The One condominium and hotel under construction at the intersection of Yonge St. and Bloor St. in Toronto on Oct. 23, 2023.Arlyn McAdorey/The Canadian Press
A recent court judgment against a company controlled by Toronto-area real estate developer Sam Mizrahi over a $12.9-million loan made against an Ottawa condominium project includes allegations of secret loans not initially disclosed to other lenders.
The ruling from Justice Charles Hackland rejected claims by Mr. Mizrahi that one of his lenders, V2 Investment Holdings Inc., had acted in “bad faith” in attempting to register a previously unsecured loan against a development property. Justice Hackland found in favour of V2 and affirmed that the $12.9-million debt had accrued another $1.4-million in interest since it had first been taken out in 2019.
Mr. Mizrahi is no stranger to complex financing deals and court battles over defaults. His name has been splashed across the business pages for his role in the insolvency and receivership of The One, a luxury condo project which has been under construction at Bloor and Yonge streets in Toronto since 2015. When completed, the building will be one of the tallest residential buildings in the country. Under Mr. Mizrahi, the project ran out of cash, owing $1.7-billion to its lenders.
Justice Hackland’s ruling notes that the V2 loan agreement stated the debt “would not be registered on title to the property until there was a default under the loan.”
Not securing a sizable debt against collateral such as property adds extra risk to a lender. According to the ruling, the loan was structured in this way to keep the debt a secret from other lenders who just days before had lent $92-million to build the luxury condominium project known as The Residences at Island Park Drive at 1541 West Wellington St. in Ottawa. Those lenders had provisions that barred Mr. Mizrahi’s company from registering any new debts against the property without their permission. If the secret V2 debt became known, it could have caused the other lenders to pull their funding out of the project.
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“That’s a default that I would barely ever tolerate, because it shows not only are you potentially encumbering property over which the lender has security, it causes a complete credibility gap,” said Steven L. Graff, a lawyer and partner with Aird and Berlis LLP’s restructuring and insolvency group, who has acted for chartered banks, private lenders and other stakeholders. Mr. Graff said real estate insolvencies are growing and now take up close to 75 per cent of his practice. He said such side deals or undisclosed loans may have become an almost normal way of doing business in previous years, when real estate projects were adding enough equity that extra debts could be paid out without endangering repayment of registered loans.
A similar claim of loan details being kept from other lenders formed a part of a $213-million demand made against insolvent financial firm Bridging Financial by Cerieco Canada Corp., which extended a construction loan to The One project based in part on an alleged secret guarantee of Bridging balance sheet assets.
Most side-deals in real estate development are more on the order of a few million dollars, or a break on a condo purchase price.
“Nine times out of 10, in the last 20 years, what would have happened is the debt would have been refinanced and nobody would have been worse off,” Mr. Graff said. It’s only now that so many projects are failing that some of these agreements are coming to light and ending up in court. “Some people get away with stuff for a long time and as a result they begin to believe that’s actually the way the world works; that they can always get themselves out of a problem,” he said.
In Mr. Mizrahi’s affidavit for the October, 2024 application for debtor-led-insolvency of the 1451 Wellington project, he describes a series of meetings, phone calls, texts and e-mails between himself and investor Henry Wolfond (CEO of Bayshore Capital and principal of V2) where it became clear that construction lender Trez Capital Limited Partnership was unwilling to continue lending money to the project unless V2 entered into a subordination agreement that would repay Trez first. Nevertheless, V2 was not required by the original loan agreement to subordinate itself and so after negotiations failed, it registered its security. As predicted, Trez demanded an insolvency process. Mr. Mizrahi would later seek to avoid repaying some of the V2 debt, calling for an “equitable set-off” because V2’s actions played a role in the project’s insolvency-related costs and further delays.
Justice Hackland dismissed that “set off” demand and noted that in the past, “Mr. Wolfond extended numerous accommodations,” after non-payment of the loan. But when he finally did register his security, as outlined in the loan agreement, Mr. Mizrahi alleged bad faith. “There was no trickery or apparent bad faith in any of this. … The request could hardly be said to be unreasonable given the borrowers continuing default and the obvious increased risk of non-payment,” Justice Hackland wrote.
According to a statement provided by Mr. Mizrahi’s lawyers at Cozen O’Connor LLP, the stay protecting the 1451 Wellington project from its creditors has been extended until June, 2025, and construction is planned to be complete before the end of the year, two years longer than initially planned.
Additionally, the statement claimed that while the $14.3-million award, “will not have any impact on construction of the 1451 Wellington project,” nevertheless “Mr Mizrahi plans to appeal Justice Hackland’s decision.”