Applying an Owner’s Payments to the Earliest Arrears

In the recent case of Toronto Condominium Corp 1462 v Dangubic, the condominium corporation registered a lien against an owner’s unit for recovery of legal costs incurred by the corporation in relation to “compliance letters” sent by the corporation’s legal counsel to the owner. The Court confirmed that the condominium corporation was entitled to recover these amounts as additional common expenses pursuant to indemnification provisions contained in the corporation’s Declaration and By-laws.

Continue reading “Applying an Owner’s Payments to the Earliest Arrears”

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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.
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Corporation Recovers Extensive Costs It Has Incurred to Recover Past Arrears

In our blog post from July last year, we reported on a case where a condominium corporation had spent several years in court in its efforts to collect common expense arrears, and the related costs and disbursements. As reported, the various decisions of the Superior Court, and the cost decision following the ultimate trial of the issue, resulted in the following findings:

  • The unit owners had liability for fees in the amount of $490,410.00 (pursuant to a partial Summary Judgement and the further Trial of the Issue); and
  • Pursuant to section 85(3) of the Condominium Act, 1998, the condominium corporation was entitled to full indemnification of its reasonable legal fees and disbursements, which amounted to a total of $790,914.63.

Today, the Court of Appeal dismissed the appeal of both the trial and cost decisions.

To me, this decision brings some comfort to condominium corporations that are acting reasonably and diligently to collect arrears, but are nevertheless faced with lengthy, challenging, and costly disputes.

The Court of Appeal has confirmed that where the fees and disbursements are reasonably incurred in the proper collection of arrears, even if the fees and disbursements are not proportional to the arrears recovered, full indemnification pursuant to section 85 is warranted.

In my view, this is wholly in keeping with the intent of section 85 of the Condominium Act, and the need to ensure that innocent owners are not financially penalized for costs incurred to collect outstanding arrears.

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Collecting Condominium Arrears – Some Tips

A condominium corporation’s right to lien for common expenses expires three months after the owner’s default. And the courts have now said that this lien right generally cannot be “resurrected” after the three-month limitation period has expired. But condominium corporations may wish to consider a strategy to maximize the corporation’s lien rights.

One good strategy is to apply all common expense payments (made by the owner) to the owner’s earliest arrears. This has the effect of making any remaining arrears “as recent as possible”, thereby delaying the three-month lien period.

This strategy is permitted in most cases, unless the condominium corporation has agreed to apply the payments in another manner. The general rule in law is that a creditor has the right to apply the debtor’s payments to whatever debts the creditor deems appropriate; again, unless the creditor has in some way agreed otherwise.

In order to avoid, or at least minimize, arguments about the right of the condominium corporation to apply an owner’s payments to the owner’s earliest arrears, I recommend two steps:

  1. Add a provision to the corporation’s by-laws specifically stating that all common expense payments will be applied to the owner’s earliest arrears. This avoids arguments about whether or not the corporation has agreed to apply payments in that manner.
  2. When preparing each unit ledger, be sure that the owner’s payments are in fact applied to the earliest arrears (and are shown as such on the ledger).

To read more about arrears in common expense payments, see our previous blog post.

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Collection Tips – Part 2

You registered a lien on a unit…now what? Here are some considerations to keep in mind once you are in the lien process:

1) Once the lien process has begun, condominiums should generally continue to accept all payments from the owner, however:

  • You may not wish to accept the payment if the owner purports to make a partial payment in ‘full satisfaction of all arrears’.
  • If legal counsel is involved, you may want to direct that all payments be made through the legal counsel. Alternatively, if payments are made directly to the corporation, be sure to contact legal counsel to obtain an update of the outstanding arrears (including legal costs and interest). In this way, you will always know what amount remains outstanding.

2) Ensure that the Unit ledger is kept up to date.

3) Until the arrears are paid, the owner will generally not have the benefit of a vote. [See Section 49(1) of the Condominium Act, 1998 (the “Act”).]

4) In the event that the lien is not paid off, the Corporation will need to consider whether it will enforce the lien by way of power of sale. Section 85(6) of the Act states that the lien may be enforced in the same manner as a mortgage. Accordingly, the Corporation may wish to follow the procedures outlined in the Mortgages Act and the Land Registration Reform Act for sale of the unit. In some cases, foreclosure may also be worth considering. [Note: the lien must be enforced within 10 years from the date of registration of the lien.]

5) If there are any unsecured arrears (arrears that are perhaps not secured by the lien, for example because they fall outside of the three month lien period), the Corporation will need to consider whether it will be pursuing these arrears by way of court process. [Note: the two year general limitation period will likely apply.]

6) Also remember that, if the Unit is rented, Section 87 of the Act allows the Corporation to direct a tenant to pay rents directly to the Corporation. This collection right applies also to unsecured arrears. This can also assist the Corporation in collecting arrears in a more timely fashion.

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