The Condominium Boom
Audrey Loeb, B.A., LL.B., LL.M., L.S.M.
Miller Thomson LLP
Condo Voice Winter 2014

In the first part of this article, published in the fall issue, some of the policy and legislative factors were highlighted that have contributed to the current state
of condominium development and condominium living

In this second part, a focus will be provided on the shortcomings associated with the marketing and sale of condominiums in Ontario. Highlights of recent examples of conduct by some developers that underline some of the shortcomings of Ontario’s disclosure based approach to condominium development will also be provided.

In Ontario, there is no standard agreement of purchase and sale. Each developer can do what it chooses in the contract and each agreement is different. Most agreements are usually a minimum of 18 pages, with various schedules, appendices, and plans attached, although there is usually a provision in the agreement that essentially makes any drawings, plans and/or measurements completely meaningless.

Usually the agreement will also contain limitations  on the developer’s  liability and empower the developer to make any changes to the design, finishes, layout, etc. of the units and/or the building as it wants and whenever it wants. The only recourse available to the purchaser is to rescind the agreement of purchase and sale and the return of his or her deposit. Developers should be held to account financially for these changes.

A client of ours bought a unit in a new development two years ago. The unit was to have two balconies, a laundry in the hallway and a couple of other features as shown on the plan. When our client went for his colour selection, he noticed the developer’s representative was holding a plan of his unit which did not resemble the one he received at the time of purchase. On this new plan, one of the balconies was eliminated, the laundry was now located in the washroom and the washroom was completely reconfigured. Our client noticed these changes. No one disclosed the changes to him. Our client was finally ableto obtain the amended plan and came to us. The developer has offered him rescission. Why should his only recourse be termination of the agreement? Why should the developer not be held accountable for these changes without the need for a lawsuit? Once developers enter into agreements of purchase and sale they should be obliged to notify purchasers of changes and be responsible if the changes are significant. Purchasers  should not have to walk from their deals because developers can sell their units for more money.

The sale of condominiums is based on the “disclosure” system as the means of tell- ing purchasers what they are “getting” when they buy. Developers are expected to provide adequate disclosure to permit prospective purchasers to make informed decisions. There is, however, no oversight to ensure accuracy or fairness in what is being disclosed. The old legal adage of “buyer beware” has been taken to new standards for condominium consumers. Ontario’s legislation contains no obligation that developers disclose in good faith. The legislation also fails to prohibit the sale or lease of suites or equipment by the developer to condominiums  and it does not prohibit the developer from entering into contracts, on behalf of the condominium, that will benefit the developer or a third party company at the expense of the condominium owners.

Disclosure works when things are simple. As was described in part one of this article; condominium development is now more complex than ever. The disclosure documents have by necessity grown more voluminous as the complexity grows. The purchasers cannot read this “stuff ” and neither will most lawyers. Without a full understanding of how condominiums operate no lawyer, and certainly no purchaser, could really understand the complexities of the inter relationships between the various parties. Even if a purchaser was to review all of the disclosure documents on a line by line basis, the reality is that such review will likely be of little practical benefit, as it is difficult to accurately predict how all the components will work until everything has been developed and the condominium is fully operational. Although the operation and costs associated with the various components are unknown and extremely difficult to predict, in Ontario developers are only obligated to make good any budget shortfall for the first year after registration.
 
There are two kinds of agreements entered into by developers which will bind condominium corporations. The first type is shared facility agreements between two or more condominiums and/or a condominium and other components of the overall project. Such agreements are typically not for profit and create reciprocal benefits and obligations for all parties. The Condominium Act, 1998, however, does not require that the developer allocate costs fairly or provide for the renegotiation of costs. The only obligation, once again, is disclosure. In fact, the Act does not even require that an agreement be entered into by a developer and a condominium corporation where facilities and services are being shared. These types of agreements can only be set aside by court application within one year after the election of the turnover board if a) terms are unconscionable and b) there was no disclosure. So, if disclosed and unconscionable, the condominium corporation cannot terminate the agreement. Plus the first year board may, in exceptional circumstances, through the sale of units to investors and/ or unsold units, leave control of the board in the hands of the developer and completely negate the possibility of terminating such an agreement.

The second type of agreement entered into by developers which will bind the condominium corporation  are contracts with third party entities like management agreements, landscaping contracts, purchases and leases of units and equipment etc. These are for-profit agreements. The Act provides that such agreements can be terminated within one year of the election of the turnover board. The Ontario Court of Appeal has, however, essentially eroded the purpose of section 112 of the Act, which was intended to allow condominiums to end “sweetheart” contacts, by finding that if an obligation to enter into the contract was included as an obligation of the Corporation in the declaration, the condominium could not terminate the agreement, not-withstanding the explicit provision in the Act. The courts have clearly adopted the view that disclosure trumps fairness and consumer protection.

An increasing number of developers have adopted the practice of entering into for- profit contracts with themselves or third parties on behalf of the condominiums. Occasionally the need for such contracts is justifiable  and there are examples of developers who prepare fair and  commercially balanced documents and agreements. Some however do not. When they
do not, they benefit themselves or a third party at the expense of the condominium owners. We have seen many agreements entered into by developers, on behalf of the condominiums, which we believe are not commercially reasonable and truly unfair, including some that last for up to 50 years with a value, over their lifetime, in excess of $10 million – which will ultimately be paid by current  and future owners. Surely this is something likely to be addressed in the new Act. Ultimately, however, any leg- islation will require proper adoption and application by the courts. Otherwise, as we have seen with so called “sweetheart” contracts, it will all be for not.

Ontario’s non-regulatory disclosure approach, when coupled with the amazingly complex condominium projects that we are seeing, has made it extremely difficult for boards and managers  to determine what their responsibilities are. When they do finally understand the agreements and their financial obligations with respect thereto, the boards and the owners end up angry and frustrated because there was never a fair negotiation. The agreements are prepared by the developers, who are subsequently released from all obligations under the agreements, and the agreements are ultimately binding on condominium owners. As a result, we have inadequate legislative provisions, no oversight, and a judiciary that is committed to the principle of “buyer beware”, notwithstanding the vagueness of any disclosure and/or the commercial unfairness often found in such for-profit contracts. The combination has left consumers poorly served.

It could make the average person’s blood boil every time a judgement is read from the Ontario courts when a purchaser or a condominium corporation seeks recourse against a developer and the judge states that the purchaser received the disclosure documents and could have chosen not to purchase. It is impossible for a purchaser to read these documents. Well, the judge says, they could go to a lawyer. Condo lawyers who spend their days dealing with these agreements of purchase and sale and disclosure documents, will confirm that the time involved in reading them and explaining them to the client so far out- weighs the fees that any client is prepared to pay, thus you can understand why purchasers do not take them to experienced lawyers. Purchasers of homes buy on emotion. They see a wonderful model suite and they believe that is what they are going to get when they complete the transaction.

Not only are the agreements of purchase and sale not standardized in any way, neither are the condominium  documents. Each condominium has its own declaration, by-laws and rules and each developer has the right to prepare them as it chooses, subject to the broad legislative authority to prepare documents dealing with certain matters. Some lawyers draft very good condominium documents. Some do not. Rarely does anyone check to see if these condominium documents are consistent or fair and there is no requirement that they be either, as neither the municipal authorities nor the provincial government adequately regulate condominium documents. Each level of government assumes it is the responsibility of the other.

The following are  some  recent  examples relating to developers who do not subscribe to the fair agreement approach:

One
A condominium corporation built on contaminated soil. There is an agreement in place as part of the condominium approval which requires ongoing monitoring and quarterly  reporting  to the Ministry of the Environment. The developer failed to monitor and/or report during interim occupancy and when the corporation was first registered and under the control of the developer board. Following turnover, management and the homeowner board did not know about the agreement. When it was discovered they did not know what should have been done, what the corporation’s obligations are, and how to report to the Ministry in light of the past non-compliance an environmental lawyer had to work with the corporation’s consultant to build a plan to carry out the monitoring and reporting, as well as stick-handle the delicate negotiations with the Ministry to ensure that the condominium did not receive fines or penalties for the developer’s actions. Efforts are ongoing to pursue recovery of the substantial costs incurred by the condominium in correcting the developer’s omissions.
 
Two
A condominium developer retained ownership of the retail space, which did not form part of the condominium,  and granted itself an easement over the condominium corporation’s  lands. There is no statutory obligation to have an agreement in place between two or more components in a project and in these circumstances, no agreement  was put in place to share costs. The retail owner therefore has no obligation to make contributions to the maintenance  and repair of the driveway over which its trucks are driving daily to make deliveries to the retail space it owns.

Three
Another developer has a habit of retaining the ownership of the ground floor retail spaces below the condominium buildings it develops. The ground floor is not part of the condominium. The developer enters into shared facilities agreements with the condominium corporations, which typically provides that retail will pay $10,000/year + CPI. There is no ability to consider any variation or escalation in the agreement and only those items specified as being subject to arbitration can be considered. In one case, two years after registration of the condominium corporation, the retail owner rented the space to a rather successful coffee shop. The cost of water and garbage has skyrocketed and the condominium corporation is “stuck” with the $10,000 per year + CPI payments.

Four
There are also examples where community centres have been mandated by the city to be part of the condominium complex. The developer in the development agreement with the municipality committed to paying all the operating costs for the life-time of the community centre. The developer was not required to pay any monies as security for its obligations. The developer is a shell company and after assigning the agreement to the condominium corporation refused to make any payments. It is unlikely any monies will be recovered for these expenses from the developer and the condominium owners will likely be responsible to guarantee these payments.

Five
A mixed used development is comprised of a condominium corporation and luxury hotel. The management agreement is with an affiliate of the hotel owners and is for a term of 25 years. The agreement also provides that if the agreement is terminated, the hotel owner may terminate the license agreement relating to the naming and trademark rights associated with the condominium development, which is likely to negatively impact the value of condominium units. The hotels and the condominiums are really intertwined and the decision making, including preparation of the condominium’s budget and allocation of costs between the parties is set by hotel management. As a result, an unbalanced financial burden may well be allocated to the condominium corporation and most of the services are focused on the operation of the hotel. The cost structure between the two entities is typically weighted to benefit the hotel’s bottom line, with the unit owners ultimately paying disproportionate costs for the services received. Some owners have encountered difficulties securing lending, as lenders are concerned about the viability of the setup.

Six
Inadequate  disclosure  is not isolated to residential condominiums. A well-known commercial condominium developer in Markham has repeatedly  found ways to take advantage of the provisions of the Act to create extremely profitable commercial parking lots, all at the expense of the small businesses that often occupy the commercial condominium units  appurtenant  to the parking area. The commercial parking spaces can be created in one of two ways. All the parking spaces may be contained within a separate legal entity or they may be units in the condominium corporation. If the commercial parking is contained within a separate legal entity, there may be a cost sharing agreement, which in many cases will typically benefit the parking lot owner who only has to pay an allocated cost under the shared facilities agreement, which rarely represents the true cost of maintenance and repair for those parking spaces.

If the parking spaces are units in the con- dominium corporation then the percentage of common expenses allocated to the com- mercial parking units in the same manner as residential parking units. Usually the percentages for parking units is very small compared to the commercial unit common expenses. The garage costs are weighted into the commercial unit common expenses not the parking unit common expenses. So the common expenses for the parking units do not reflect the true costs of maintaining and repairing underground parking and, so again, the commercial unit owners are ben- efiting the owner of the parking units, who uses these parking units for the commercial parking lot, without having to contribute the true share of the costs for its business operation. Regardless of how it is done, the real cost of the maintenance and repair of the garage slabs is typically borne by the condominium corporation not the commer- cial owner.

Then, there is the case of a ten year old commercial condominium, which consists  of 100+ commercial and retail units and over 300 parking units. When the building was being constructed and the initial sales occurred, the developer retained ownership of all the parking units. The developer, entered into a 10 year lease agreement with the condominium corporation, as owner of all the parking units to rent them all to the condominium and the developer board signed the agreement on behalf of the condominium corporation. The units only use half of the parking spaces. A by-law containing the lease was registered on title and it showed the details of the agreement and the escalating rental costs for these parking units. This lease has been renewed twice since then and recently came up for a further renewal. Until last year, the board of directors had at least two of the principals of the developer as board members. They retained ownership of a sufficient number of units to elect them as members of the board of directors. In 2013 this changed.

In 2013, the corporation was paying close to a $1million per year in parking rental fees to the developer. The parking unit rental fee according to the lease would now be close to $300 a month per unit. An independent appraisal determined that the actual rental value is $25 a month per unit. At its highest point, the parking rental fee paid to the developer was 42% of the condominium corporation’s annual budget. The lease for the parking units has now been terminated and the corporation is now looking at its legal remedies against the developer and the developer’s board members who also remained on the condominium board after turnover. Notwithstanding the success in this case, it is important to note that this property is apparently only one of several where this developer has entered into commercially unreasonable parking lease agreements to the detriment of primarily small business owners.

Seven
A declaration  between a Vacant Land Condominium Corporation and its developer included a provision that the vacant units did not have to pay common expense fees until the dwellings were constructed and the units were occupied. Although the Condominium Act, 1998 says all units will pay their proportionate share of common expenses and there is no excuse for non- payment, the court held that the provision in the declaration was valid.

The wording from that Vacant Land Condominium Corporation’s declaration has now been carried over to the standard condominium format and at least a couple of developers have included provisions in their declarations, which excuse the devel- oper owned units from paying common expense fees until the developer transfers title of its unsold units to a third party. This creates a whole set of problems, including accountability for the first year budget, purchasers not knowing the true cost of living in the condominium and the “expected” contributions. If there is a slow down in the market or the developer decides to rent units, are the remaining unit owners expected to carry the costs and/or sue the developer and try to re-apply the very clear provision in the Act.

Eight
Recently a by-law prepared by a developer and disclosed to the purchasers was challenged by the condominium corporation once the home owner board was in place. The developer entered into an agreement  approved by by-law, which prohibited the condominium corporation from suing the developer for anything other then what is covered  under the Tarion warranty for new construction. The by-law was included in the disclosure materials given to new purchases and similar provisions were incorpo- rated into the declaration and purchase agreements. The corporation challenged the validity of the by-law and was unsuccessful at trial. The decision was appealed without success. The end result is that the corporation has no rights to sue the developer with respect to matters that are outside the scope of the warranty program. An agreement of this nature approved by by-law benefits only the developer and should be prohibited by legislation as should any agreement where the only beneficiary is the developer or a third party company and the unit owners have not had the right to negotiate that agreement.

The above are only a few recent examples (all within the last year) that have been encountered which, in the view of many, confirms that disclosure alone is not adequate. The anger and frustration of the unit owners in each of the above instances makes it easy to see why some purchasers are experiencing the “living hell of condominium living”. Disclosure alone does not provide Ontario consumers with protection. The condominium  “world” has gotten too complex to just “disclose”. Even if lawyers review the disclosure documents in detail with their clients, the advice at the end of the day is likely to remain the same. Purchasing a pre-construction condominium is essentially a leap of faith—faith that the developer will deliver what was presented in the sales office (since the agreements of purchase and sale include provisions allowing the developers to make whatever changes they want), and faith that the agreements entered into and services provided will be commercially reasonable and equitable for all parties, especially the condominium corporation.

In closing, the proposed new Act is likely to contain provisions to address some of the issues highlighted in this article, including:

•	a booklet to accompany the disclosure package and intended to explain condominiums and what the buyer is getting, although this is likely to be viewed as yet another document for reading and simply will simply be ignored by purchasers;
•	a restriction on the declarant’s ability to sell or lease parts of the condominium, such as guest suites, amenities, unsold parking/locker units, etc., except perhaps for green loans;
•	we hope, an obligation for good faith disclosure and completion of contractual and marketing promises;
•	we hope, more directed disclosure accompanied by some standardized documents;
•	separate metering for all utilities between condominium corporations and other components of the project;
•	we hope, an obligation for a shared facilities agreement to be in place where appropriate;
•	we hope, an obligation that agreements be “equitable” and open to arbitration to re-allocate costs;
•	registration of property management companies and certification  of property managers;
•	a condominium “office” paid for by condominium owners to provide support and dispute resolution services; and
•	Condominium education for new board members.

The focus will be more on governance than on development in this new Act. What is not known is whether any of the proposed amendments can be made to apply to the existing condominium stock or whether it will be limited to future condominiums only. It is great to help the new projects but it may not be enough. Ontario has at least 600,000 residential condominium units with approximately 1.3 million people living in them and then a host of commercial units as well. This is not going away.


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