CONDOCENTRIC: For Better or Worse: The Condominium Act, 1998 (Anniversary Commentary)

May 5, 2006 marks the fifth anniversary since the “new” Condominium Act was proclaimed into law. This new Act did not simply create limited amendments, but entirely replaced the previous legislation, which had remained virtually unchanged for over 20 years.

The previous legislation was brief, vague and subject to varied interpretations. The current legislation is lengthy by comparison and whereas it provides more guidance, it is still subject to varied interpretations.

The following is a brief commentary on certain points in the Act (certainly not all) of what works, what doesn’t and what changes I think could benefit the condominium community:

What works:

• Declaration Amendments: By reducing the threshold from 100% of all unit owners and mortgagees to, either 80% or 90% of owners (depending on the amendment) the Act has introduced some very much needed flexibility in the structure of condominiums while still keeping the threshold relatively high. This is particularly useful as it is now possible to “modernize” a condominium corporation’s declaration, and/or amend provisions that make little sense (i.e. a 12 board member requirement in a 36 unit condominium).
• Reserve Funds: The Act now mandates that reserve studies must be carried out every three (3) years, it prescribes who can carry out reserve fund studies, and it requires that action be taken to ensure that the reserve fund becomes fully funded as per the study. While this requirement has probably caused more than its share of financial hardship for many condominium corporations required to play “catch-up” with their finances, it certainly stands out as one of the more significant amendments aimed at protecting unit owner real property investments.
• Separate Bank Accounts: Condominium corporations must have separate operating and trust accounts. In the past, it was often the case that condominium corporation funds were separated on paper only – but were in fact co-mingled in a single account. In extreme cases, the reserve fund would be all but depleted by continued underfunding of the operating account, and accumulated operating deficits.
• By-laws: The Act has greatly expanded the areas of what may be addressed by by-law. For example, it is now clear that a by-law can establish what qualifications an individual has to be on the board; to govern the maintenance of units and the common elements; to restrict non-resident owners from making use of the common elements; and to permit board meetings by teleconference.
• Alterations to the common elements: Where the old Act was vague, cumbersome, and required a unit owner meeting in every instance of alteration, the current Act is more guiding and pragmatic, recognizing the importance of cost and unit owner self-determination, in determining when a unit owner meeting to vote on an alteration would be necessary. The current Act also recognizes that not all alterations are physical in nature, and includes alterations to services together with physical alterations. This change is not perfect though. If a Board wants to discontinue a service there is ordinarily no cost involved. Absence any direct cost, the protections in the Act fail to apply, and the Board, without notice to the unit owners, arguably has the power to discontinue this service.

What doesn’t work?

• Consumer Protection - Conversions: Conversions are existing buildings which have been retrofitted or converted to use as a condominium. Currently, Tarion does not provide any warranty protection (as is otherwise available in new construction), meaning that a board of directors is forced to deal directly with the developer to resolve construction deficiency disputes. More problematic, however, is that, while many conversions look “new” on the outside, there is no guarantee of what has been done on the inside. If the reserve fund set up by the developer is akin to that for new construction (minimum 10% of the budget), how can this fund possibly address building systems (elevators, roofs, HVACs, etc.) which might be twenty or thirty years old?
• Occupancy Standards By-law: The Act permits condominium corporations to pass by-laws to limit the number of persons residing in a unit. The difficulty comes in enforcing this provision. For example, if, in enforcing this provision, a condominium corporation demands that a family vacate the unit, the condominium corporation could run afoul of the Human Rights Code – specifically, discrimination in respect of Family Status. If enforcement is by way of charging back the additional costs incurred as a result of the breach, the Act provides little guidance on how same should be calculated.
• Insurance deductible: Under the old Act, the courts had determined that insurance deductible could be charged back to the owner of the unit from where the damage originated. A finding of fault was not necessary. The current Act represents a significant step backwards. First, a by-law must be passed to avoid having to prove responsibility on the part of the owner. With the by-law in place, as long as the Corporation was not at fault, the deductible could be charged back. Secondly, the claim for deductible is limited to the cost of damages to the owner’s unit only. This is of little use in the case of water escape where the majority of damage is to the units below. The condominium corporation is left relying on its indemnification provision (usually in its declaration) to recover the balance of the deductible.
• Owner Occupied Director: This point is perhaps more appropriately characterized as “nuisance”. For the last five (5) years, in our practice, I can recall the “owner-occupied” director requirement performing as intended (protecting individuals against “block voting”) on only one (1) occasion. For the most part, this provision creates a time consuming nuisance at Annual General Meetings, using up limited and precious time.

Things I would like to see changed:

• Increased Protection for Consumers from Developers: Mandatory third party inspections, by an engineer or architect, on conversion properties, as contemplated by section 9(4) of the Act, coupled with realistic funding of the reserve fund for conversion and new construction would be a start. Collection of first year budget deficiencies represents another problem. In many cases, new condominium corporations are required to increase common expenses significantly, not only adjust for increased costs after the first year, but also to make up for the first year budget deficiency while re-payment of same is unnecessarily delayed.
• Spot Audits: As lawyers, we are subject to spot audits of our trust accounts by the Law Society. The Law Society can require a lawyer to clarify matters or to change certain practices. The failure to properly deal with trust moneys and/or cooperation with the Law Society can result in a lawyer losing his/her right to practice law. There is no similar protection for unit owners from board members and property managers. Corporations continue to co-mingle funds, under fund the reserve fund, supplement operating deficits through the reserve, and in some cases minimize the significance of being in a net deficit position. While a condominium corporation’s auditor may raise concerns regarding these practices, there is no regulatory body that can insist on swift change. In some instances, unit owners have “faith” in members of the Board who are their “friends and neighbors” and refuse to accept that anything is in any way improper.
• Regulation of Property Managers: In practice, I am fortunate to work with many individual managers who, and many management companies that, strive to meet the ideals of this vocation. These are individuals and companies that take the time and make the effort to better serve the condominium community by investing in themselves and the condominium community. This effort comes at a cost. On the other hand, we have all seen the role played by property managers trivialized – by board members and unit owners who fail to recognize the knowledge and skill required to do the job well, and, more importantly, by other managers who have no interest in making a long term commitment to their clients or the industry. This latter group seems to offer services at seemingly low cost – but offer little service in return. In a condominium community which is cost sensitive, and whose memories fade with each change on the board, this latter group perpetuates as the “lowest common denominator” and puts downward pressure on the industry as a whole.
• Dispute Resolution: The old Act contemplated the Bureau – a condominium specific, not-for-profit body to educate the community, and to resolve disputes quickly and with little cost. The Bureau was never implemented, and is not mentioned in the current Act. Mediation is certainly beneficial and has its place in condominium disputes; however, it remains time consuming and costly when dealing with the communal living disputes (people, pets and parking) that permeate condominium corporations. Condominiums are, in essence, global communities, on a micro scale. Many are very culturally and demographically diverse. A condominium specific, dispute resolution mechanism needs to be developed, which addresses the many and varied interests of all stakeholders in this diverse community.

Making The Best With What We Have

The current Condominium Act is far from perfect; however, it represents a significant step forward from the Act that it replaced. Arguably the single biggest concern that condominium corporations have are dealing with the community based disputes. If the community is fragmented and constantly disputing, larger monetary disputes such as construction deficiency claims, first year budget claims, etc. and other “legitimate” business of the condominium may fall by the wayside.

Many of us remember the “Golden Rule” taught to us by our parents and grand parents: “Do unto others as you would them to do unto you”. It has been suggested that there is a “Platinum Rule” which reads: “Do unto others as you think they expect you to do unto them”. The platinum rule does not mean giving in at every turn. Rather, it concerns looking forward and anticipating where conflict can lie. Perhaps this is the better approach to communal conflict.

When a condominium corporation is forced to react, time is limited, the issues in dispute are often those raised by the opposing party, and the condominium corporation is often forced to make very difficult decisions very quickly.

By being proactive (i.e. being forward looking so that conflicts are anticipated), a condominium corporation would ordinarily have time to gain a better understanding of the conflict as well as possible solutions for it. The condominium corporation can then, in a more leisurely and constructive manner, communicate matters faced by the Board to unit owners in a manner whereby unit owner questions are anticipated and answered (insofar as possible) before the conflict is allowed to escalate into a dispute.

From “Common Elements” May 2006

All of the information contained in this article is of a general nature for informational purposes only, and is not intended to represent the definitive opinion of the firm of Elia Associates on any particular matter. Although every effort is made to ensure that the information contained in this newsletter is accurate and up-to-date, the reader should not act upon it without obtaining appropriate professional advice and assistance.

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