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The perils of tendering for real


									THE LAWYERS WEEKLY June 30, 2006



The perils of tendering for real estate are not always appreciated
By Roy Nieuwenburg Tendering for the sale of real estate is nothing new. The hot real estate market has magnified the attractiveness of this format for owners. It also increases what is at stake for disgruntled bidders. In my practice I do a lot of competitive tendering on the “revenue” side (for concession operations and the sale and leasing of real estate) and also on the “expense” side (e.g. construction tendering), acting for owners. The former tends to follow less formal processes. The latter tends to be more formal (giving rise to, it seems, an unending stream of court cases and litigation). About once a week I receive a sales brochure e-mailed by a real estate firm promoting the sale of a commercial property through an informal bidding process (e.g. “bids will be accepted until 3:00 p.m. on a specified date, and you have to use our form of contract”). I observe that many of these informal processes amount to competitive bidding, but don’t build in the safeguards that are commonplace in construction tendering. They typically contain a statement to the effect that the owner does not have to award to the highest bidder, and reserve the right to waive irregularities. But these safeguards do not go nearly as far as needed to match the vigour that the courts appear willing to assert for the benefit of bidders it perceives to be aggrieved. A recent case demonstrates this vigour. In Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways) [2006] B.C.J. No. 657, Tercon was second bidder on a $35-million highway construction project. Tercon claimed that the Ministry wrongfully awarded to an ineligible bidder. The case could have gone either way, in my opinion. Ultimately, the court sided with the plaintiff Tercon, and awarded damages of $3,293,998 for lost profits, plus costs. What I find striking is that in doing so the court swept aside strong language purporting to give the owner flexibility, including a limitation clause stating: “… no Proponent shall have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a proposal each proponent shall be deemed to have agreed that it has no claim.” In setting this aside, the court reasoned that: “A party should not be allowed to commit a fundamental breach sure in the knowledge that no liability can attend to it and the court should not be used to enforce a

The power of competitive bidding processes for the sale of real estate seems to be well appreciated. From what I see, often the perils are not so well appreciated by those initiating the processes. A recent headline in the Vancouver Sun illustrates the power of competitive bidding processes: “$193 million bid blows away competition”. Vancouver city council accepted a local development company’s $193-million bid to buy the southeast False Creek land where the Olympic athletes’ village will be built. The price was “far in excess of anything the city had anticipated for the 2.6-hectare site”. The winning bidder, the Millennium Group, will develop the land into 800-plus market housing units that will be sold after the 2010 Olympics.

bargain that a party has repudiated … In the circumstances here, it is neither fair nor reasonable to enforce the exclusion clause. Although both parties are sophisticated, it could not have been contemplated that there would be no recourse if the Ministry accepted a non-compliant bid ... These circumstances do not lead this court to give aid to the defendant by holding the plaintiff to this clause.” To me, this is fictional reasoning. I would say “actually, yes, it was contemplated that there would be no recourse – that’s why the owner put this clause in the document. There it is, in black and white, for all to see. Tercon is a sophisticated party, and agreed to it.” How can the court award damages against the owner for a supposed breach of the contract on the basis that the owner repudiated the contract by relying on an express provision of it (i.e. the exclusion clause)? Basically, the court is saying “we don’t care what you put in your documents, if you transgress our sense of fairness, we will ignore it”. My perspective is that because it was laid out in black and white, it’s fair. But, because the courts are willing to engage in this fictional reasoning, well, that’s the law. That doesn’t reduce litigation – it fosters litigation. Tercon, having been successful against the Ministry in a similar (but much clearer, in my opinion) landmark case a decade or so earlier [see Tercon Contractors Ltd. v. B.C. [1993] B.C.J. No. 911], wasn’t shy about testing the waters again. In 2002, the Manitoba Court of Appeal delivered its judgment in

Mellco Developments Ltd. v. Portage la Prairie (City) [2002] M.J. No. 381. In Mellco, the city issued a request for proposals for the sale of land for residential development, and awarded the contract to Lions Park Housing Inc. Mellco Developments, the unsuccessful bidder, sued and lost. That case could have gone either way too, in my opinion. Leave to appeal to the Supreme Court of Canada was refused. In both Tercon and Mellco, the court wrestled with the question of what factors govern whether the law of competitive bidding or tendering (referred to in Tercon as “the M.J.B./Ron Engineering paradigm”) is invoked. It is clear that what the process is called (i.e. a “call for tender”, or a “request for proposals”) is not definitive. The irrevocability of bids is a factor. Having a fixed date for submission of bids is another. Stipulating a prescribed form of contract is another. I foresee that with the strong real estate market, and greater use of informal competitive processes, there could be a stream of court cases and litigation on the “revenue” side too. If as an owner, or a real estate firm acting as agent for an owner, you want to avoid the spectre of court cases and litigation, then, among other things, the approach adopted for your competitive processes should be responsive to the vigour shown by the court in Tercon. Roy Nieuwenburg is a commercial lawyer with Clark Wilson LLP in Vancouver.

Drafting an audit clause should be part of the lease negotiation process
By Paul Mayer audit is conducted by an auditor with real estate expertise on behalf of a tenant who wishes to ensure that the terms of his lease are respected and that he is not paying more than agreed. Questionable expenses Those who conduct lease audits claim that the three most common types of errors and discrepancies typically revealed in lease audits result from human error, misinterpretation of lease language and unique provisions in a tenant’s lease that differ from the standard lease for the building and were not taken into account. Many of these errors are believed to be unintentional. The most common mistakes and questionable operating expenses that lease auditors run across in lease audits include: • incorrect measurement of the square footage of the premises, or building, and the proportionate share of operating expenses and real estate taxes; • duplication of costs, including after-hour HVAC (heating, ventilating and air-conditioning) costs, which are paid by a specific tenant but then not deducted from common area costs; • misallocation of expenses within a mixed-use complex; • improperly allocated capital repair and replacement costs, which either should be excluded or included depending on the wording of the lease and amortized over their useful life expectancy in accordance with generally accepted accounting principles (GAAP) instead of being treated as an operating expense that can be charged to and recovered from tenants in one

A lease audit is a detailed review of a lease agreement and the statements provided by a landlord to a tenant determining the costs incurred to operate and maintain leased premises. Lease audits can be historical (one time) and/or annual. Ordinarily, a lease

year; • inappropriate gross-up of certain operating expenses when a building is partly vacant; • costs of management and administration fees above and beyond the agreed percentage of operating costs; • failure to calculate costs properly by neglecting negotiated exclusions or caps on operating costs (e.g., exclusion of structural repairs and replacements); and • real estate tax refunds not being passed on to tenants. Is a tenant entitled to an itemized listing of expenses when the lease is silent? Most commercial leases provide that, at the end of each lease year, landlords must remit a “statement” to their tenants indicating the actual costs incurred for operating expenses and real estate taxes for the year. Such a clause usually provides for an appropriate adjustment to be made if the amount already paid by a tenant is greater or less than what is then owing for the whole year. Typically, such statements provide tenants with only abbreviated information.

After receiving this document, can a tenant request an itemized listing of the operating expenses and real estate taxes in order to verify that the amounts assessed were actually incurred if the lease is silent in that respect? The issue of whether a tenant is entitled to an itemized list of operating expenses when the lease is silent and the landlord is unwilling to provide the information was examined in 1988 by the Maryland Court of Special Appeals in P . Properties, Inc. v. Rock Creek .V Village Associates Ltd. Partnership, 77 Md. App. 77. In that case, the lease stated that once a year the landlord was to give the tenant a “written statement setting forth the total actual costs incurred in maintaining the common areas.” The tenant requested an itemized list of maintenance costs from the landlord in order to verify the amounts charged. The landlord refused and instead issued a statement which covered all expenses for the year. The Circuit Court dismissed the
see TENANT p. 17

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