A prominent Vancouver developer has been ordered to pay nearly $6 million under a profit-sharing agreement that it claimed was no longer in effect.
Boffo Investment Corp. and Boffo Developments (Smithe) Ltd.—subsidiaries of the Boffo Group of Companies—argued that the company that was the beneficiary of the profit-sharing agreement had repudiated it through the disreputable conduct of its principal owner James Schouw.
In a decision issued last week, B.C. Supreme Court Justice John Walker ruled that the agreement was still enforceable and ordered the Boffo companies to pay $5,945,162, plus interest, to Smithe Residences Ltd., Schouw’s former company.
3 downtown developments
Smithe Residences was the plaintiff in the case, which was initiated by the company’s receiver, MNP Ltd.
The company was one of three Schouw incorporated in the 2000s to acquire and develop downtown Vancouver real estate, specifically parcels on Hornby, Homer and Smithe streets, respectively.
Schouw had developed three other properties in the downtown core by the time he incorporated Smithe Residences, according to the decision.
“While lauded for their stunning design, it does not appear that they were profitable developments, in part because Mr. Schouw engaged in unconventional financing by issuing investment certificates with high rates of return for the investors,” the decision reads.
“Some investment certificates were also conversion certificates which allowed the holder to obtain substantial discounts if they purchased a unit in the development project.”
By 2009, Schouw and his companies were in “significant financial distress,” and in 2011, all three of the properties were in foreclosure and subject to court-ordered sales, according to Walker’s decision.
In that context, the Boffo Group sought to acquire the properties and take over their development.
The company entered a joint venture agreement with Schouw’s group of companies, eventually paying a total of more than $28.3 million to acquire the lands on Hornby, Homer and Smithe streets.
Aside from a $200,000 payment to Schouw, the decision notes, all of this money went toward discharging debts owed by Hornby Residences, Homer Residences and Smithe Residences—the three companies Schouw had incorporated—to ensure Boffo could acquire clear title to the lands.
After the sale, Boffo proceeded with the development that Schouw had designed and planned for the Hornby project, which was the closest to being ready for construction.
The decision indicates that Schouw helped with marketing of the project, known as Artemesia, speaking to media about the development and communicating with prospective buyers who had reached out to Boffo.
Artemisia was substantially completed by early 2014 and the final unit was sold the following year. Hornby Residences, the company Schouw incorporated for the project, was assigned into bankruptcy in 2015, but received a profit-sharing payout under the joint venture agreement, regardless.
The Smithe project
Schouw had developed a concept for the Smithe Street property, but that project was not as far along, and Boffo opted to go in a different direction.
In light of what it felt were “shortfalls” in the amount of revenue generated by the Artemesia project, Boffo proposed a pair of “consulting agreements” to Schouw, according to the decision.
These agreements reduced the amount of profit to which Schouw’s companies would be entitled upon completion of the developments, and specifically called for Smithe Street profit to be used to offset Hornby Street shortfalls before profits were shared.
Schouw signed the consulting agreements in 2013, though there was some dispute about whether they replaced or merely served as a means of implementing the joint venture agreement, according to the decision.
The Smithe project wound up being extremely successful, with the 93 condo units sold for a combined total of more than $175 million. Walker valued the building’s commercial space—which was transferred to a different Boffo Group company—at a further $29 million.
However, while Boffo had paid out profits to Hornby Residences after Artemesia was completed, the company opted not to do the same for Smithe Residences, claiming that all agreements between Boffo and Schouw’s companies had ended.
Schouw’s conduct
Boffo took the position that Smithe Residences had “repudiated” the companies’ agreements, specifically through Schouw’s conduct.
In 2015, Schouw and Hornby Residences were the subject of a notice of hearing from the B.C. Securities Commission, in which the regulator alleged that they had defrauded investors.
Schouw gave an interview at the time in which he said he was “working hard” to get his investors their returns, including through agreements with Boffo, according to the court decision.
Schouw and his companies were also the subject of numerous lawsuits, and the CRA had initiated a case against him alleging more than $830,000 in unpaid taxes.
A panel of the BCSC eventually concluded that Schouw and Hornby Residences had committed fraud against one investor, and the regulator fined them $125,000 and permanently banned them from most financial market activities.
“To this day, Mr. Schouw does not accept the finding and disputes he committed any fraud,” Walker’s decision reads.
“Mr. Schouw was also found guilty of failing to remit GST, which he unsuccessfully appealed.”
Boffo also took issue with Schouw’s structuring of the Hornby Residences investments, blaming him for causing millions of dollars in lost revenue on that project. The company alleged that Schouw had issued an investment certificate related to Smithe Residences despite providing assurances that there were none, and it also blamed Schouw for sending a letter to 4 Corners Properties Ltd. advising that an agreement for that company to purchase the Smithe Street commercial space would be honoured.
Boffo told the court that Schouw’s actions were “deeply detrimental to the defendants and their reputation,” articulating essentially the same argument it had made in 2016 letter to Smithe Residences’ lawyer, informing the company that it considered the agreement repudiated.
For its part, Smithe Residences told Boffo at the time that it remained “willing and able to perform” its duties under both the joint venture agreement and the consulting agreement.
‘Questionable’ reputation
Walker was unconvinced by Boffo’s arguments.
The judge concluded that the consulting agreement and its profit-sharing provisions were binding on Boffo’s Smithe Street subsidiary.
The defendant argued that the agreement was intended to share profits only if Boffo built Schouw’s design on the Smithe Street site, claiming it would be “commercially absurd” for a company to agree to share profits with another entity that did not do any work or assume any risk related to the project.
Walker disagreed, noting that if the agreement intended to explicitly bar Smithe Residences from receiving a share of the profit if Schouw’s design was not used, it would have included language to that effect.
“Interpreting the agreement with the benefit of hindsight is improper,” the judge’s decision reads.
“While it may seem unfair that the plaintiff is entitled to a share of the proceeds of a development that the plaintiff did not contribute to, that was the defendants’ choice. The purpose of favouring the interpretation of contracts in a manner that is commercially reasonable is not to allow parties to avoid contractual obligations simply because the bargain they entered into was undesirable or unusual.”
With regard to Smithe Residences’ alleged repudiation of the agreement, Walker was similarly unpersuaded.
While Boffo submitted “a substantial amount of evidence” about Schouw’s financial liabilities, lawsuits and other problems, none of that evidence demonstrated that Schouw ever showed an intention not to be bound by the agreements, according to Walker.
“I agree with the plaintiff that the Smithe consulting agreement did not require that Mr. Schouw be solvent, deal with creditors with the utmost good faith, not obtain financing in unconventional ways, abide by the law, or to be of good character generally,” the decision reads.
“The defendants generally knew that Mr. Schouw’s reputation was questionable and that he and his companies were in financial distress. The evidence is clear that the defendants saw the plaintiff’s distress as a good opportunity to purchase prime development property from companies controlled by Mr. Schouw.”
Having concluded that the agreement was enforceable and that Schouw and Smithe Residences had not repudiated it, Walker calculated damages based on the profit sharing provisions of the agreement.
After accounting for the amounts to which Boffo was entitled before Smithe Residences could receive its share, the judge found there would be $5,662,059 left. That’s less than the $8,012,422 to which Smithe Residences would be entitled, so Walker ordered Boffo to pay all of it, plus GST, to the plaintiff.
The total award was $5,945,162, and Smithe Residences is entitled to both pre- and post-judgment interest, according to the decision.
