals process, and mounting financing challenges. This is not the firsttime the Eden Group has cancelled a project. Last fall, two Vancouverprojects were cancelled, both before a shovel entered the ground. At thetime,Icommented that the cancellations were appropriate since thepurchasers—mostly investors — only bought in two to three months priorand delaying the inevitable would have mired the developer and purchasersin financial quicksand. Not so with the Sophia situation. Many people areaffected significantly by the receivership. Some have waited more than twoyears to move into their condos, located in an up-and-coming, vibrantneighbourhood. Predictably, they are experiencing a range of emotions:sadness, anger and confusion. Claire Munroe and partner Josh Alter, both

27, purchased their one-bedroom condo in early 2006. Their projectedpossession date was the summer of 2007, then winter of 2007, then thismonth, then spring. The delays were disappointing but toLerated because thesheer volume of construction activity in the Lower Mainland, including ashortage of skilled labour, was well documented. Munroe said she and Alterjust celebrated their fifth anniversary together and were looking forward tomoving from their Kitsilano rental and taking their first step onto the homeownership ladder. “We already shop and dine in the neighbourhood andwere excited about being part of our new community,” said Munroe.“Hopefully, the judge orders the completion of the building and allows us tocomplete the purchase of our condo at the price we paid two years ago.Right now we are ridingaroller coaster of emotions; it’s not a good feelingknowing our future is uncertain,” she said. Bright, articulate and feisty,Kristen Gray is just 22 and has been saving for her first home since she was16. Gray works for a prominent residential developer who has allowedKristen time at work to spearhead efforts to contact other purchasers toestablish e-mail information chains and organize meetings where they candiscuss the receivership process and possible outcomes. ‘My dream house’“1 did lots of research beforelbought at Sophia. This was supposed to be mydream home. I bought furniture and made plans for the move. Just incase ,Ispent last weekend looking at other condos all over Vancouver but,you know, I couldn’t find a single placelwould rather live,” said Gray. Graypurchased her condo on assignment last August from an original purchaser.She paid the market value of the condo at that time, essentially remitting tothe seller the lift (profit) in real estate values since the original purchase (eg.,if the original purchase price was $250,000 and the condo is now valued at$350,000, the lift is $100,000). In Gray’s case, she paid the lift applicable toher unit and the down payment to take over the contract. Thankfully, bothlift and deposit are held in trust. No such luck for Michael Nowak andfamily. In October, Nowak, 33, and his wife Paulina, whohaveasevenmonth-old daughter, sold their home in Windsor, Ont. andmoved toaVancouver apartment. Like Gray, Nowak purchased a condo froman original purchaser, but, unlike Gray, he did not have the lift ($120,000)and deposit ($16,000) placed in trust. He paid the seller cash, up-front, so ifthe judge decides Sophia will be completed but purchasers must kick inthousands more to secure their homes, Nowak might have no choice but topay the extra cash. He is currently seeking legal advice. ‘Such nice people’“Originallyiwas stressed out. I felt swindled. Now, after meeting all theother purchasers, my family is actually looking forward to moving into thebuilding. They are all such nice, friendly people, it will be great to have

them as neighbours. That is, of course, if all goes well in court,” saidNowak. Which begs the question, are assignments problematic? Somedevelopers allow them while others do not. “Our purchase-and-saleagreements oniy allow for assignment with our written consent once thebuilding is 100 per cent sold out,” said David Podmore, president of ConcertProperties. Podinore added he would consider selling his personal homebefore he subjected his purchasers to the trauma and uncertainty of areceivership action. So, what is to become of Sophia purchasers? B .C.Supreme Court will decide, likely this month. My strong desire is that thepurchasers — cash-strapped first-time buyers, downsizing emptySophiamore than a buyer, seller drama: All of us are players We can learn, forexample, about pre-completion caution Sophia is the third new-home projectthat the Eden Group has abandoned. it is also almost ready for occupancy.One leader of the local development and residentialconstruction industrysays he would consider selling his personal home before he would subjecthis customers to the uncertainty of a receivership. See PRE-SALE K 10PETER SIMPSON SPECIAL TO WESTCOAST HOMESCONSTRUCTIVE THOUGHTS C]