A B.C. Supreme Court judge has ruled against the provincial government in a contractual dispute arising from its first public-private partnership.

The province sought a declaration from Justice Stephen Kelleher that it could obtain two Victoria office buildings for $11 million or by paying down the mortgage balance by that amount.

Kelleher, however, accepted the argument of the buildings’ owner, Axor Group Inc. It maintained that the province would have to pay $22 million to exercise its option to buy the property. That’s because according to the contract, the province would be on the hook for $11 million plus any encumbrances up to $11 million.

Vancouver lawyer David Gruber, who represented Axor Group, told the Straight by phone that the NDP government sold the site to Axor Group and leased it back in the mid-1990s. Under the agreement, the province could exercise an option to buy back the buildings after a 20-year lease term, which is due for renegotiation in 2017.

“Their first public-private partnership has now ended up in litigation 20 years later,” Gruber said. “To me, that’s the most interesting thing about it. It was before [Crown corporation] Partnerships B.C. [was created].”

Gruber pointed out that the B.C. government had initially planned to finance and develop the buildings. He added that after the Treasury Board raised concerns about the impact of this development on the provincial debt, the government decided to turn over the site to Axor Group. The lawyer said the assessed value of the land and buildings exceeds $40 million.

Kelleher’s decision stated that the B.C. government has the “right of first refusal” to buy the property. The ruling also noted that the government wanted to ensure that the leaseback arrangement would have no impact on its balance sheet.

“This concept required that the project not incur nor involve any long-term debt,” Kelleher wrote. “For that reason, the lease would have to be characterized as an ‘operating lease’, not a ‘capital lease’. This is because if a lease is characterized as a capital lease, it is debt.”

Another defendant in the B.C. government’s court action, Arca Investments Inc., is a division of Alberta Treasury Board and Finance.

According to Gruber, Arca Investments financed construction of the buildings.

“It’s an asset on their books,” Gruber stated.