Quest University has asked the courts to allow the school to defer rental payments for four of its residences, to the chagrin of the student housing owner.
On June 10, the lawyer for the school, John Sandrelli, asked Justice Shelley Fitzpatrick to allow Quest to defer rental payments for June, July and August — an amount equal to about $720,000
However, during the online hearing, the counsel for Southern Star Developments, implored Fitzpatrick to deny that request.
Southern Star was identified in court documents as the owner of the buildings. Its president, according to the documents, is Squamish developer Michael Hutchison.
This hearing took place about two weeks after the school won an extension to its financial protection under the Companies' Creditors Arrangement Act, or CCAA. The school will be shielded from bankruptcy or receivership until Aug. 10 with the possibility of a further extension until Sept. 30. The September extension will come into effect if Quest is able to negotiate an agreement with an interested academic partner.
Quest was also granted permission to borrow an extra $3 million to cover its costs in the meantime.
The interim loan does not cover the costs of rent.
Sandrelli noted that the school collects rent money as part of tuition costs each year. Students were not refunded that portion of their tuition after the pandemic hit.
Quest's argument was that the COVID-19 pandemic forced the school to empty its residences. The facilities are not being used, and, as a result, they should be able to put off their rental payments for the summer.
The provincial health officer banned gatherings of 50 people or more, said Sandrelli, meaning Quest had to vacate its residences.
Fitzpatrick, however, noted the order appeared to be aimed at events and mass gatherings, and wondered if that applied to student residences where students have individual rooms.
"Let me concede that the order does not preclude [using a residence] — I take the point," said Sandrelli.
"[But] most, if not all, post-secondary institutions took steps in light of the state of emergency order, the mass gatherings order, as well as the essential services declaration to, again, shut down their in-person experiences."
Sandrelli also said that there was nothing in the CCAA that says the school must pay rent while under its protection.
"There is no provision in the CCAA that requires post-filing rent to be paid," he said.
The closest rule suggesting this says that the CCAA protection doesn't prohibit someone from requiring payment for the use of leased property, he said.
However, the residences are not being used, Sandrelli said.
Finally, Sandrelli said that the lease payments to Southern Star are not true lease payments, but rather a form of financing. This could change how the law applies to these payments.
"They are not leased property as properly interpreted, rather, in the circumstances of this case, as structured, they're really financing transactions," he said.
That's because, under an agreement with Southern Star Developments, the buildings are to be given to Quest after 25 years.
Quest owns the land on which the residences sit, but the development company built the buildings and currently has ownership of them.
The court heard that as part of an agreement with the university, Southern Star will transfer the facilities to Quest after 25 years so long as the school pays its rent and issues a charitable receipt to the company.
"So that's the spirit of the transaction," said Sandrelli. "That is — enter into a lease that mirrors the financing costs associated with what's required for constructing the residences."
This makes the payments more like a financing arrangement and not a true lease, Sandrelli said.
This could mean Quest is not obliged to pay the rent while it's under CCAA protection, he said.
On the other hand, the lawyer for Southern Star, Peter Reardon, said that there are still some people occupying the buildings so they are being used.
Sandrelli, however, said that these occupants were only there to function as building caretakers.
The residences continue to be used as a selling point to attract students and potential academic partners or buyers, Reardon said.
"That is a use Quest is making of the residences," he said.
Reardon also questioned whether provincial health officer Dr. Bonnie Henry's order applied to Quest residences. When looking at the wording of her order, Reardon said that there isn't anything saying that Quest was forced to close down its residences.
"You have nothing, I think, to show you that the [provincial health officer] had ordered a business like Quest to close," said Reardon. "Quest chose to do so."
Reardon also said that the rent that Quest is paying for the residences is for a "true lease," as the school is paying for use of the buildings.
Finally, he pointed out that there was no deadline or time of payment. Quest said that it was not asking to forgo the rent entirely, just to delay its payment. But Reardon said that there was nothing that would ensure Southern Star would get paid by a specific time.
"Nowhere have we been told — or has it been suggested — how rent will be paid at some point in time. It doesn't say when and it doesn't say how," he said.
A lawyer from Bank of Montreal, the creditor for Southern Star, also weighed in, asking Fitzpatrick to deny Quest's request.
"The petitioner cannot have it all," said Poisson.
"They cannot choose to stop paying rent but keep the student residences available at no cost indefinitely while Southern Star does not receive the income with which to pay its mortgage obligations, thus defaulting, thereafter preventing BMO from acting on the defaut."
Poisson said outstanding balance on the mortgage is about $34 million.
Fitzpatrick did not make a decision that day. She said she will make a ruling as soon as possible, but didn't give a date.
In the meantime, Quest has paid its June rent to court-appointed monitor, PwC. The monitor will hold the rent in trust until the judge makes her decision.
If the school succeeds wins this case, it will receive the money back.
