Use of Reserve Fund Monies

Section 93(2) of the Condominium Act, 1998 states that a condominium corporation’s reserve fund can only be used for the purpose of major repair and replacement of the common elements and assets of the corporation. In light of this wording, we are often asked whether this means that only the strict repair costs (for example, the costs of contractors and engineers) can be funded from the reserve fund. We are also asked whether this means that only repairs and replacements that are listed in the reserve fund study can be funded by the reserve fund.

In our view, the wording of section 93(2) allows for the use of reserve fund monies for all costs related to major repairs and replacements. Such costs may include a variety of soft costs, which are incurred for the purpose of proceeding with a major repair and replacement.

In addition, reserve fund monies are not restricted to funding only those major repairs or replacements which are listed in the reserve fund study. In appropriate circumstances, reserve fund monies can properly be used to fund unexpected or unplanned expenses.

One note of caution: for any unplanned expenditure (not predicted by the reserve fund plan), remember to consider whether or not the unexpected depletion of the reserve fund could result in an increase in reserve fund contributions in the future (which might need to be disclosed in paragraph 12 of the status certificates).

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Owners Share the Good and the Bad (Including Construction Liens)

Maintaining and repairing the common elements is one of the primary obligations of a condominium corporation. Condominium corporations generally retain independent contractors for this work. Unfortunately, a contractual relationship sometimes leads to a dispute. For example, the contractor may feel that the corporation is improperly holding back payment.

If such a dispute arises, one of the contractor’s collection powers is to register a lien against the property. A lien for common element work can be registered against all the condominium units. This is because all units have a shared interest in the common elements.

There are only a few court decisions that illustrate unit owners’ shared responsibility for the amount of a construction lien. One such decision is Associated Mechanical Trades Inc. v. Kurzbauer, a 2008 Ontario Superior Court decision. In this case, a condominium corporation hired a contractor to carry out work on the common elements. As a result of a contractual dispute, the contractor registered a lien against the condominium units.

Under the Construction Lien Act, in order to discharge the lien, the condominium corporation can pay into Court the amount of the lien as security, pending the Court’s decision on whether the contractor is entitled to that amount.

In Kurzbauer, the unit owner sought to pay her unit’s proportionate interest toward the security. The contractor required that the entire amount of the security be paid before the construction lien would be discharged against any individual unit. The owner brought a motion against the contractor.

The Court examined the following issue:

  • Can an individual unit owner pay his or her proportionate interest in the lien, and require the contractor to discharge the construction lien as against his or her unit only?

The contractor argued that the entire security should be paid, because the owners have an “undivided interest” in the common elements, and therefore the security could also not be divided.

The Court ultimately found in favour of the owner, relying on section 14 of the Condominium Act, 1998.  Pursuant to this section, a unit owner can discharge the portion of a lien that is registered against her unit (equivalent to the proportionate interest, not the proportionate contribution) of the unit, as set out in the Corporation’s Declaration.

The Court stated that if each unit owner paid the unit’s proportionate interest toward the security, then the lien claimant would be in no different position than if the lands were not registered as a condominium.

According to the Court, the contractor has “nothing to lose” by vacating the lien against one unit, where the unit owner pays for the unit’s share of the lien. Moreover, it is unreasonable to expect that a single owner can pay the full amount of the lien in a large condominium complex.

I note that section 14 of the Act specifically applies to encumbrances that are registered prior to the Declaration of a condominium corporation.  The Court seems to suggest in the Kurzbauer decision that the “policy” underlying section 14 applies more generally, including to liens registered by contractors after declaration.

Of course, the condominium corporation may arrange to pay for the entire amount of the security, on behalf of the ownership.  If the lien is substantial, the Corporation may need to consider funding options such as: a special assessment, borrowing, or depleting the reserve fund.  The best approach will depend on the facts of each case.

If the corporation is ultimately successful in defending the contractor’s claim, the amount paid for the security would be returned to the Corporation.

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Condominium Board Policies

The Condominium Act contains no reference to “Policies”. So, can a condominium corporation establish “Policies” (as opposed to passing Rules or By-Laws)? If so, when does a Policy make sense?

In our view, the Board has the right to establish policies for matters falling within the mandate of the Board (i.e. matters that can be decided by the Board). A Policy (created by resolution of the Board) is essentially a “repeating decision” of the Board. In other words, a Policy expresses how the Board will decide a particular type of issue (if it arises more than once). Again, it’s essentially a decision of the Board that will apply to similar situations in future – until the Board, or a future Board, changes the Policy.

A Policy is enforceable only to the extent that the particular Board decision is enforceable. So, a Policy (as opposed to a By-law or Rule) normally makes sense only in cases where the Board decision can be independently enforced.

Note that a condominium corporation may have a legal obligation to establish certain policies. Examples are as follows:

  • A Violence and Harassment Policy (under the Occupational Health and Safety Act), if the corporation has at least one employee;
  • A Customer Service Policy (under the Accessibility for Ontarians with Disability Act), if the corporation has at least one employee;
  • A Privacy Policy;
  • A Human Rights Policy.

But, again, the Board can also consider Policies for any repeating issues.

In a given case, the Board will need to consider:

  • Would a Policy make sense for this particular issue?
  • If so, should the Policy be provided to all owners, and also attached to all status certificates?
  • Would it be more appropriate to pass a By-law or Rule? (For instance, is a By-law or Rule needed in order to enforce the particular decision?)
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Apply Payments to Earliest Arrears

In debtor-creditor law, the general principle is that the creditor can decide how to apply payments received from the debtor. [Note however, that there may be an argument that the debtor has the right, in some instances, to specify how a payment from the debtor must be applied.]

In the condominium setting, dealing with an owner who is in arrears, it is normally best to apply the owner’s payments to the owner’s earliest arrears, for the following reason: The limitation periods (for collection) generally run from the date of the default. For instance,

  • Lien rights expire unless the lien is registered within three months of the default; and
  • Court claims, for recovery of unsecured arrears, generally must be started within two years from the default.

So, if an owner’s payments are applied to the earliest arrears, the “date of default” (for any outstanding amounts) will of course be more recent, and the limitation periods will therefore have later start dates.

To achieve this result, our recommendations are as follows:

  1. To avoid arguments about your rights to apply payments to the earliest arrears, include a provision in your by-laws (stating that all payments are applied to the owner’s earliest arrears).
  2. Whenever permitted, apply each payment to the earliest arrears (in each unit ledger).
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When is a Director’s Resignation Effective?

We know how it can happen. At a board meeting, there is some controversial business, something is said, a decision is made that is accepted by a majority (but not all) of the board, feelings are hurt, tempers flair and someone announces that he or she is resigning. But over a period of time – an hour, a day, a week – the person who has resigned wants to withdraw the resignation. When is a resignation effective? Can a resignation be taken back or withdrawn?

In the world of Ontario for-profit corporations, section 121.(2) of the Business Corporations Act states that a resignation of a director becomes effective at the later of the time the resignation is received by the corporation and the time specified in the resignation. But there is no such provision in the Condominium Act, 1998.

This issue (when is a resignation is effective?) was recently considered by the Ontario Divisional Court in the June 28, 2012 case of Adams v. Association of Professional Engineers of Ontario.

In the Adams case, Dr. Hogan resigned as a director of the Association of Professional Engineers of Ontario (“APEO”) by an email to the APEO Council dated March 3, 2012. By further email dated March 14, 2012, Dr. Hogan purported to withdraw his resignation. On April 13, 2012, the APEO Council met and accepted Dr. Hogan’s resignation. The question was whether or not Dr. Hogan had the right to revoke his resignation (before it had been accepted by the Council). There were no relevant provisions in the APEO bylaws, nor in the Ontario Corporations Act (which governs not-for-profit corporations).

The Divisional Court held that, in the case of a not-for-profit corporation, unless there is applicable wording in the corporation’s by-laws or governing statute, once a resignation is given it cannot be withdrawn or retracted without the Board’s consent. So, Dr. Hogan’s resignation was effective on its terms, and could be withdrawn only with the consent of the APEO Council.

It seems to me that this same reasoning might very well apply to a resignation of a condominium director.

So, be careful to think before you press the “send” button or otherwise deliver your resignation. Once delivered, you may not be able to take it back, unless the Board agrees.

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