Family Cottage Succession: A Dream or A Nightmare Take Two

August 5, 2022

By Brian Babcock

About a year ago, we posted an article entitled Family Cottage Succession: A Dream or A Nightmare?. That article dealt with the issues that could arise from a simple brother-sister dispute when two buildings were constructed on one lot. We concluded the article with the tagline “don’t let your dream turn into their nightmare”, with “their” referring to your heirs.

THE ISSUES

But what if your family cottage property is so large and so valuable that the Ontario Court of Appeal redacts all information about value or price?

What if the dispute involves 25 family members from five groups or clans?

What if 13 of the family members have an interest in the value of the land while the other 12 only have rights to use the property and contribute to the maintenance?

Then what happens if some of the family members, but not all, want to sell to realize on the increased value of the property?

THE CASE

These were the questions that arose in Lash v. Lash Point Association Corp.

It was definitely a nightmare in spite of obvious careful attempts to plan, including the formation of the Lash Point Association Corp. to hold the property. As the court put it in the first paragraph of its judgment, “ [T]his appeal highlights the challenges that may arise when cottage property is owned by multiple family members.”

What an understatement.

The first four paragraphs of the judgment briefly set out the essential background:

[1]         Lash Point is a cottage property consisting of about 28 acres on Lake Rosseau in the Township of Muskoka Lakes. It has been in the Lash family for over 100 years. This appeal highlights the challenges that may arise when cottage property is owned by multiple family members.

[2]         In 1996, thirteen family members (the “founding members”) transferred their ownership interests in Lash Point to a non-profit corporation, Lash Point Association Corporation (“LPAC”). The object of LPAC, as stated in its letters patent, was “to own and conserve land and its natural features for the enjoyment of its members and guests.” In the event LPAC was ever wound up, the founding members would receive a percentage of the proceeds realized from the sale of Lash Point equal to the percentage of their interest in Lash Point contributed to LPAC.

[3]         By 2016, LPAC had 25 family members from five groups or “clans”. They consisted of 13 founding members and 12 non-founding members. The founding members were those who retained an economic interest in the LPAC assets upon dissolution or wind up. The non-founding members were the adult children of the founding members who had the benefit of, and some responsibility for, the property. They had no interest in the property on dissolution or wind up but were voting members of LPAC.

[4]         The family members disagreed on the future of Lash Point. Some wanted to stay, continue to enjoy the property, and avoid triggering capital gains tax (the “Remainers”) while others wanted to leave and realize on the fair market value of their interests (the “Departers”). Neither side could muster a two-thirds majority of voting members as required by LPAC’s by-laws. The parties concluded that a court-supervised solution was required. This appeal involves the evolution and outcome of that process.

If you are not aware, Muskoka Lakes generally and Lake Rousseau in particular is some of the most expensive waterfront property this side of British Columbia.

The first thing to note is that the dispute started in 2016, and here we are in 2022 and it is still not resolved.

Among other things, in 2016 the Superior Court had appointed a Receiver for the purpose of implementing the buyout on terms described in the order. Any dispute was to go back to court and the Receiver was not to participate in disputes.

Efforts were made to sever lots to accommodate both those wanting to sell and those wishing to remain. These efforts did not bear fruit.

The Receiver received and accepted a single offer in 2020. It was the proposed buyer, not the Receiver or any of the shareholder family members, who sought court directions. The Superior Court motions judge approved the sale, when terms that were effectively very different from the original order appointing the Receiver and directing a sale. Certain family members at that point appealed.

THE LAW

The Court of Appeal makes points that are interesting to lawyers and Receivers above the jurisdiction of the Superior Court and supervision of Receivers, but we suspect that those are of little interest to the average reader.

What you do need to know is that there is a well-established process going back to at least 1991 that governs the approval of sale agreements in a Receivership context. That process requires a court to consider:

  1. whether a sufficient effort has been made to obtain the best price and whether the Receiver has acted improvidently;
  2. the interests of all of the parties;
  3. the efficacy and integrity of the process by which the offers were obtained; and
  4. whether the working out of the process was unfair.

In the Lash case, the motions judge determined that the sales process undertaken by the Receiver met none of these requirements but nonetheless approved the sale.

THE RESULT

Not shockingly, the Court of Appeal overturned this decision and applied the well-established principles. It gave fresh directions for the property to be remarketed consistent with these principles, on an expedited basis, with the hopes that it can be sold this spring, while the cottage market is still at its peak. We hope it works out this time.

In the result, six years have passed, the family members who wanted to cash out have not been paid, and those who wanted to remain will lose their long-time family cottage property. Rather than a “win-win” situation, this might fairly be described as “lose-lose”.

TAKEAWAYS

We repeat the most important takeaways from our earlier article about how to plan and avoid disputes:

  • careful succession planning for the future ownership of the property, if the intent is to keep it in the family;
  • a plan for future sharing of expenses;
  • a plan for how the use will be shared; and
  • a written agreement covering the shared cost and use, to reduce or avoid disputes in the future.

The Lash case is a reminder of the need to provide a simple, inexpensive, and speedy means to resolve a dispute when and if some but not all family members want to dispose of the property. No matter how much you may intend to keep the property in the family, you should plan for the almost certain inevitability that at some point it will be sold.

Also, if asking to have a Receiver appointed, try to select one which can follow the court-ordered process.

WHAT CAN WEILERS LAW DO FOR YOU?

At Weilers Law, we have a group of real estate lawyers with extensive experience in dealing with cottage properties near Thunder Bay and throughout Northwestern Ontario who understand not only the special steps in buying or selling these properties but are experienced in addressing issues that arise in succession planning. We also have corporate and trusts law experience if those skills are needed to implement your plans. If you find yourself in a situation where there is a dispute, we have lawyers experienced in dispute resolution and litigation to assist you.

Whether you are engaged in family cottage succession planning, or are affected by earlier poor planning, Weilers Law may be the right lawyers for you.