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Court File No. CV-15-529094

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N

TORONTO MEDIA ARTS CLUSTER

Plaintiff

- and-

EDGE ON TRIANGLE PARK INC. and THE CITY OF TORONTO

Defendants

STATEMENT OF DEFENCE OF THE CITY OF TORONTO

1. The City of Toronto (the "City") is a municipality created pursuant to s. 2(2) of the City

of Toronto Act, 1997, and since continued pursuant to s. 125(1) of the City of Toronto Act, 2006,

S.O. 2006, c.11, Sch. A.

2. The City has no knowledge of paragraph 8 of the Statement of Claim (the Claim), or

insufficient knowledge with which to plead, and puts the Plaintiff to the strict proof thereof.

3. The City denies each and every other allegation against it in the Claim, as well as the

claim for relief, and puts the Plaintiff to the strict proof thereof.

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Re-Development in the West Queen West Community

4. Beginning in approximately 2006, an area of the City of Toronto referred to as the West

Queen West Triangle (an area which is bounded by Queen Street West to the north, Dovercourt

Road to the east, and a rail corridor on the south and west) became the subject of significant land

redevelopment proposals. The area is designated as a Regeneration Area in the City of

Torontos Official Plan.

5. In particular, the West Queen West Triangle had a significant concentration of artists.

The City sought to preserve work space for the local arts community in the course of the

contemplated development in the area.

Re-Development Proposal at 2 6 Lisgar Street

6. The City was approached on or about 2007 by the owner of a property municipally

known as 2 6 Lisgar Street (the Property) to obtain land-use approvals necessary to facilitate

the construction of a residential condominium at the Property. On April 11, 2011, the Ontario

Municipal Board allowed an appeal from the Citys zoning bylaw (by-law 438-86) to permit the

construction of two towers, fourteen and sixteen stories, respectively, on a six-storey podium.

The development was to consist of a total of 479 dwelling units.

7. Later in 2011, the City was approached by a community organization in the West Queen

West Triangle. It asked the City to consider a proposal for the creation of a not-for-profit arts and

cultural space at the Property. It was to be located at the base of the proposed condominium.

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8. The owner of the Property, Edge on Triangle Park Inc. (Edge) had agreed to create

2,800 square metres of space to be used for not-for-profit art and culture purposes for the benefit

of the entire community (the Arts and Culture Space). In exchange for the creation of the Arts

and Culture Space, Edge sought land use approvals from the City for additional height and

density at the Property, and at a nearby property that it owned. Edge sought to build two towers

at the Property, which would be nineteen and twenty-two stories, respectively, on a seven-storey

podium, comprising a total of 660 dwelling units, or 181 units more than originally permitted.

9. The creation of not-for-profit art and culture space at the Property would be consistent

with the Citys goals in its Official Plan, as well as a report entitled Creative Capital Gains An

Action Plan for Toronto (which was adopted by City Council in May, 2011) to preserve

affordable arts and cultural space. Edge proposed entering into an agreement pursuant to s. 37 of

the Planning Act, R.S.O. 1990, c. P.13 with the City. Section 37 of the Planning Act authorizes

increases in height and density beyond what would otherwise be permitted in exchange for the

provision of services and facilities which are determined to be of benefit to the community.

10. The City determined that its goal of providing space for local artists could be best

satisfied by having a local not-for-profit group operate the Arts and Culture Space, rather than

the City directly assume the day-to-day management and operations of the Arts and Culture

Space. The proposal by Edge was that the Arts and Culture Space would be operated by the

Toronto Media Arts Cluster (TMAC), to which it would convey the Arts and Culture Space for

nominal consideration. TMAC was an organization composed of eight media arts groups, each

of which was a separate not-for-profit corporation.

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11. TMAC asserted that it required more than 2,800 square metres of space for its purposes.

It entered into an agreement with Edge to acquire an additional 670 square metres of space,

which would be located near the Arts and Culture Space (the Additional Arts and Culture

Space, together with the Arts and Culture Space as the Combined Arts and Culture Space).

Owing to this additional space requested, as well as certain costs for construction and finishing

of the Combined Additional Arts and Culture Space, TMACs acquisition of the Combined Arts

and Culture Space would be subject to a vendor take-back mortgage in favour of Edge in the

amount of $1,562,972.

12. In exchange for the additional height and density which was being offered to Edge, the

City required security over the Combined Arts and Culture Space to ensure that it would be used

for arts and culture purposes, and for the benefit of the community. Because TMAC was to

obtain the Arts and Culture Space for nominal consideration, the City sought to ensure the

Combined Arts and Culture Space would not be used for for-profit commercial uses with no

public benefit.

13. The City entered into an agreement with Edge pursuant to s. 37 of the Planning Act on

June 7, 2012 (the s.37 Agreement) to pursue these above-mentioned objectives. Among other

terms, the s. 37 Agreement provided that should Edge and TMAC not enter into a purchase

agreement to convey the Combined Arts and Culture Space to TMAC, or should the transaction

fail to close, the Combined Arts and Culture Space would be conveyed to the City for nominal

consideration. The City would then be entitled to either:

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a. select a new not-for-profit community use for the Combined Arts and Culture

Space;

b. obtain title to the Combined Arts and Culture Space, and use it for community

purposes, such as a daycare or recreation centre; or

c. sell the Combined Arts and Culture Space at market value, and direct the proceeds

to community services, parkland, or streetscape improvements in the area (the

Citys Use Rights).

TMACs Failure to Enter Into Purchase Agreement by Deadline, and Citys Two

Extensions

14. The s. 37 Agreement provided that Edge and TMAC were to enter into a purchase

agreement respecting the conveyance of the Combined Arts and Culture Space no later than

December 31, 2012. If no agreement was entered into respecting the conveyance of the

Combined Arts and Culture Space, the City could enforce the Citys Use Rights over the

Combined Arts and Culture Space.

15. TMAC raised numerous concerns concerning construction, and interior and exterior

finishing at the Property. This resulted in delays in the land-use and building permit approvals

processes. The City assisted TMAC to facilitate it entering into a purchase agreement with Edge

by twice extending the deadline in the s. 37 Agreement. On November 27, 2012, Toronto City

Council extended the deadline from December 31, 2012 to March 31, 2013. Further, on

December 16, 2013, Toronto City Council extended the deadline from March 31, 2013 to March

31, 2014.

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Agreements between Edge, TMAC and the City

16. The City and TMAC entered into an agreement respecting the use of the Combined Arts

and Culture Space (the Land Use Agreement), and Edge, TMAC and the City entered into an

agreement dated March 31, 2014 respecting the conveyance of the Combined Arts and Culture

Space (the Purchase Agreement).

17. The Land Use Agreement contained numerous terms to ensure that the Combined Arts

and Culture Space would be operated as a not-for-profit art and cultural space for the benefit of

the community, and could not be encumbered or sold by TMAC. In particular:

a. 5.1: TMAC was restricted from using the Combined Arts and Culture Space

for anything other than not-for-profit arts and cultural uses (other than a small

caf or bistro of no more than 110 square metres);

b. 6.1: TMAC consented to the registration of a certificate under s. 118 of the

Land Titles Act prohibiting the transfer or charge of the Combined Arts and

Culture Space without the consent of the City;

c. 9.6: TMAC was not permitted to abandon the Combined Arts and Culture

Space;

d. 9.7: TMAC was not permitted to undergo a change in control over its

management and policies without the Citys consent; and

e. 9.10: TMAC was not permitted to become bankrupt or insolvent.

In addition, section 7.1 of the Land Use Agreement required TMAC to enter into an agreement

with the City wherein upon breach of various terms in the Land Use Agreement, the City would

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retain the option of requiring TMAC to convey the Combined Arts and Culture Space to the City

for nominal consideration (the Citys Ownership Option).

18. The Purchase Agreement provided the following (among other terms):

a. 6: The transaction and purchase of the Combined Arts and Culture Space

must take place no later than May 3, 2015. Any extensions must be on the consent

of Edge and TMAC, and even if both consented, would then require the consent

of the City, failing which, the Purchase Agreement would be terminated and have

no further force or effect; and

b. 25: There are no representations, warranties, or collateral agreements or

conditions, to the Purchase Agreement other than those written in the Purchase

Agreement.

TMACs Financial and Operational Problems

19. Beginning on or about July, 2014 to March, 2015, the City received numerous

communications from TMAC on numerous occasions that indicated that TMAC would be unable

to successfully operate the Combined Arts and Culture Space. In particular, TMAC:

a. did not have the funds to pay the closing costs associated with accepting title to

the Combined Arts and Culture Space;

b. owed approximately $100,000 to various creditors;

c. had a fundraising deficit of $200,000, which it had to raise to obtain matching

government grants;

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d. had directed all of its consultants, project managers, architects, engineers and

legal advisors to stop work due to a lack of funds;

e. did not have a governance model to operate the Combined Arts and Culture

Space;

f. had a Board of Directors which was deadlocked;

g. lacked a chair for its Board of Directors;

h. was unable to add new members to its Board of Directors;

i. was unable to hire consultants to develop a business plan for its operation of the

Combined Arts and Culture Space;

j. needed the City to give it at least $25,000 so that it could hire consultants to

develop a business plan;

k. stated that there was in-fighting between constituent organizations of TMAC

resulting in the deliberate attempts by certain members to delay the preparation of

a business plan;

l. stated that two members of the board of directors of TMAC indicated they wanted

TMAC to discontinue its plan to accept the conveyance and operate the Combined

Arts and Culture Space, and instead, they wanted the Combined Arts and Culture

space to be turned over to the City.

20. TMAC sought the Citys assistance to help it successfully acquire and operate the

Combined Arts and Culture Space. The City endeavoured to respond to TMACs request for

help. TMAC produced some of its financial and operational documents to the City. TMAC had

thanked the City for the opportunity to have the City review and comment on its financial and

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operational documents, as it indicated that the Citys comments and feedback was of assistance

to help it improve its financial and operational plans.

21. As a suggestion to assist TMAC with its financial and operational problems, City staff

proposed that TMAC consider approaching other community arts groups to enter into potential

new arrangements to assist it to successfully operate the Combined Arts and Culture Space.

TMAC advised the City it was open to exploring such an option.

22. In March and April, 2015, both the membership and board of directors of TMAC

changed significantly. The newly-constituted TMAC approached the City on or about April 15,

2015 seeking to retract its earlier statements (which it had made repeatedly as recently as two

months prior) that it wanted to abandon its plan to accept the transfer and obligation to operate

the Combined Arts and Culture Space.

23. The newly constituted TMAC provided the City with draft business plans, budget, and

memoranda of understanding between it and its new constituent organizations in April, 2015 (the

TMAC Operations Documents).

24. City staff reviewed the TMAC Operations Documents in April, 2015 in accordance with

the criteria in the:

a. United Nations Development Program Public-Private Partnerships for the Urban

Environment;

b. Business Plan Risk Predictor Scoreboard from Enterprise Toronto; and

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c. City of Toronto Below-Market Rent Organization Assessment and Financial

Review.

25. City staff concluded based on its above review and further investigations that TMAC

had:

a. A poor likelihood of success because of its own projected annual shortfall of at

least $800,000 each year;

b. No significant financial resources;

c. No significant assets;

d. Failed to meet the requirements to obtain a federal grant from Heritage Canada;

e. A risk of having its provincial grant from the Trillium Foundation rescinded;

f. No proven track record of raising funds anywhere near the amount of its annual

projected deficit;

g. No experience in managing a space as large as the Combined Arts and Culture

Space;

h. Only 4 of its 11 officers who were committed to the operating the Combined Arts

and Culture Space;

i. No experience in operating a very large number of events, which was the core of

TMACs proposed business plan;

j. Proposed operational uses which may have been inconsistent with the uses of the

Combined Arts and Culture Space which were permitted by the Land Use

Agreement (in particular, a craft brewery and special events hosted by third

parties); and

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k. A demonstrated inability to work effectively as a collective.

Lapse of the Purchase Agreement

26. Counsel for Edge wrote to counsel for TMAC on Friday, May 1, 2015. This letter advised

that it was impossible for Edge to convey the Combined Arts and Culture Space to TMAC at that

time. This letter indicated the ability to obtain a property identification number, necessary to

legally identify and convey the space, had been frozen by the Ontario Land Registry Office. The

letter further advised that in light of the pending deadline of the Purchase Agreement (as of

Sunday, May 3, 2015) the Purchase Agreement would be null and void.

27. Section s. 6 of the Purchase Agreement provides that even if TMAC and Edge purported

to extend the closing date deadline, such consent is also required from the City. City staff

reviewed its entire dealings with TMAC, including its history of delay, poor governance,

corporate infighting, lack of experience, lack of finances, lack of acceptable business plans, and

proposed uses of the Combined Arts and Culture Space which may be prohibited by the Land

Use Agreement. Based on this review, City staff concluded that TMAC was not a viable group to

operate the Combined Arts and Culture Space for the benefit of the community.

28. Accordingly, City staff concluded that the City would not agree to extend the deadline in

the Purchase Agreement.

29. Counsel for the City wrote to counsel for TMAC on Friday, May 1, 2015. This letter

noted that the lapse of the Purchase Agreement was imminent because Edge had indicated it

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would not consent to any extension, and that regardless, the City would not consent to an

extension.

30. TMACs right to obtain the Combined Arts and Culture Space from Edge expired on

Monday, May 4, 2015 at 9am upon the termination of the Purchase Agreement.

31. The City denies that any terms or obligations should be implied in the Purchase

Agreement to ensure that the Purchase Agreement is a commercially viable agreement. Neither

the Land Use Agreement nor the Purchase Agreement were intended for commercial purposes,

and neither the City nor TMAC is a commercial entity. Moreover, s. 25 of Schedule B to the

Purchase Agreement provides that the only terms, representations, warranties, agreements or

conditions are those written in the agreement.

32. The City denies it that it induced Edge to breach any contract. The Purchase Agreement

expired by the passage of time, accordingly, there was no valid or enforceable contract between

TMAC and Edge capable of being breached. Moreover, none of the Citys conduct was intended

to either procure any breach of the Purchase Agreement, or to cause damage to TMAC. None of

the Citys conduct was unlawful or unacceptable. Further, and in the alternative, the actions of

City staff were justified as a good faith attempt to support the Citys objective of ensuring that

Combined Arts and Culture Space could be successfully operated for the benefit of the

community.

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TMAC has Incurred no Damages

33. The City denies that TMAC has incurred the damages alleged in the Claim, and puts

TMAC to the strict proof thereof.

34. In the alternative, the City pleads that if TMAC suffered any damages, which are not

admitted but specifically denied, they are excessive, exaggerated, unforeseeable, too remote and

uncompensable in law, and puts TMAC to the strict proof thereof. Furthermore, the City states

that TMAC has failed or refused to mitigate its damages by failing to take adequate, timely,

reasonable or appropriate steps in all of the circumstances.

35. In particular, the City pleads that costs incurred by TMAC in relation to the Combined

Arts and Culture Space are from funds obtained in whole or in part from private or public

donors. Such donations were intended to benefit the community and its use of the Combined Arts

and Culture Space, regardless of whether or not TMAC, or some other entity, operated the

Combined Arts and Culture Space. The City pleads that if TMAC received, held or spent any

such funds, which is not admitted but specifically denied, than TMACs relationship to those

funds was that of a bare trustee, and therefore, it has not incurred any damages which are

compensable at law.

36. The City therefore submits that the Claim be dismissed with substantial indemnity costs

in light of the unfounded allegations of conflict of interest raised against City officers.

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DATED: June 25, 2015 CITY SOLICITORS OFFICE 26th Floor, Metro Hall, Stn. 1260 55 John Street Toronto, ON M5V 3C6 Christopher J. Henderson LSUC No: 54291B Telephone: (416) 397 - 7106 Fax: (416) 397 - 5624 Email: chender3@toronto.ca

Lawyers for the Defendant City of Toronto TO: GOODMANS LLP Bay Adelaide Centre 3400 - 333 Bay Street Toronto, ON M5H 2S7 Mark Dunn LSUC No: 55510L Tel: (416) 979 - 2211 Fax: (416) 979 - 1234 Email: mdunn@goodmans.ca Lawyers for the Plaintiff AND TO: BERKOW COHEN LLP 400 - 141 Adelaide Street West

Toronto, ON M5H 3L5 Jack B. Berkow Tel: (416) 364 - 4082 Fax: (416) 364 - 3865 Email: jberkow@berkowcohen.com

Lawyers for the Defendant, Edge on Triangle Park Inc.