



COURT
OF APPEAL FOR BRITISH COLUMBIA




Citation:



Edgewater Casino Inc. (Re),









2010 BCCA 16




Date: 20100118

Docket: CA035922

In the Matter of the
Companies Creditors Arrangement Act
,
R.S.C. 1985, c. C-36, as amended

In the Matter of the
Business Corporations Act
,
S.B.C. 2002, c. 57, as amended

In the Matter of Edgewater Casino Inc. and
Edgewater Management Inc.

Between:

Canadian Metropolitan Properties Corp.

Appellant

(
Applicant
)

And

Libin Holdings Ltd., Gary Jackson Holdings Ltd.
and Phoebe Holdings Ltd.

Respondents

(
Respondents
)






Before:



The Honourable Mr. Justice Mackenzie





The Honourable Mr. Justice Lowry





The Honourable Madam Justice Neilson




On Appeal from: 
Supreme Court of British Columbia, March 5, 2008,
(
Edgewater Casino Inc. (Re):  Property Tax Issue,
2008 BCSC 280,
Docket S062842)




Counsel for the Appellant:



J. Hunter, Q.C.
J. Henshall







Counsel for the Respondents:



M. Buttery
A. Folino







Place and Date of Hearing:



Vancouver, British
  Columbia





December
  8 and 9, 2009





Place and Date of Judgment:



Vancouver, British
  Columbia





January 18, 2010









Written Reasons by
:





The Honourable Mr. Justice Mackenzie





Concurred in by:





The Honourable Mr. Justice Lowry
The Honourable Madam Justice Neilson






Reasons for Judgment of the
Honourable Mr. Justice Mackenzie:

[1]

This appeal arises as a result of a dispute between a lessor and lessee
over the premises housing the Edgewater Casino in downtown Vancouver. As with
most commercial leases, the disposition of this matter turns on how the parties
intended to, and how they in fact did, arrange their mutual responsibilities
for the premises.

[2]

These reasons address two issues raised on this appeal, the
apportionment of property taxes between landlord and tenant, and whether the
tenant is obliged to contribute to the costs of a successful property tax
appeal.  Both issues turn on the interpretation and application of provisions
in clause 3.05 of the lease between the parties.

The
Property Tax Issue

[3]

Clause 3.05 provides that the respondent tenant will indemnify the
appellant landlord for the portion of the increase in property taxes arising
from improvements to the property made by the tenant.

[4]

The lease, technically a sublease, covered part of land leased by the
landlord on the north side of False Creek in Vancouver, known as the Plaza of
Nations site.  The site included three buildings, designated A, B, and C, and a
plaza stage for outdoor entertainment.   Building A  and most of building B
remained in the landlords possession and were not included in the lease.  The
tenant extensively renovated building C to convert it to a class II casino and
also renovated a small part of building B for commercial offices. The tenant
was reported to have spent up to $20 million on the renovations of building C,
including the cost of gaming equipment installed in the casino.

[5]

Immediately after the renovations were completed, the property tax
assessed value of the landlords parcel (including the leased premises) increased
from $32,972,000 in 2004 to $59,600,000 in 2006 (reduced on appeal to
$47,500,000).

[6]

The material part of clause 3.05 of the Lease states:

3.05 Taxes for the Lands

The Landlord will be solely responsible for the payment of
all real property taxes for the Lands, except that commencing in 2005, and
continuing in each calendar year thereafter, the Tenant will reimburse the
Landlord for that portion of the increase in the property taxes assessed
against the Lands over the amount of taxes that were payable for the Lands in 2004
which is solely attributable to the increase in the assessed value of the Lands
as a result of the improvements made to the Lands and the Premises by the
Tenant,
determined using the principles and methods used by the British
Columbia Assessment Authority in determining the assessed value of the Lands
.
[Emphasis added.]

Within the lease Lands is
defined to mean lands and all improvements thereon....  Premises is defined
to mean the premises leased by the tenant, including building C, part of building
B, and the plaza building.

[7]

The first issue is the proper basis for determining what portion of the
increased property tax came as a result of the tenants improvements.  The
chambers judge concluded that the portion should be determined on the basis of
the increased building values on the property assessment notices from 2004 to
2006.  The difficulty arises from the fact that while the buildings value
increased from $1,268,000 in 2004 and 2005 to $5,455,000 in 2006, the total value
of the landlords property rose from $32,972,000 in 2004 to $47,500,000 in
2006.  This was largely a result of an increase in value assigned to land from
$30,504,000 in 2004 to $40,777,000 in 2006.  The landlord contended that a
substantial portion in the increase in value assigned to the land resulted from
the tenants improvements.

[8]

The chambers judge rejected that submission.  He concluded that the
increase in taxes allocated to the tenant should be based on the increased
building values set out in the property assessment notices.

[9]

The landlord submits that the chambers judge erred in failing to give
effect to the provision in clause 3.05 that the increase in property tax
assessment solely attributable to the tenants improvements should be
determined using the principles and methods used by the British Columbia
Assessment Authority in determining the assessed value of the Lands.  The
evidence demonstrates that the Assessment Authority (BCAA) adopted an income
capitalization approach to the valuation of the subject property.  Essentially
the approach involved determining an estimated net operating income (NOI) and
applying a capitalization percentage rate to produce a valuation of the
improved portion of the property.  The report of Philip Gertsman, the expert
employed by the landlord for the conduct of the assessment appeals, explains
the income method in more detail:

·

The square footage of the rentable areas of the various
components is determined

·

Market rents are determined for the various components

·

The rentable areas are multiplied by the market rents (Gross
Potential Rent)

·

A stabilized vacancy and non-recoverable expense allowance is
deducted from the Gross Potential Rent to calculate a net operating income

·

A market capitalization rate is determined

·

The net operating income is divided by the capitalization rate.

[10]

The NOI did not change significantly between 2004 and 2005, when the
casino was under construction, but it jumped from $1,600,000 to $2,881,592 in
2006, when the casino was completed.  There were no other material improvements
to the Plaza of Nations site in the relevant period and Mr. Gertsman attributed
the increase in the NOI to the casino.  The increase in NOI flowed through to
the increase in total assessed value of the Plaza of Nations site from approximately
$33 million in 2004 to $47.5 million in 2006.

[11]

However, given the process for building value attribution used in
producing the property assessment notices, the increase attributable to the
casino improvements on the income approach is not reflected in the allocation
between land and buildings on the notices.  Instead, the notices show a
much more modest increase for buildings from $1.2 million in 2004 to $5.5
million in 2006. The allocation to buildings on the original 2006 assessment
notice was $17.5 million but as a result of submissions by Mr. Gertsman it was
reduced in successive appeals to $5.5 million.  He deposed that approximately
$2.7 million of this reduction reflected a reduction of the value of the casino
as a result of a change in capitalization rate, and increases in the vacancy
and non-recoverable expense allowances.  The balance of the reduction,
approximately $9.5 million, resulted from a reduction of an excess density
factor by the assessor under the income approach. A summary explanation of the
excess density factor is provided in the report of real estate appraiser Russ
Reynolds:

[T]he reductions obtained through appeal relate exclusively
to Buildings A & B, thus they are inconsequential when analyzing the
increase solely attributable to Building C. Mr. Gertsman successfully argued
that part of the assessment as it relates to Buildings A & B was redundant
(double counting) as the Assessor was valuing both the income value of
Buildings A & B as well as the value of the excess density that could only
be maximized if Buildings A & B were demolished. This is evidenced by the
2006 Property Assessment Appeal Board recommendation, which stated the
following:


The net income from two of the buildings had to be
revised because the income stream would be negatively affected in order to take
advantage of excess density on site.


This explanation demonstrates
how the reduction in value as a result of the excess density factor is only attributable
to buildings A and B and not attributable to building C, the casino.

[12]

Mr. Reynolds also provided an explanation for why so little of the
increase in the property value was allocated to buildings on the assessment
notice, and why this effect was further exaggerated by the application of the
2006 appeal reductions entirely to the buildings line:

The reason Building values appear
low, relative to their value by the Income Approach is because under the
Assessment
Act
there is a requirement to allocate values between Land and Buildings.
Consequently, values shown on the assessment notice have been allocated based
upon current (actual) market value and Building values have been allocated
based upon a residual valuation technique. Therefore, the Building assessed
values as shown on the property assessment notice and property tax bill, do not
correspond to the overall improvement value as established by the Income
Approach as shown on the Assessors Property Valuation Summary.

[13]

The tenant challenged the opinion of Mr. Gertsman with the expert report
of Tim Down.  Mr. Down opined that the Tenants 2006 property tax obligation
should be determined by measuring the difference between the 2004 Property
Assessments income approach to value and the 2006 Property Assessment Appeal
Board Decision Notice Value.  Mr. Down argued that no portion of the increase from
$30.5 million to $40.8 million allocated to land should be attributed to the
tenant because the result of the 2006 appeal meant that little or none of the increase
was assigned to the tenants improvements.  Mr. Reynolds disagreed.  In his
opinion, Mr. Downs comparison was inconsistent as it compared different
figures.  He argued that Mr. Downs erred in comparing values determined by the
income approach in 2004 to residual allocated values in 2006, instead of using the
properly comparable 2006 income approach valuations.  Mr. Reynolds agreed with
Mr. Gertsman that the combined effect of the income approach applied by the
assessor and the residual allocation used in the assessment notice embedded the
increase in value resulting from the tenants improvements in the land line
of the assessment notice.  He also agreed that the excess density reductions
achieved by Mr. Gertsmans submissions on appeal were properly assigned to
buildings A and B retained by the landlord and not to the building C casino
where the tenants material improvements were made.

[14]

The chambers judge did not address these issues as he relied solely on
the values allocated to buildings on the face of the assessment notices.  In my
view, that approach was in error as it failed to follow the terms of clause
3.05 and determine the values using the principles and methods used by British
Columbia Assessment Authority, namely the income approach.  Under that
approach used in this case, the values allocated to buildings on a notice
result from a residual calculation and do not reflect the income approach value
of the tenants improvements.

[15]

The chambers judge gave some weight to a 2006 invoice sent by the
landlord to the tenant that reflected a different approach than the income
approach.  The 2005 and 2006 invoices were inconsistent and were apparently
prepared by a clerk in the landlords office without regard to the principles
and methods used by the assessor.  In my view, they are of no assistance in
determining the proper application of clause 3.05.

[16]

The three experts agree that the assessor applied an income approach to
valuation.  Mr. Down disagreed with Mr. Gertsman and Mr. Reynolds on the amount
that is solely attributable to the increase in value as a result of the
tenants improvements. I am persuaded that Mr. Reynolds critique of Mr. Downs
analysis is correct and Mr. Down erred in comparing 2004 income values to 2006
allocated values in determining the increase in assessed value solely
attributable to the tenants improvements. Lands as defined includes both
land and improvements.  Consequently it is the increase in both resulting from
the improvements irrespective of whether it is reflected in the assessment
notice allocation between land and buildings.

[17]

I would allow the landlords appeal on this issue and direct that the
increase in value solely attributed to the tenants improvements be determined
as calculated by Mr. Gertsman and Mr. Reynolds.

The
Appeal Costs Issue

[18]

The second issue to be decided is whether the tenant is liable for expenses
claimed by the landlord for the successful 2006 assessment appeals, primarily
the fees paid to Mr. Gertsman as agent.  The chambers judge rejected that claim
on the ground that the lease did not require contribution as the tenant did not
participate in the appeals.  This issue, as with the prior one, turns on the
application of a provision in clause 3.05 of the lease which reads:

The Tenant is entitled to appeal
any assessment of the value of the Lands for property tax purposes or any
assessment of property taxes against the Lands, and the Landlord will
co-operate with the Tenant in any such appeal and permit the Tenant to conduct the
appeal in the name of the Landlord if necessary, and the Tenant will indemnify
the Landlord against the expenses and costs of the appeal.
If the Landlord
also wishes to appeal any such assessment that the Tenant wishes to appeal,
then the Landlord will allow the Tenant to participate in such appeal, at the
Tenants own cost, and the Landlord will take into account the interests and
position of the Tenant in prosecuting that appeal
. [Emphasis added.]

The landlord contends that the conclusion that the tenant
did not participate in the appeal is unreasonable.  It argues that the appeals
benefited both landlord and tenant and that the tenants representative, Gary
Jackson, met with Mr. Gertsman and the landlords representative and expressed
dissatisfaction with the 2006 assessment

[19]

Mr. Gertsman had acted as the landlords property tax consultant for
several years.  He was engaged by the landlord pursuing this appeal as the
party to which the assessment notice was directed. Mr. Gertsman deposed that he
understood at the end of the meeting that he was authorized by the tenant as
well as the landlord to appeal the assessment.  The landlords representative,
Daisen Gee-Wing, supported that understanding.

[20]

Clause 3.05 contemplates two alternatives, either a tenants appeal in
which the landlord lends its name if necessary in return for an indemnity
against costs, or a landlords appeal in which the tenant is allowed to
participate, at its cost.  In this instance, the evidence supports the
conclusion that the landlord appealed and engaged Mr. Gertsman.  The formal
letter of engagement is solely between the landlord and Mr. Gertsmans firm,
Deloitte & Touche.  The tenant had no involvement in pursuing the appeals
after the meeting referred to above.

[21]

The chambers judge concluded that the tenant did not participate in the
appeals and I think that it was open to him to find that Mr. Jacksons comment
at the meeting was insufficient to amount to participation in the appeal within
the terms of clause 3.05.  In my view that clause contemplates more active tenant
involvement and some attention to the cost exposure reflected in that active
involvement.  Those elements are lacking here.   Furthermore, the engagement
letter is a contract only with the landlord.  Clause 3.05 does not contemplate
the tenants liability for costs other than as a result of willing
participation in the appeal and in my view there is no equitable basis for a
cost-sharing obligation outside its terms.

[22]

Accordingly, I would not give effect to the landlords appeal on the
assessment appeal costs issue.

[23]

In the result, I would allow the appeal on the property tax issue and
dismiss the appeal on the issue of the costs of the assessment appeals.

The
Honourable Mr. Justice Mackenzie

I AGREE:

The Honourable Mr. Justice Lowry

I AGREE:

The Honourable Madam Justice Neilson


