Caution: Reading this Post May Cause Nightmares About Indemnity Clauses

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A recent case involving the right of a condominium to charge legal fees to an owner for alleged non-compliance with a rule has the industry talking. The decision has divided the legal community, resulting in many interesting legal debates and a whole lot of uncertainty for condominiums going forward.

The case is Amlani v. York Condominium Corporation No. 473. The dispute was about smoking. Amlani smoked and the condominium received complaints about it. The condominium took some steps to improve the situation, such as sealing joints and penetrations between the units. The owner limited his smoking to one room and used air filters to reduce the smoke transmission to other units. Unfortunately, the condominium received further complaints. The owner was willing to meet and discuss potential solutions, but the condominium was unwilling to do so and demanded that he stop smoking in the unit as it was a nuisance.

The condominium then passed a no smoking rule, which grandfathered smokers but the condominium refused to grandfather Amlani because he was no longer a resident (as he had moved out of the unit in an attempt to prevent the smoke transmission to other units). The condominium charged its legal costs to the owner and threatened to sell the unit when he didn’t pay. The legal costs sought were over $25,000 for demand letters and a failed mediation. The indemnity clause relied upon by the condominium was:

Each owner shall indemnify and save harmless the Corporation from and against any loss, cost, damage, injury or liability whatsoever which the Corporation may suffer or incur resulting from or caused by an act or omission of such owner,…to or with respect to the common elements and/or all other units except for any loss, costs, damages, injury or liability caused by an insured (as defined in any policy or policies of Insurance) and insured against by the Corporation.

All payments pursuant to this clause are deemed to be additional contributions toward the common expenses and recoverable as such.

The court was asked to rule on the condominium’s claim for indemnity from the owner for its legal costs as well as the condominium’s conduct in handling the smoking complaints and enforcing against the owner.

Compliance Costs Without Court Order

As mentioned above, the decision has been interpreted in a number of ways, but there are two main schools of thought. One group believes that this case stands for the proposition that a condominium cannot collect its legal costs from an owner for compliance (i.e. for sending a demand letter when an owner violates a rule) without first obtaining a court order. The argument seems to be that common expenses fall within s.134 as “compliance costs” and are not collectible from the owner without a court order under s.134. They suggest that the case is a significant development for condominiums in Ontario.

The other group believes that this case has not changed the law at all. They believe the decision was specific to the facts (i.e. inadequate indemnity clause in the condominium’s declaration and the behaviour of the condominium). They rely upon previous cases as their primary ground of support.

My Two Cents

While I support the outcome of the decision in this case, I tend to favour the reasoning of the second group. In my opinion, a condominium with a properly worded indemnity  clause in the declaration may collect legal costs from an owner for compliance even if it has not obtained a court order. I believe the unreasonable conduct of the condominium in this case was a significant factor in the decision. My primary reasons are as follows:

#1 Indemnity Clause was Inadequate

The indemnity clause in this case was inadequate to support a lien. This is not news. The Courts have repeatedly invalidated liens based on these sorts of clauses. These clauses do not cover legal costs. See our previous posts for more on this: https://ontcondolaw.com/2018/02/26/update-improper-use-of-the-indemnification-clause/.

#2 Past Decisions

If the decision stands for the proposition that the first group suggests it does, it is hard to reconcile it with previous decisions. There are plenty of previous cases where indemnity clauses were successfully used by condominiums to collect costs from owners for compliance issues without court orders.  This case is distinguishable from those previous decisions because the condominiums had indemnity clauses that specifically mentioned legal costs for compliance, which was not the case here.

#3 Definition of Common Expenses

The decision relies upon the definition of “common expenses” in the declaration, but makes no reference to the Act itself. According to the Act “common expenses” means the expenses related to the performance of the objects and duties of a corporation and all expenses specified as common expenses in this Act, in the regulations or in a declaration. In my opinion, the Act clearly allows a condominium to specify common expenses in a declaration. There is nothing that suggests this is limited only to the list of common expenses shared by all owners (i.e. usually Schedule E) and cannot be used to describe further situations where a single owner might be responsible for a cost.

#4 Potential for Abuse

If there is a concern about the amount a condominium is charging to the owner for compliance costs, the owner has avenues to address the issue, including bringing his or her own court proceeding for a ruling by the court or assessing the lawyer’s accounts as the party ultimately responsible for paying it. While it was of no assistance to Mr. Amlani, future amendments to the Act will also provide some relief to owners facing improper or unreasonable charges.

#5 Amendments to the Act

The amendments to the Act (that are not yet in force) clearly envision these sorts of costs being considered common expenses. For example, section 7 will add the following to the list of additional content permitted to be added to declarations:

(a) a statement specifying the common expenses of the corporation and the circumstances that may result in the addition of any amount to the contribution to the common expenses payable for the owner’s unit to indemnify or compensate the corporation for,

(i) an actual loss, as is prescribed, that the corporation has incurred in the performance of the corporation’s objects and duties, or

(ii) any other purpose, if any, that is prescribed;

Similarly, section 84 (along with future regulations) will create a process for condominiums to charge costs to owners in certain circumstances. The government is currently working on regulations to provide further detail about the process. It appears that the CAT may ultimately have jurisdiction on dispute about indemnity claims.

In my opinion, the amendments seek to codify the existing case law that permits condominiums to recover certain costs from owners so long as they have proper indemnity clauses in the declaration. The amendment should prevent condominiums abusing these sorts of clauses, while allowing other condominiums to collect costs from owners where it is appropriate to do so (thereby saving the other innocent owners from footing the bill for an owner’s non-compliance). The amendments should strike a good balance between the competing interests.

Conclusion

To me, this case is a good reminder for condominiums to be reasonable when investigating complaints and enforcing compliance. Previous cases have repeatedly reminded condominiums (and owners) of the duty to be reasonable and work together to find solutions for problems. Court should be a last resort. The case is also a good reminder (or lesson for some) that condominiums cannot rely upon general indemnity clauses to recover any and all costs that it incurs from an owner. It must be properly authorized by the Act, its regulations, or the declaration. If in doubt, check with the condominium’s lawyer before adding the costs to the owner’s common expenses.

I should also note that the appeal period for this case has not expired. As such, it may not be the last we hear on this one.