A Reminder About Reserve Funds and Status Certificates

If a condominium corporation is aware of any circumstances that may result in an increase in the common expenses (that is, an increase beyond inflation), this must be disclosed in Paragraph 12 of the status certificates. Therefore, something may need to be mentioned in Paragraph 12 of the status certificates if it appears that contributions to the reserve fund may need to increase (beyond inflation).

For example, some features of the common elements may not be covered by the reserve fund study; such as, if those features won’t require replacement until after the reserve fund study period. If so, I recommend that the condominium corporation give careful consideration to the following: Is it possible that the annual contributions to the reserve fund will need to increase when those features “come into the study period” at some time in the future? If so, this may need to be mentioned now in Paragraph 12 of the status certificates.

As mentioned in my blog post last November, the reserve fund study period (currently required to be “at least 30 years”) is also expected to be increased, likely to “at least 45 years”, as part of the anticipated amendments to the Condominium Act and Regulations. Depending upon the particular condominium, this may mean that features not currently covered by the reserve fund study will be covered (if and when the study period increases to at least 45 years). Again, if this could result in an increase in the annual reserve fund contributions, this may need to be mentioned now in Paragraph 12 of the status certificates.

Owner’s Refusal to Co-Operate With Fireplace Maintenance Requirements – An Expensive Lesson

In the compliance proceeding case MTCC No. 634 v. Adamo, a condominium corporation had asked that fireplace maintenance be completed; however, one owner steadfastly refused to fix the problems with his unit’s fireplace to bring it into compliance. Prior to the court hearing in October, 2015, the owner had finally complied, and the Court was only required to decide the issue of costs.

The Court suggested that the owner alone was effectively responsible for the matter ending up in court, but refused to allow the condominium indemnity for costs of “extra-litigation efforts” to identify and rectify the problem. The Court indicated that the recovery of costs was restricted to only the costs reasonably necessary for the litigation.

By the time compliance proceedings get to court, the costs incurred are usually significant. A condominium corporation will often make attempts to find a resolution throughout a dispute; however, sometimes things cannot be resolved with an uncooperative owner unless a court proceeding is commenced, no matter how reasonable the proposed solutions.

In this case, the Court commented that:

  • The maintenance problem had to be fixed, although it was no doubt unwelcome news for the affected owners
  • The owner resisted fiercely and he claimed that the problem was due to the condominium corporation’s failure to perform annual maintenance; however, he did not prove this claim
  • The owner refused to remedy the problem and took the position that the condominium corporation would have to get a court order against him
  • The condominium corporation took all reasonable steps and showed patience with the owner, prior to commencing the application
  • The owner only had himself to blame for the fact that the condominium corporation incurred costs to bring the matter to Court
  • Given the nature of the application, the Court felt that the costs claimed were “exorbitant”. However, after reviewing the history of the file, the Judge understood how the costs got higher than one would expect for a matter of this nature.

The Court decided that the condominium corporation’s entitlement to indemnity ($15,000 was being claimed) should be restricted to the costs reasonably necessary for the litigation itself; that is, not the extra-litigation efforts to identify and rectify the problem. It stated that the costs must be proportional and consistent with the owner’s reasonable expectations of the costs he might be called upon to pay.

As such, we have another case in which the court is recognizing the indemnification principles when an owner is in breach of their obligations, and nothing in the Court’s comments suggests that the condominium corporation acted improperly. However, the Court limited the reimbursement of costs owed by the owner to the corporation to $9,000, by concluding:

  • What an owner could reasonably expect the costs to be in this type of case
  • That the indemnification principles in this case do not apply to all costs incurred in the dispute, just the costs required for the litigation.

To read more about indemnity and enforcement, take a look at our previous blog post.

Another Interesting Court Decision about Condominium Collections

There was another interesting case in December last year about the rights of condominium corporations to collect common expenses.

In the case of Trez v. Wynford, a condominium corporation (MTCC 1037) had failed to register liens for collection of certain common expense arrears. The units in arrears were owned by a company that was controlled by two of the directors of the condominium. Those directors also controlled the condominium’s Board, and they apparently decided, on behalf of the condominium corporation, not to register liens against the units that were in arrears. The Board had also issued status certificates for a new mortgage against the units in arrears, indicating that there were no arrears. At that time, the arrears were over $800,000, and they later grew to about $1.3 million.

The particular directors were subsequently removed from the Board.

The new Board asserted that, in these special circumstances, the condominium corporation should be entitled to an equitable lien against the defaulting units in priority to the mortgage.

The Court disagreed, saying:

The [Condominium Act] clearly sets out MTCC’s right to a lien for common expense arrears. As a result, it is not proper for the court to create an equitable lien in its place. The principle is analogous to case law under similar statutes, such as the Construction Lien Act, which have held the court cannot create an equitable lien where a statute has occupied the field by creating a lien for the same purpose.

The Court also refused the corporation’s request to “revive” its lien rights.

This left the condominium corporation without lien rights, and therefore having only unsecured rights of collection. As a result, the condominium corporation might not be able to collect the arrears. For instance, if a defaulting owner was to go bankrupt, the condominium corporation would be left to share the equity, if any, of that bankrupt owner with all other unsecured creditors of that owner.

Of course, if the condominium corporation had fidelity bonding, that bonding might cover this sort of loss.

Depending upon the circumstances, there might also be basis for a claim against past directors, which may be covered by the corporation’s Directors and Officers (D&O) Liability Insurance. D&O insurance won’t respond to claims resulting from dishonesty or bad faith. But the D&O insurance might respond to a claim against the “innocent” Directors on the Board at the time. But for such a claim to succeed, the corporation would have to prove negligence on the part of those innocent Directors, which might not be the case, depending upon all of the circumstances.

In my view, there are two morals to this story:

  1. It’s important to register timely condominium liens.
  2. It’s always best to elect honest condominium Directors.

ACMO CCI-KINGSTON 3rd Annual Conference – DATE POSTPONED

Nelligan O’Brien Payne is proud to be a Diamond Sponsor of the 3rd Annual ACMO CCI-Kingston Condominium Conference. Please note the event has been postponed. An announcement will be made when a new date is selected.

Morning presentations will include:

  • Helpful Tips for Condominium Corporations
  • The Engineering Panel
  • Let’s share ideas: Condo Triumphs and Regrets

The afternoon will include:

  • A presentation on the Accessibility for Ontarians with Disabilities Act
  • The Legal Panel
  • Closing remarks

The day also includes a luncheon and three breaks with Exhibitors, who are ready to speak with attendees about condominium issues throughout the day! 

For more information and to register for the conference, visit the CCI site here.