Condos in Trouble

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We’ve all heard the horror stories of condominiums with no money in their reserve accounts and significant repair projects that need to be completed. Work orders may have been issued by the municipality because the buildings are falling apart and becoming a danger to the occupants. At best, there are allegations of mismanagement by previous boards. At worst, there are allegations of fraud and theft. Many of the owners have defaulted in their contributions toward the common expenses and the condominium is unable to pay its contractors, which results in lawsuits due to unpaid bills. The local real estate agents know of the issues and the market values of the units plummet.

When the board attempts to fix some of these problems, such as levying special assessments, they often receive a requisition to remove them. The new board quickly changes managers, rescinds the special assessment, and lowers monthly fees. A requisition is received to remove the new board shortly after they are elected. Factions form and every issue creates further division among the owners. The problems are ignored or pushed aside while the groups fight for control.

So, what can be done in these terrible situations? The Act contains a few options to help condominiums get out of trouble.

Inspector

Section 130 of the Act permits a condominium or an owner (and a few others) to apply to the Superior Court of Justice for an order appointing an inspector. The inspector may inspect or conduct an audit of the accounts and records mentioned in section 43 (documents to be turned over by the declarant at turn-over), section 55 (records to be maintained by the condominium), or 115 (people who receive money on behalf of the condominium).

The court must be satisfied that the application is made in good faith and that the order is in the best interests of the applicant. The inspector must prepare a written report to the applicant and condominium. The court has the authority to make an order with respect to the costs of the investigation or audit or “any other matter as it deems proper”.

This is a potent remedy, but very rarely used. There are other methods of inspecting or auditing accounts and records that are significantly less costly than an inspector. That said, I have seen it used where the records of the condominium were in shambles so it was nearly impossible to perform an inspection or audit. The court order required the former directors to open their books to the inspector so the inspector could determine if the funds missing from the condominium’s accounts were due to theft by the former directors or mismanagement.

Administrator

Section 131 of the Act permits a condominium, owner or mortgagee of a unit to apply to the Superior Court of Justice for an order appointing an administrator. While the Act states that at least 120 days must have passed since turn-over meeting, there is a case where an administrator was appointed when the declarant refused to call a turn-over meeting. The court may make the order if it would “be just and convenient, having regard to the scheme and intent of this Act and the best interests of the owners.”

The order must specify the powers of the administrator, the powers and duties of the board that will be transferred to the administrator, and contain the directions and terms that the court considers just. Often times the administrator is given all of the powers and duties of the board, but it can be limited to a particular issue or project, such as a major repair project or legal dispute.

Some of the factors that the court will look at when determining if an administrator is appropriate are:

  1. substantial inability to manage the condominium;
  2. substantial misconduct or mismanagement or both;
  3. struggle within the condominium among competing groups such as to impede or prevent proper governance of the condominium;
  4. whether only the appointment of an administrator has any reasonable prospect of bringing to order the affairs of the condominium.

The courts have repeatedly stated that “it is also important to remember that the democratic government of the community should not be overridden by the court except where absolutely necessary.”

Other Remedies

Often one of the most significant problems is financial. The condominium simply does not have enough money to pay its bills and maintain and repair the property. Raising monthly common expenses is too slow; the hole is too deep. A large special assessment is normally required. It may be tens of thousands of dollars or more, which is impossible for most owners to raise in a short amount of time. In these situation, a good solution may be to approach a lender about borrowing the necessary funds to complete repairs and pay unpaid bills. Borrowing may be the only option.

In some cases the condominium may have property or assets, such as superintendent’s suite or extra parking units, that it can sell to raise money. Others will lease common elements in exchange for rental income. For example, some condominiums lease their rooftops for telecommunications antennas. These are short-term solutions, but they can be quite effective if the deficit is small.

Some condominiums even consider terminating the condominium and selling the lands to a developer. This isn’t always an option as the condominium must be in an area where a developer is likely to purchase it. It might be worth pursuing if none of the other solutions are available.

These are only some of the remedies available to struggling condominiums. If your condominium is facing some or all of the issues described in this post you should speak with your manager or lawyer about options. Putting your head in the sand will only make the situation worse.