Terminating Agreements in Condos

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There has been some talk about a recent decision of the Court of Appeal that discussed the duty of honest performance. The duty of honest performance “requires the parties to be honest with each other in relation to the performance of their contractual obligations”. This is not the first case to discuss this obligation, but it an important case for the condo industry.

A little about the case first. A contractor provided services to ten condominiums as part of a shared facilities agreement. There were two agreements. One for summer maintenance and one for winter maintenance. The winter agreement permitted the condominiums to terminate on 10 days’ notice to the contractor. The condominiums decided to terminate in March or April of 2013, but did not provide notice to terminate to the contractor until September after he had provided services at no charge to the condominiums as an incentive to renew the agreements. The contractor sued for breach of contract.

The Court of Appeal found in favour of the condominiums. While the condominiums may have failed to act honourably in delaying the termination and accepting the “freebies” when they knew they planned to terminate the agreements, their conduct did not rise to the level required for breach of the duty of honest performance. According to the terms of the contract the condominiums were required to inform the contractor of the decision to terminate and give him 10 days’ notice. As the Court said, “[t]hat is all the [contractor] bargained for, and all that he was entitled to.” Accordingly, the contractor’s claim for breach of contract was unsuccessful and the condominiums were awarded legal costs of $10,000.00 for the appeal and their legal costs of trial.

The case highlights the importance of reviewing agreements carefully before signing them to make sure you get what you bargained for. Even though the condominiums were ultimately successful, the case is a good reminder of how easy it is for a condominium to get into trouble when terminating an agreement. In many cases, condominiums terminate agreements without any legal advice and only seek our help after they’re in trouble. Here are some suggestions to help you avoid trouble in the first place.

Terminating Contracts – Condo Act Rights

The Act describes the termination rights of condominiums in some cases. For instance, some agreements entered into before the owners elect a new board at a turn-over meeting may be terminated by a condominium even if the agreement does not contain a termination clause. The requirements for termination, such as the notice period, vary depending upon the type of agreement. For instance, a management agreement can be terminated with at least 60 days written notice to the management company.

In some cases the agreement may only be terminated within the first 12 months after the turn-over meeting is held. A mutual use agreement may be terminated within 12 months following the turn-over meeting, but only if a judge of the Superior Court determines it is necessary to amend or terminate the agreement because the disclosure statement did not clearly and adequately disclose the agreement and the agreement is oppressive or unconscionably prejudicial to the condominium or the owners. Other agreements, such as those where the condominium receives goods or services on a continuing basis (i.e. snow removal), can be terminated with 60 days notice within the first 12 months following the turn-over meeting where the owners elect the new board.

An insurance trust agreement can be terminated upon 60 days notice to the insurance trustee, despite the provisions of the declaration or the insurance trust agreement. This is not restricted to agreements entered into after the turn-over meeting.

The termination of telecommunications agreements is described in section 22 of the Act. A condominium that includes one or more residential units may terminate a telecommunications agreement if at least 10 years have passed since the later of execution of the agreement and registration of the declaration. The Act also requires the board and the owners of at least 50% of the units approve the termination. The condominium must give 120 days written notice of termination to the other party. The termination right in the Act does not apply to agreements entered into after the turn-over meeting if the agreement is non-exclusive and the agreement also for the installation of other telecommunications systems.

It is important to keep in mind the termination rights described above do not permit a condominium to terminate an easement except in accordance with the easement instrument document. Often, easements are modified on the consent of the parties. In this case, the Act has specific requirements that a condominium must follow before it grants, transfers or releases an easements. In some cases, the condominium can do so by passing a by-law. In other cases an amendment to the declaration may be required.

Other Agreements

Where the Act does not provide termination rights the parties should look to the agreement itself and general contract principles, such as the duty of honest performance described above. In some cases, the agreement will describe a process for notifying the other party of performance issues before terminating the agreement. The purpose is to provide the other party with an opportunity to remedy the issue before the agreement can be terminated. In other cases, such as with employees, there may be legislation that describes the rights of the other party upon termination of the agreement by the condominium.

In most cases it is wise to have a lawyer review the agreement before providing notice of termination to the other party. The lawyer can help you determine the termination rights of the parties (i.e. applicable notice period) and advise you of the consequences for terminating an agreement early (i.e. being sued for breach of contract).

Question: I’m a director for a new condo. What do I need to know?

Being a director for a recently registered condominium is hard work, but it can be very rewarding. It reminds me of being the parent or caregiver for a newborn. At first, babies need constant attention and a high level of assistance to satisfy even their most basic needs. As they grow older they become more independent and are capable of satisfying their basic needs without much assistance from adults. A condominium is similar. Those first year or so after registration the directors will be very busy and face many challenges, but as the condominium ages it should get easier.

In addition to their ordinary duties (i.e. to manage the affairs of the condominium and ensure the owners comply with the Act and the condominium’s documents), the directors for a new condominium should pay special attention to the following:

  1. Performance Audit – The performance audit is an inspection performed by an engineer or architect to determine if there are any deficiencies that could give rise to a claim for payment from Tarion. The performance audit is mandatory for all residential condominiums, even if a claim to Tarion is not possible like in the case of conversion condominiums. The performance audit must be completed within the 6 to 10 months following registration and must be submitted to Tarion before the end of the 11th month following registration.
  2. Reserve Fund Study – A reserve fund study is a planning document that helps the board estimate current and future cash requirements for major repairs and replacements of the common elements and assets of the corporation. It must be completed within the first year of registration. The condominium may save some time and money by having the engineer performing the performance audit complete the reserve fund study around the same time.
  3. First Year Budget Deficit – Many budget statements prepared by declarants are grossly inadequate for the proper operation of the condominium. The fees are kept unreasonably low and/or expenses are estimated at unrealistic amounts. Luckily for condominiums and owners, the Act states that the declarant is accountable for the budget statement for one year following registration. This means the condominium can recover a first year deficit, if any, from the declarant. The condominium must notify the declarant of the deficit within 30 days of receiving the audited financial statements. The declarant is obligated to pay the deficit within 30 days of notice from the condominium. If a dispute arises about the deficit, the parties must mediate the dispute, and if necessary, use binding arbitration to resolve it.
  4. Agreements entered into by the Declarant – Some agreements entered into by the declarant on behalf of the condominium may be terminated by the new board:
    1. Management Agreements – with 60 days written notice.
    2. Agreements for goods, services, facilities, or leases of common elements for business purposes – with 60 days written notice if terminated within 12 months of the turnover meeting.
    3. Mutual Use / Shared Facilities Agreements – court may order that the agreement be terminated or amended within 12 months of the turnover meeting.
    4. Insurance Trust Agreements – with 60 days written notice.

This list is not exhaustive. The list above includes the most time-sensitive obligations that could cause significant problems for the condominium, directors and owners if they are not completed on time.