Quest University was denied its application to defer its rent payments for four of its student residences.
As a result, the school will have to pay rent for June, July and August, which amounts to about $720,000.
In May, Quest had won an extension on its financial protection under the Companies’ Creditors Arrangement Act, or CCAA, but the extension did not allow the school to defer its rent. As a result, earlier this month, the school asked the courts to allow the university to defer its rent for the three summer months due to the financial hardship it was facing.
On June 19, Justice Shelley Fitzpatrick’s written reasons for judgement were published.
In it, she dismissed the school’s application for a rent deferral, saying it was “manifestly unfair.”
“Quest’s request is not for a very short time...rather, it is for a longer period (three months) and with no real end date. The result of this deferral would be to require that Southern Star become an unsecured creditor of Quest through the means of this restructuring,” wrote Fitzpatrick.
Southern Star Developments, whose president is local developer Michael Hutchison, owns the residences.
“The deferral would mean significant negative consequences to Southern Star, likely [Bank of Montreal] taking default proceedings under its security,” Fitzpatrick said.
She noted that no protection or compensation for the delay of payment has been offered to Southern Star. The company would be exposed to significant risk should Quest fail in its restructuring, she said.
Fitzpatrick said that some parties, such as the Vanchorverve Foundation — Quest’s biggest lender — will receive a benefit from the rent deferral.
“I fail to see why Southern Star (and indirectly, BMO) should bear substantial risk and loss to allow all of the other stakeholders to enjoy this benefit. It is, in my view, manifestly unfair,” she wrote.
In her decision, Fitzpatrick addressed some of the key arguments made by Quest.
During a hearing earlier this month, the school’s lawyer, John Sandrelli, argued that the arrangement between Southern Star and the university was not a “true lease.”
As a result, this could change how the law governs this arrangement, and could mean Quest is not obliged to pay the rent while it's under CCAA protection.
Under an agreement, Southern Star built and owns the four student residences, but Quest owns the land upon which they stand.
The corporation is leasing the buildings to the school, but will transfer the buildings to the university after 25 years so long as the university pays its rent and issues a charitable receipt.
As a result, Sandrelli characterized the arrangement as more of a financing arrangement and not a true lease.
In her decision, Fitzpatrick said she disagreed.
“The subleases only reflect normal real property lease terms; use in exchange for rent. There is no reference to financing or even the possibility of Quest acquiring equity in Southern Star through the means of paying rent,” Fitzpatrick wrote.
The only underpinning for the argument, she said, is that the amount of rent is linked to the cost of financing. But this does not change the leases into something else.
“This only means that rent is calculated by reference to the cost of that financing. The basis for the rent calculation, either on its own or in the context of the entire document, does not elevate the subleases, whether in form or substance, to something they clearly are not.”
As a result, Fitzpatrick said she did not interpret the leases to be a financing arrangement.
A second major argument used by Quest’s lawyer was that it was forced to empty its buildings due to the COVID-19 pandemic. Since the buildings aren’t being used, they should be able to put off their rental payments for the summer, Sandrelli said.
However, Fitzpatrick’s decision says that the buildings are in fact being used.
She wrote that Quest is allowing staff members to reside there.
The university was “more than able” to fill the residences with students or other people as of June, which is something it has done in past summers, Fitzpatrick wrote.
“As of June and continuing into July and August 2020, the principal reason why the residences are vacant is no different from previous summers,” she said. “In previous summers, Quest continued to pay rent to Southern Star since it was still ‘using’ the residences under the terms of the subleases”
Fitzpatrick also said that Quest was using the residences as a key selling point to attract potential partners.
