A company’s attempt to recover rent from a shareholder for Steveston commercial units used for a marijuana grow operation was thwarted in court.
0843003 BC Limited sued Inspire Group Development Corporation and its previous sole director, Terry Kin Keong Lai, claiming Lai had used five units in a commercial building to grow weed instead of renting them out.
In a B.C. Supreme Court judgment issued Jan. 5, Justice Ardith Walkem said the case involved “multiple layers of corporate entities” and is part of an ongoing legal saga related to the misappropriation of funds and other allegations of misconduct.
The case has “received significant consideration before the courts,” she added.
Lai purchased the strata complex at 12280-12320 Trites Rd. with another individual, Paul Cheung, through their respective companies by purchasing shares in 0843003. Lai and Cheung were each nominated to serve on 0843003's board of directors.
0843003 controls Holdco, also known as 0891360 BC Limited, which owns the Trites Road property.
Property manager accused of withholding rent
According to the judgment, Cheung became suspicious in 2015 that some of the Trites Road units thought to be vacant were actually being used to grow marijuana and hired a private investigator.
His lawyer raised the concerns with Lai’s lawyer, suggesting Lai might have been collecting and withholding rent for those units.
Lai acted as the property manager between 2010 and 2015 despite having no formal contract and it was part of his job to rent out vacant units and collect rent, to be deposited into 0843003’s account. He also had access to keys for the vacant units.
Although Lai’s records indicated no rent was received for the five units during periods between 2011 and 2014, BC Hydro statements showed they were metered to third parties not registered to Lai and Inspire during the same period.
In a response to Cheung’s lawyer, Lai’s lawyer confirmed Lai used the units “for his personal use” and he had no obligation to pay rent as an owner of the complex.
She added the units were used “as a medical marijuana grow operation” and was “a legal and licenced operation inspected by all related safety departments.”
In June 2015, Lai was replaced by Cheung as property manager but did not provide keys to the five units or the administrative office unit. In the lawsuit, 0843003 claimed Lai and Inspire later used the office for their own business and argued Lai deprived them of use of the office until 2016.
Cheung sought to recover $420,277.42 in rent from Lai and their two companies purported entered into an agreement to sell the property in September 2015.
Later in November, Lai then leased the five units and the office unit to Inspire Group Development Inc. even though Inspire is registered in Canada as Inspire Group Development Corporation. He signed for both parties and the leases “were for below market rent.” Cheung only found out about the leases when they were provided to the buyer of the property.
Also unbeknownst to Cheung, Lai had transferred his shares in Inspire to a company co-owned by himself and another individual back in 2013.
Lai and the individual, Tonggui Xie, entered into a joint venture agreement to redevelop the Trites Road property. Cheung did not become aware of this until 2017, according to the Supreme Court judgment.
When Xie tried to get his investment back in 2015, Inspire agreed to sell the property.
The Trites Road property was ultimately sold in 2016 for $14 million with $500,000 to be withheld for settling any outstanding amounts.
Xie received $700,000 from the sale. He also took Lai and other individuals to court for misappropriating $1 million from his investment and $1 million from Inspire Group from the sale of the Trites Road property and was awarded $2 million in damages.
Inspire not liable for former director's actions, says B.C. Supreme Court justice
In 2021, a B.C. Supreme Court justice rejected 0843003’s application to make Inspire and Lai pay rent for the units and excess utilities. He found Inspire did not occupy the units and declined to declare Lai had done so.
Lai was ordered to pay $58,630.20 for breaching his duty to pay property taxes on time.
0843003 appealed the decision and a Court of Appeal justice sent the case back to trial in 2022.
In her decision, Walkem found Lai either used or rented out the five units for marijuana grow operations and collected and kept the rent. She also found Lai had occupied the office unit by withholding the keys after he was removed as building manager.
Although 0843003 argued Inspire benefited from Lai’s occupation and thus should be bound by Lai’s action, Walkem disagreed.
She found Inspire lost potential rental income as a result of Lai’s actions and the act of occupation cannot be attributed to Inspire.
She also rejected 0843003’s argument that Inspire was vicariously liable for Lai’s breach of fiduciary duty as director of 0843003.
Walkem noted it was “particularly compelling” that Lai was appointed by Inspire as director of 0843003 while he was the sole director and sole shareholder of Inspire, the Trites Road property was Inspire’s only business and Inspire failed to take preventative steps to minimize the risk of Lai’s wrongdoing.
“I agree with the plaintiff’s submissions that the lack of oversight or steps taken by Inspire were inadequate to address the risk of Mr. Lai’s wrongdoing, which unfortunately materialized,” she wrote.
However, despite finding the policy goals of “fair compensation and deterrence” for vicarious liability were met in this case, Walkem declined to find Inspire vicariously liable for Lai’s fiduciary breaches as the director for another company.
She explained she was not pointed to any cases under such circumstances and there is a concern with an unwarranted extension of the doctrine of vicarious liability where Inspire did not benefit from the situation.
She also decided it would not be appropriate to quantify damages against Lai because no arguments were made about his personal liability.
Meanwhile, Richmond City Council rezoned the Trites Road property in 2017 from light industrial to residential to allow 30 single-family residential lots.
Got an opinion on this story or any others in Richmond? Send us a letter or email your thoughts or story tips to [email protected].
