CONDOCENTRIC: Property Management Fraud

While the industry is in a “tizzy” (to quote from a recent Toronto Star Article) about the alleged fraud by Channel Property Management and Mr. Khan has been seen in a village in Bangladesh , I have to ask: has this happened before? (Yes!).. As participants in various roles in the condominium industry, I also have to think of my Dad who often says... “there go I but for the grace of God” – So forget the blame for a minute -- What do we NEED to learn from this event?

As a piece of background to this piece, it is important to note that the by-law was registered by a law firm, which means that certain protocols discussed herein were leveraged by the law firm in protecting the Corporation.

The Players and Their Roles and Relationships

1. The Condominium Corporation’s Board of Directors:
   1. Has a duty under the Condominium Act, 1998 to manage the assets of the Corporation and to do so it needs to direct property management and keep on top of property management.
   2. Does not look like the directors were involved but did their management contract give Channel Property Management “too much power”?

2. The Condominium Corporation’s Unit Owners:
   1. By-laws present a cloud on title, how does a fraudulent by-law impact title?

3. The Lender
   1. Lends money based on its due diligence and a variety of documentation containing covenants, representations and warranties from the borrower – the condominium Corporation.

4. The Property Management Company
   1. Facilitates, at the board’s direction, the loan process: from the calling of the meeting to approve the borrowing by-law to receiving the cheque from the borrower.

5. The Lawyer
   1. Interprets the Act for clarity on how a borrowing by-law is required to be put in place for every borrowing by the Corporation;
   2. Interprets the Declaration, By-laws and Rules to identify how business is to be transacted by the Corporation and the scope of the Corporation’s power and authority;
   3. Interprets the representations from the Corporation attesting to who the officers and directors of the Corporation are and which of them have authority to sign documents on behalf of the Corporation, including documents confirming the validity of the By-law.
   4. Interprets the representations from the designated officers that the borrowing by-laws have been duly passed by the Board of Directors and Unit Owners;
   5. Relies on evidence of identity provided by individuals signing in person at the lawyer’s office all borrowing documents;
   6. Photocopies evidence presented in person by parties signing borrowing documents;
   7. Complies with the Law Society of Upper Canada’s requirements to “Know Your Client”
       
6. The Bank
   1. Relies on resolutions (prepared by the bank’s counsel) to evidence the Corporation’s commitment to the Bank and who can sign; and
   2. Relies on evidence of identity provided by individuals signing in person at the lawyer’s office all borrowing documents.

Who is exposed?

Everyone is impacted to a degree. Your sense of trust is breached - even if you have not been impacted financially but realistically we are all taking the hit.

WHAT TO DO TO AVOID DOODOO: What is the C.Y.A. Strategy – How Do We Stop or Minimize Risk From Ever Happening Again!?

First, we should not be naive enough to think that fraud can be entirely prevented. It has happened in the past and where there are people who are greedy, selfish, show disregard for the clients they serve, lack integrity, do not value the purpose of the laws that govern them and blatantly construct a method of stealing, it will happen again and again.

A list of some DOs to avoid stepping DooDoo:

1. At a minimum, the Condominium Corporation’s Board of Directors:
   a. Hire well reputed Property Management. Do not be fooled by low prices, you may get what you pay for.
   b. Keep on top of your property management company’s activities through monthly board meetings that are comprehensive in understanding the operations of the Corporation.
   c. Have monetary limits on property management for bank accounts and do not let management sign alone.
   d. Have proper policies and procedures in place.
   e. Hire professional directors

2. At a minimum, in respect of the Condominium Unit Owner’s interests:
   a. The fraudulent by-law, as alleged in this case, is a fraud against the title of each unit. Therefore, if you have title insurance your title will be protected. Therefore, if you do not have title insurance, why don’t you? All of our condominium purchasing clients are strongly urged to obtain the same for a relatively nominal cost in most cases. The key benefit is title protection.

3. At a minimum, in respect of the Lender:
   1. The Lender should have a representative at the meeting where the by-law is presented for two reasons:
      1. To answer questions about the loan;
      2. To ensure the by-law was passed by the meeting.
   2. The Lender should demand an opinion from the lawyer for the Corporation about corporate authority, good standing etcetera. The lawyer should not opine on the documents however.
   3. The Lender should be provided with evidence in its opinion from the lawyer and the closing documents of evidence of the identity of the signatories and confirmation that the same attended in person.
4. At a minimum, the Lawyer for the Corporation:
   1. The Lawyer should amongst the documents, prepare and obtain a properly executed certificate of incumbency, certified extracts of the resolutions, Officer’s Certificates regarding facts, corporate searches, PPSA searches, bankruptcy and Bank Act searches (amongst some of the searches).
   2. The Lawyer in accordance with Law Society of Upper Canada requirement should have signatories attend in person and take two piece of required identification from each signatory.

Could this been avoided? Probably with the right precautions and measures in place.

SIDEBARS:

1. BE ACCOUNTABLE: Years ago at a panel discussion at an ACMO/CCI Conference, I, together with one other lawyer, advocated that licencing similar to that for real estate agents is required. I was told by more experienced people in the industry that it was not reasonable. I am wondering how much more evidence we need before we actually have the courage to introduce licencing. The economic reality is that it will serve property managers and condominiums better and we all care about our economic realities. We need the profession to have meaning. It does not have meaning if anyone can be a property manager [even someone who has previously committed fraud]. I personally know property managers who I deeply respect for their knowledge, integrity and commitment. However, this kind of alleged behaviour takes the profession of property management steps backward by creating distrust; I hope that industry leaders do what they need to do to protect the ultimate clients – condominium communities.
    
2. BE EDUCATED Boards need to understand the law and their roles. Use educated property management.
    
3. AVOID RED HERRINGS/EXCUSES: While some people may wish to cloud this issue with obvious superficial labels do not be fooled (or sucked in) – a rose by any other name would NOT be sweeter. Fraud is fraud. I recently heard of one property management consultant saying that a coloured person should not be hired for a certain building with a highly Jewish population – outrageous that such mentalities exist today. Just make sure that the people and companies you hire have the right skills, resources and protocols required and take the time to check them out.
    
4. LEARN FROM WHAT HAPPENS AND DO SOMETHING: Will we survive this? There is a reason we pay insurance premiums but we must learn to manage our risk so that insurance is financially affordable. It is always also easy to complain from the cheap seats.
    
5. MANAGE YOUR RISK

How do we manage risk?

1. Policies and procedures;
2. Licensing;
3. Director Education;
4. Implement your knowledge; and
5. Understand your banking arrangements (i.e. Does your manager have the right to transfer money electronically without authority?).

6. BE HONEST: We recently secured a judgment against Mareka Property Management for breach of fiduciary duty. Bottom line, the company took money that was owed to our clients. This company and its principal in spite of the judgment has refused to pay the amount owed. So our client is stuck spending more money and time to try and obtain the money. If you make a mistake, own up to it and FIX IT – this goes to your reputation.
    
7. DO NOT SUCCUMB TO FEAR: Should we panic? Absolutely not. This is an unfortunate circumstance. However, I would like to believe that there are many more stories of integrity, professionalism and dedication in the property management industry by property management professional that make this an unfortunate occurrence but not a legacy. If you have a great property management company, make sure you let them know!!

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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