A Condominium’s ‘Natural’ Reserve Fund Contribution

Condominium Boards are often faced with difficult decisions about whether or not to make a lump sum contribution to the reserve fund. When asked to consider these questions, I often think about the condominium’s “natural” reserve fund contribution.

Here’s what I mean by that: to me, the “natural” contribution is the condominium’s normal annual contribution, assuming a normal reserve fund balance. It’s like the “perfect annual contribution” for the condominium, based on normal life expectancies and replacement costs for the various reserve fund components, once any deficiencies have been addressed.

If a condominium’s annual reserve fund contribution is at or near the “natural” level, then the reserve fund contributions should closely reflect the true long-term repair and replacement costs for the condominium. The result should also be that the condominium fees are at a normal or natural level for the particular condominium, which arguably makes the most sense for marketability of the units. Furthermore, with annual contributions at the “natural” level, the reserve fund balance shouldn’t grow to an excessively high level at any time down the road.

On the other hand, if a condominium’s annual reserve fund contribution is “higher than natural”, this will mean “higher than natural condominium fees”, and the condominium will tend to build up an excessive reserve fund balance as the years go by.

In some cases, a special assessment (or a loan, subject to by-law approval) may be a good way to keep the annual reserve fund contributions closer to the natural level. In other words, in some cases it may make sense to “boost up” the reserve fund balance, so that ongoing annual contributions can be at the natural level. This is something for consideration of the Board in a given case.

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A Board’s Mandate to Make Changes to the Common Elements

A recent Ontario Superior Court decision Mazzilli v. Middlesex offers further insight into Section 97 of the Condominium Act – namely, when it is (and is not) necessary to involve owners in decisions about work on the common elements.

In the Mazzilli case, the Board had approved the following work, without involvement of the owners:

  • Changed the existing wood balcony guards with vinyl siding to a tempered glass/ballast system
  • Changed existing windows, which were a combination of sliders, casement and fixed windows, to vinyl awning windows
  • Changed the existing asphalt shingles to pre-finished steel roofing
  • Changed the existing brick and vinyl cladding to a combination of brick, stone and stucco; including the installation of a product known as Kerlite
  • Changed the existing electric forced heating units in the hallways to gas-fired units
  • Renovations to the interior lobby areas.

Overall, this was a $5 million renovation. One of the owners contested the changes to the common elements, arguing that the work required approval of the owners.

The Court, however, held that all of the work fell within the Board’s repair and maintenance mandate, and did not require involvement of the owners pursuant to Section 97 of the Condominium Act.

The Court decided that the condominium corporation was only keeping up with technology, consistent with advice from the corporation’s engineer. As such, this was all repair and maintenance, even if the result had a “different, more contemporary, aesthetic appearance”.

This decision tells us that changes of appearance do not necessarily require involvement of the owners, as long as the purpose is to replace or repair “old, defective or worn out” common elements, and particularly if the work is recommended by the corporation’s expert. However, I think each case needs to be considered on its own particular circumstances – including any expert advice. In some cases, I think changes of appearance may require owner involvement. But again, it will depend upon all of the circumstances.

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The Hammer or the Fly Swatter? – Condo Corporations and Litigation

As many condominium corporations are no doubt aware, using the court or an arbitration to resolve a dispute is sometimes unavoidable. It can often be the only effective manner in which to deal with a difficult owner who is either unwilling or unable to comply with the Act and/or a condominium’s governing documents. The Condominium Act in Section 17 (3) clearly states that condominium corporations have a duty to take all reasonable steps to enforce the Act, declaration, by-laws and rules; and this duty is owed to all residents of the community. It’s an important provision, directed at protecting and preserving the comfort of all condominium occupants in Ontario.

Because of these obligations, Section 134 of the Act (and often the declaration) includes a mechanism that effectively ensures the condominium corporation is fully indemnified in such situations. That is, it enables the corporation to recover all of the costs reasonably incurred in attaining compliance.

Balancing the interests of the innocent, compliant owners with those of the individual who is unwilling or unable to comply can be a challenging task. The compliant owners are entitled to enforcement; but the enforcement steps must also be reasonable. And the situation can be even more complicated when a non-compliant resident suffers from a disability (rendering him or her incapable of compliance), because condominium corporations have a duty to accommodate such disabilities. In my view, this doesn’t mean that non-compliance in such cases must be tolerated, so that enforcement becomes impossible.

I think the basic principle is as follows: Condominium corporations must consider all of the unique circumstances of each situation, and then determine a reasonable course of action to achieve compliance.

Courts are increasingly making decisions that appear to indicate that, in some cases, condominiums may be taking a hard-line approach that goes beyond what is reasonable in the circumstances.

In the December 2015 case Couture v. TSCC No. 2187, Justice Myers made the following statement as a footnote in his decision:

“Perhaps the board had an eye toward subsection 134 (5) of the statute that entitles a condominium corporation to full indemnity costs in litigation against a unit owner in which the condominium corporation obtains any award of damages or costs. This subsection performs an important role to protect innocent unit owners from paying the price of unmeritorious litigation. However, it also provides a skewed incentive to boards of directors and their advisors who can wield a heavy sword over the heads of unit owners… This section unfortunately incentivizes recalcitrant, litigious behaviour by condominium boards of directors and their advisors whom may be so inclined.

Clearly not every condominium’s behaviour would be characterized as “recalcitrant” or “litigious”. However, this footnote offers important insight into the perspective of the courts on applications for compliance, a perspective we’ve noticed is also reflected, to some extent, in other recent cases. Courts appear to be sending a signal to condominiums that while they are legally entitled to full indemnity costs in cases of non-compliance, they nonetheless have a duty to ensure that those costs are incurred carefully and reasonably. In other words, it’s best to avoid using a hammer, when a fly swatter will do.

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Bill 106 has received Third Reading. What Now?

Now that Bill 106 has been passed and received Royal Assent, many of our readers may be wondering: “What now?”. To start with, condominium corporations and managers may wish to begin planning for the arrival of the new legislation.

Here’s my list of some of the key considerations.

I. Further detail still to come in the regulations

The regulations will arrive and the legislation will be proclaimed in force likely within 12 to 24 months. Much of the important detail will be contained in the regulations, so these will of course require careful scrutiny when they arrive. Some of the key details to be contained in the regulations are as follows:

  • Provisions respecting permitted reserve fund expenditures, reserve fund studies and the adequacy of reserve funds
  • The types of disputes that fall within the jurisdiction of the new Condominium Authority Tribunal
  • Mediation and Arbitration procedures
  • Directors’ training and disclosure obligations
  • Details of the licensing requirements for managers
  • New proxy and status certificate forms
  • New requirements respecting record-keeping and owners’ access to records.

II. Condominium insurance deductibles and standard unit descriptions

The new legislation will eliminate insurance deductibles by-laws. Such provisions will only be valid if added to the declaration, with consents from owners of 90% of the units. This will place added pressure upon condominium corporations when it comes to insured damage. To relieve some of that pressure, many condominium corporations (and their owners) may wish to consider new standard unit by-laws, in order to remove certain “high risk” features from their standard unit descriptions. Those features would then be treated as “unit improvements”, covered by the owner’s insurance.

III. Management costs and management contracts

The new legislation will mean new licensing fees for condominium managers, and will likely also mean added work for condominium managers. To give just a few examples:

  • The legislation contains enhanced requirements for notices to owners
  • There will be new provincial reporting requirements for condominium corporations
  • Contract procurement processes (tendering) will be mandatory for many types of contracts
  • Managers might be expected to handle some sorts of disputes, such as applications to the new Condominium Authority Tribunal.

This may well mean higher management fees. Therefore, I recommend that condominium managers and boards now check their management contracts and discuss whether or not the manager will have the right to charge added fees or extras for this added work and expense, when the new legislation comes into force.

IV. Declaration amendments

Condominium corporations may wish to start considering possible amendments to their declarations for the following reasons:

  • The new legislation contains a revised definition of “repair”, which may alter previously understood repair and maintenance obligations in some condominiums
  • The new legislation appears to say that a chargeback can only be added to an owner’s common expenses if the declaration contains a clear provision for such. Condominium corporations may wish to add such a provision to their declarations, if they don’t now contain one
  • As described above, condominium corporations may wish to add a provision respecting insurance deductibles to their declarations.

V. By-law amendments

Condominium corporations may wish to start considering possible amendments to their by-laws for the following reasons:

  • The new legislation says that a condominium corporation can enter a unit without notice in an emergency only if there is a provision allowing for such in the corporation’s declaration or by-laws. But not all condominium declarations or by-laws contain such a provision!
  • The new legislation says that new provisions for voting by “telephonic or electronic means” may be added to the by-laws
  • As noted above, condominium corporations may wish to consider amending their standard unit descriptions, by passing new or revised standard unit by-laws.

VI. Directors’ disclosure and training

All condominium directors will have to comply with the new training and disclosure requirements to be contained in the regulations.

VII. New forms of proxy and status certificates

Some condominium forms will need to be updated – including new prescribed forms for status certificates and proxies.

VIII. Non-leased voting units

Condominium corporations will need to determine whether or not the revised provisions respecting “non-leased voting units” apply to them.

IX. Owner chargebacks

Condominium corporations will want to consider their rights of collection against any owner who causes the condominium corporation to incur costs. Factors to consider include:

  • Does the Act or the declaration contain a provision allowing for the chargeback to be added to the owner’s common expenses?
  • Condominium corporations will need a sound procedure in place (for collection of chargebacks) that meets the new “chargeback collection procedures” in Section 84 (3) of the amended Condominium Act
  • In some cases, condominium corporations may wish to consider other methods of collection – such as a claim in Small Claims Court or an Application to Superior Court.

X. Dispute procedures

For any given dispute, condominium corporations will need to consider:

  • Is this dispute subject to mandatory mediation and arbitration?
  • Does the Condominium Authority Tribunal have jurisdiction over this dispute?
  • Can this dispute be taken to Court?
  • What is the applicable limitation period for commencement of the dispute process?

XI. Record of owners and mortgagees

The new legislation contains revised provisions respecting the corporation’s record of owners and mortgagees, and respecting notices of meeting. Condominium boards and managers will want to be ready to call meetings in compliance with these revised provisions.

XII. Licensed manager

Finally, when the new legislation arrives, condominium corporations will of course need to verify that their manager (if they have one) is licensed as required by the new Condominium Management Services Act, 2015.

Final note

The legislation also contains many new requirements for condominium declarants, and relating to newly-declared condominiums. This report does not deal with those requirements. Look for our upcoming blogs on those topics!

Also, for more commentary on Bill 106, check out our previous posts.

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Water, Water Everywhere – Can One Unit’s Excessive Water Consumption Be Charged Back to the Owner?

In the 2015 Small Claims Court case Metropolitan Toronto Condominium Corporation No. 659 v. Chris Truman, the Condominium Corporation commenced a claim against the owner of a commercial unit who was using excessive amounts of water to operate a legal marijuana grow-operation. The Condominium Corporation wanted the owner to be responsible for the costs of the water consumption used by the unit.

The Corporation installed a meter to help determine the water consumed in the unit, and sought payment from the unit owner for the cost of the excessive quantity of water consumed. It was just over $19,000 during the applicable time period, so not an insignificant amount.

In deciding that the unit owner was required to reimburse the Condominium Corporation, the Court emphasized the issue of proportionality, fairness and equity, and determined that the defendant unit owner’s use of water was disproportionate to the allotted 5.13% share of common expenses for the unit. It was not fair to the other unit owners to have to bear these costs, when the defendant alone reaped the benefit. The other unit owners were, in effect, subsidizing his cultivation of medical marijuana.

Therefore, the Court granted judgement in favour of the Condominium Corporation for the costs of the excessive water used by the unit. This case is beneficial to the interests of all unit owners, in situations where a single unit is taking advantage of the communal structure of common expense payments, and utility usage, in condominiums.

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