Trouble with the declarant?

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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

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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

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