A real estate investment trust has launched a $10-million claim against Torys LLP for alleged negligence and breach of its fiduciary duty on a now-rescinded real estate transaction.
A real estate investment trust has launched a $10-million claim against Torys LLP for alleged negligence and breach of its fiduciary duty on a now-rescinded real estate transaction.
Partners REIT retained the international business law firm to act for it in a 2014 real estate transaction — known as the Holyrood transaction — that it entered into based on advice received from Torys lawyers, according to an amended statement of claim filed on Jan. 9.
The REIT later discovered that Torys had knowledge that the purchaser in the transaction had been working jointly with the CEO of the time to fend off a hostile takeover, the claim said.
The REIT also claimed that Torys had allegedly preferred the interests of other clients over those of Partners REIT when it found itself in a position of conflict. None of the allegations has been proven in court.
Les Viner, managing partner of Torys, confirmed that no claim has been served on the firm.
“We will respond if and when we are served with a claim,” he said in an email.
In its statement of claim, Partners REIT said that, in the transaction, the trust acquired retail centres in Hamilton, Kemptville and London, Ont. from Holyrood Holdings Limited in exchange for 18.7 per cent of the REIT’s outstanding units.
According to the statement of claim, Holyrood was owned and controlled by Laura Philp, who Partners REIT later learned was a close friend and business associate of Ron McCowan, the REIT’s interim CEO, who owned approximately 14.9 per cent of the REIT’s outstanding units.
Partners REIT also discovered that Torys had knowledge of the nature of their relationship, the claim alleges.
The claim alleges that, in 2013, Torys acted for McCowan when he acquired 14.9 per cent of outstanding units of Partners REIT and the right to manage the trust. Torys was appointed as counsel to the trust and its trustees, and the firm then provided legal advice to both McCowan and the putative trustees with respect to the change of trustees — failing to appreciate this might place the firm in a conflict, according to the statement of claim. Partners REIT argued that Torys knew or ought to have known that the legal and commercial interests of McCowan might not always align with those of the REIT, according to the claim.
Faced with a possible hostile takeover of Partners REIT at around that time, Torys told McCowan that he needed to secure a “blocking position,” meaning a third party friendly to him would sell assets to the trust in exchange for enough equity that would deter a takeover, according to the statement of claim.
The trust claimed that it was this need to preserve McCowan’s control over the trust that underpinned Torys conduct, as it was not a need of the REIT, and it did not “recognize, disclose, or seek their clients’ informed approval of this conflict.”
McCowan and Torys advised trustees that, in order to grow the REIT, McCowan had approached Philp about her interest in selling properties to the trust in exchange for securities and mortgage assumptions, the statement of claim said. McCowan held her up as “an arm’s length business woman who carried on a real estate and nursing home business” with whom he had shared office space.
“Torys did not disagree with Mr. McCowan’s representations about Ms. Philp even though it knew or ought to have known, and ought to have disclosed to the REIT” the extent of their relationship, according to the statement of claim.
It turned out that McCowan and Philp were actually close friends and business associates going back to the early 1980s, according to the statement of claim. They had frequently provided loans to each other and he had managed various properties for her and was CEO of some of her companies, according to the statement of claim.
Torys knew the two had been acting jointly by Jan. 22, 2014 at the latest, said the statement of claim, which added “any reasonable lawyer would have advised Partners REIT to either not close the Holyrood Transaction or to have it approved by a vote of its disinterested unit holders.”
Torys also found itself acting for Partners REIT with respect to the purchase of these properties at the same time that the firm was advising McCowan on how to deter the hostile bid, according to the claim.
“Torys saw the need to close the Holyrood transaction through the lens of McCowan’s lawyers, not Partners REIT’s lawyers,” the statement of claim said. “The former needed completion of the Holyrood Transaction urgently. The latter did not.”
The fact that the two had been allegedly working jointly was problematic as Partner REIT claimed it was under the mistaken belief that no insider within the trust had an interest in the transaction, that the transaction would not materially affect control of the trust and that, in closing the transaction, Partners REIT was complying with securities laws.
It wasn’t until after the transaction closed that Partners REIT became aware of their close relationship and that they could be “considered acting together under applicable securities regulation,” the claim said. When the REIT learned this information, it claimed it immediately retained new counsel and looked to rescind the transaction.
The REIT claimed that it completed the transaction without an independent valuation and without seeking the approval of disinterested unit holders based on Torys’ legal advice.
The trust also claimed that Torys knew representations the trust then made to the TSX about the transaction were false, as the firm knew McCowan had a financial interest in the transaction and that it would affect the control of the trust by creating a blocking position. The REIT claimed it needlessly spent millions of dollars as a result of Torys advice on negotiating the transaction, agreeing to the purchase, investigating the alleged misconduct and unwinding the transaction. The lawyer representing Partners REIT, Paul Pape, said in an email that the claim had not been served.
