Trouble with the declarant?

action artisan burnt construction

Photo by Anamul Rezwan on Pexels.com

I am regularly consulted by our condominium clients about issues with the declarant. Sometimes the declarant is in arrears of common expenses for units it still owns. Other times the declarant has not paid the first year budget deficit owing to the condominium. Sometimes the declarant made promises to purchasers that they didn’t follow through on. On occasion there are construction defects. What’s a condominium to do? Unfortunately, the answer depends on the situation and there is no one best way to deal with the declarant.

Arrears of common expenses

The easiest problem on the list – arrears of common expenses – is also one of the most common. Where the declarant has fails (or refuses) to contribute toward the common expenses payable for any units that it still owns the condominium may be able to register a lien against the unit to collect the amounts owing just like it would with any other unit owner. The declarant usually intends to sell the units quickly after registration so it is important to pursue liens against declarants in a timely manner. If not, the declarant could transfer the unit and a dispute could arise about their responsibility for arrears owing prior to the transfer.

It is important to note that the condominium can only register the lien against the units in arrears and not all of the units owned by the declarant. It is also important to review the declaration to see if the declarant is obligated to pay for the units while it still owns them as on occasion there is an exemption for the declarant while it owns units (see this case).

First year budget deficit

Another common issue is collecting the first year budget deficit owing from the declarant to the condominium. We previously posted about the declarant’s obligation to reimburse the condominium for the first year budget deficit (see here).

The Condominium Act, 1998, states that the declarant is accountable for the budget statement for one year following registration of the declaration and description (or the registration creating any phases). Section 75 of the Act states that the developer is responsible for the difference between the budget statement and the actual numbers, which are described in the audited financial statements. The condominium must notify the declarant of the deficit within 30 days of receiving the audited financial statements. The declarant then has 30 days to pay the condominium.

If the declarant refuses to pay the condominium, or they have a dispute about the deficit, the condominium and declarant must mediate the dispute pursuant to subsection 132(3) of the Act:

Capture

If the condominium and declarant cannot reach a settlement at mediation the next step is binding arbitration, which is very costly.  Fortunately, in my experience, most declarants pay before arbitration is required.

Like with arrears of common expenses, it is very important that the condominium act quickly when faced with a first year budget deficit issue. The Act has very tight timelines (i.e. 30 days after receiving the audited financial statements) that must be complied with or the declarant may be able to avoid the obligation. Also, as the units are sold the declarant may transfer assets, which may leave very little funds left to satisfy the first year budget deficit.

Inadequate Disclosure or Misrepresentation

Some owners feel like the declarant misrepresented some aspect of the development to them. For instance, I have two different sets of condominiums who feel aggrieved because their declarants marketed the condominiums as phased condominiums only to register them as separate condominiums. This may not seem like a big deal, but the costs are significantly higher to operate the condominiums as two separate entities than it would have been as one. In one case, the condominiums are considering legal action to recover their damages. In the other the declarant agreed to contribute toward the costs of amalgamation.

If the purchaser becomes aware of the issue prior to closing on the unit, such as after receiving a material change notice from the declarant, they may be able to rescind the agreement and walk away. Unfortunately, once the units are transferred from the declarant to the purchasers the process is more complicated as rescission of the agreement is no longer an option and the owners must sue for damages. For this reason, it is vital to have the disclosure documents (and any notices about changes to the disclosure documents) promptly reviewed by a lawyer. The lawyer needs time to review the documents and prepare a notice to the declarant within ten days of receiving the documents if rescission is sought by the purchaser. Time is of the essence!

Construction defects

Some unfortunate condominiums find construction defects in the common elements or units. The engineer often finds them during the performance audit or subsequent reserve fund studies, but sometimes they can be discovered years later when destructive testing is completed for an upcoming repair project. Depending on a number of factors (i.e. the time of the discovery, type of condominium, and the type of defect), the condominium could have a warranty claim to Tarion. If not, the condominium may still have a cause of action that could be pursued at court, such as breach of contract, breach of warranty, breach of statutory duty, or negligence.

If a condominium suspects there are construction defects it needs to hire an engineer to investigate as soon as possible. It should also have a preliminary discussion with a lawyer to determine any possible limitations to a claim against the declarant. Apart from traditional limitations, such as the statue of limitations or expiration of warranty periods, some declarants are not including documents in their disclosure packages that require the condominium to release legal rights to pursue the declarant for construction defects, except for those that cannot be released (i.e. major structural defect warranty claims to Tarion).  My recommendation would be to consult with engineers and lawyers familiar with construction defect litigation. The condominium’s general counsel may not have the knowledge and expertise that you need when it comes to construction defects.

 

Clear and Current Disclosure

Photo by Pixabay on Pexels.com

In Toronto Standard Condominium Corporation No. 2051 v Georgian Clairlea Inc. (“Georgian”) the Ontario Court of Appeal affirmed the findings of the motion judge with respect to a declarant’s disclosure obligations as set out in the Condominium Act, 1998 (“Act”).

Subsection 72(1) of the Act provides that “the declarant shall deliver to every person who purchases a unit or a proposed unit from the declarant a copy of the current disclosure statement made by the declarant for the corporation of which the unit or proposed unit forms part” (emphasis added).  The obligation to provide the current disclosure statement demonstrates that the Act intends for the declarant’s disclosure obligations to continue as the project changes between inception and final closing. Continue reading

Common Errors with the Amendments: Part 3

tech

We posted previously about some common errors and misconceptions that we have run into since the Act was amended last year. We are still encountering issues regularly. Given the complexity of the regulations is it any wonder we are still encountering mistakes and misconceptions? Here are some of the most common issues we have encountered so far:
Myth: If a candidate makes a disclosure prior to her election or appointment she is automatically disqualified. For instance, if a candidates checks off the box that says “I am not an owner” the candidate cannot be on the board.

Continue reading

Forms for Ongoing Disclosure by Directors

director disclosure.png

A lot has been written about the obligation of candidates to disclose information and make certain statements prior to their election or appointment to the board of directors. The Act requires candidates to satisfy the disclosure obligations prior to their election to be qualified as directors (see section 29(1)(f) of the Act). Whether the disclosure may be made orally at the meeting or in writing depends upon a number of factors, including when the person notified the condominium of their intention to be a candidate and the condominium’s by-laws. There is no prescribed form for making the required statements in writing, but many law firms and management companies have created forms for candidates to complete prior to the election. The requirements for candidate disclosures are described in section 11.6 of O.Reg. 48/01.  Continue reading

Interesting decision on material change from 40% increase in monthly fees

A new case sheds some light on the requirements for notice of a material change. Section 74 of the Act requires the developer to notify purchasers of material changes in any information contained or required to be contained in a disclosure statement.

In 2009 the purchasers agreed to buy a unit in the Trump Hotel from the developer. The closing date was to be in 2010. An amendment was agreed upon that extended the closing date to March 31, 2012 at the latest. In early 2012 the developer’s lawyer provided the closing documents to the purchasers’ lawyer. The purchasers’ lawyer noticed that the common expenses for the unit had increased from $1,775 per month in the original documents to $2,472 per month in the closing documents. The purchasers’ lawyer wrote to the developer’s lawyer about the difference and argued that it constituted a material change that required the developer to provide notice or a revised disclosure statement. The purchasers terminated the agreement, but the developer refused to return the deposit.

The purchasers commenced a proceeding against the developer. The purchasers argued that the developer’s lawyer had set a closing date, extended it and the developer failed to close by the closing date in the agreement. The developer argued that it had not extended the closing date. The purchasers sought an order requiring the developer to pay back the deposits paid, being $228,250. The developer sought a declaration that the deposits were forfeited.

The court found that the developer’s lawyer had authority under the agreement to extend the closing date and had done so by his communications to the purchasers’ lawyer. The court also found that the purchasers relied upon the communications of the developer’s lawyer to their detriment.

The most interesting portion of the case (for me at least) was that the developer argued that the purchasers should have invoked section 74 of the Act to rescind the agreement, and since they did not they were in breach of contract for failing to close. However, the court noted that the triggering event for rescission in section 74 of the Act is delivery of a revised disclosure statement or notice. The developer argued that the statement of adjustments provided to the purchasers’ lawyer by its lawyer prior to the proposed closing date was sufficient. The court disagreed and found that the purchasers were entitled to rescission since the triggering event (i.e. a revised disclosure statement or a notice of a material change) never occurred, which means the time period for rescinding the agreement had not begun.

The purchasers were entitled to their deposits back plus interest. Costs have not been decided.

This case is important for any developers, purchasers, and their lawyers since there are specific requirements for notice of a material change under section 74 that must be followed. A simple letter from the developer’s lawyer to the purchasers or their lawyer may not suffice.

Large Pillar Obstructing Storefront is NOT a Material Change

The Court of Appeal upheld a trial judge’s decision that a “large pillar blocking part of a storefront in a constructed condominium unit” was not a material change from the disclosure statement provided to the prospective purchaser. As a result, the purchaser was not entitled to rescission under sections 73 and 74 of the Condominium Act, 1998.  Continue reading

Status Certificate Error Costs Condo, Lawyer, and Others

The Court of Appeal has released its decision in Orr v. Metropolitan Toronto Condominium Corporation No. 1056.  I encourage a full reading of the case, but here is a summary of the important facts and findings.

The condominium was developed in the late 80s and registered in 1993. One of the principals of the developer purchased a unit and built a third floor in the common element attic space above his unit. The third floor held a large family room, bedroom, ensuite, storage area and small furnace room. The condominium documents showed the unit as a two-storey unit. The principal was the president of the condo until 1997 when he sold the unit. The purchaser obtained two estoppel certificates (now called status certificates). Neither certificate mentioned the third floor issue. The purchaser bought the unit. During renovations of the unit the new owner discovered construction defects. She had her lawyer write to the condominium and property manager, who responded by demanding that she stop immediately. The condominium’s engineer investigated the defects and noticed the third floor. The condominium brought an application against the owner for the third floor changes. The owner commenced an action against the former owner of her unit (who was also the former president of the condominium and principal of the developer), the City of Toronto, and the real estate agents. The owner started another action against her former law firm, the condominium, the property manager, and a number of individuals.

At trial, the judge found the condominium, lawyers, and seller/director liable for damages.  The owner was ordered to close up the third floor and pay the condominium rent for her use of the third floor. The owner appealed. The seller/director, lawyer, and condominium all cross-appealed

The Court of Appeal made the following findings and comments:

1) Owner’s Claim against the Condo

The Court of Appeal determined that the condominium was liable for negligent misstatement in regard to the certificate that indicated that there were no breaches of the Act, declaration, by-laws or rules. In doing so, the Court made the following findings:

  • The condominium owed the purchaser a duty of care in the preparation of the status certificate. The condominium could not escape its duty by contracting out or delegating the completion of the certificates to the property manager.
  • The condominium and property manager should have been more vigilant and diligent in preparing the certificate when they knew the records transferred from the previous manager were “in dribs and drabs”.
  • The failure of the property manager to make any inquiries into the issue with the third floor prior to completing the certificate was “not reasonable or prudent in the circumstances.”

As a result, the condominium was not entitled to demand the owner close up the third floor and restore the unit to a two-storey configuration at her own expense.

2) Owner’s Claim against the Property Management Company

The property manager was not liable as it was acting as agent for the condominium in preparing the certificates. The property manager did not owe the purchaser an independent duty of care.

3) Owner’s Claim against her Real Estate Lawyer

The Court of Appeal upheld the finding that the law firm was negligent in failing to show all of the plans of the unit to the owner prior to her purchase. The lawyer was not entitled to rely upon the estoppel certificate that indicated there was no breach of the Act, declaration, by-laws or rules; the certificate was “never intended to provide evidence of proper title to a property.”

4) Condo’s Claim against Manager/ Manager’s Claim against Condo

The condominium and property management company claim against each other. The property manager relied upon its management agreement, which included an exception for liability arising from facts that were known by the board and not disclosed to the manager. The Court of Appeal said that it would not impute the knowledge of one director (the seller/president) to the board as a whole since it would “have the potential to vastly increase the liability of condominium corporations and would certainly make risk management on their part all but impossible.”  As a result, the property management company was ordered to indemnify the condominium for the damages it owed the owner as a result of her reliance on the certificate.

5) Condominium’s Award of Punitive Damages from Seller/Director

The trial judge ordered the seller/director to pay $50,000.00 in punitive damages to the condominium. The condominium appealed, asking for $140,000.00. The Court of Appeal upheld the award of $50,000.00.

6) Damages

The owner was awarded:

  • from the condominium – $41,681.00 for repairs to the common elements she made;
  • from the real estate law firm – $28,379.02 for the amount she paid them;
  • from the condominium and law firm (jointly and severally) – the difference between the value of the townhouse as a renovated three-storey unit and a two-storey unit.

The condominium was awarded:

  • from the seller/director – $50,000.00 for punitive damages;
  • from the management company – the amount it owes to the owner for negligent misrepresentation (in the certificate).

The issue of costs (which exceed $1,000,000.00 between the parties) will be determined next year.