Chapter 11
Condominium finances


There has been insufficient recognition by many condominium corporations of the fact that they are running significant business operations. Substantial increases in maintenance fees, unscrupulous developers and shoddy builders are not necessarily the cause of a corporation's financial problems. The key to successful management of a condominium is effective administration of the corporation's finances.

Annual budget
The centerpiece of the financial system, the annual budget, currently receives only limited attention in The Condominium Act. Throughout the Act, a number of sections imply the need for an annual budget and an expectation that the Board of Directors will prepare and administer a budget. Section 25 (1), empowers the Lieutenant-Governor in Council to  “make regulations requiring and governing the accounting to members of condominium corporations in such manner and at times as are prescribed”. So far, no regulations have been made. The sole explicit reference in the Act to a corporation budget is section 24b (4), which was enacted in 1974 to eliminate “lowballing” of common expenses by developers.

Submissions from the Institute of Chartered Accountants, lawyers, management firms, developers and consumers remarked on the need for firmer guidelines in the preparation of financial statements.

The diversity of condominium corporations in size, design, and requirements of the declarations or by-laws has been a major factor inhibiting the proper analysis of budget statements. The financial reports submitted by condominium corporations varied considerably in completeness, and it is not feasible to comment on the adequacy of the statements without knowing more about the individual circumstances of corporations.

There are, however, certain general comments that can be made regarding the coverage of financial statements. Each corporation should prepare annually a budget statement that identifies projected revenues from all sources, such as common expense charges, parking fees, lease revenue and interest. It should also identify the anticipated expenses. The major expense categories are utilities, insurance, maintenance, repairs, management fees and reserves.

Seldom will a budget year be completed with revenues and expenses behaving as forecasted when the budget is prepared, nor will the two amounts balance precisely. Consequently, there will be a surplus or deficit at the end of the year and the budget should make provision for this net cash flow or net income, either positive or negative.

The board should also, for purposes of improved control, allocate the annual revenues and expenses on a monthly or at least a quarterly basis.

The corporation should prepare a separate budget for the reserve or contingency fund that indicates how the money in the fund is earmarked or committed.

Before the annual general meeting, the board should circulate a balance sheet and a statement of income and expenses to the owners. These statements should be explained by the Treasurer and discussed by the owners at the meeting.

The balance sheet should identify major assets and liabilities for both the current operations and for the reserve fund. It is also helpful if comparative data is provided for the previous fiscal year.

The statement of income and expenses should identify any discrepancies between budgeted estimates and actual results, with explanations where appropriate.

As with the budget, boards will facilitate their control of the corporation if the balance sheet and the income/expense statement are prepared on a monthly or quarterly basis. These statements should be audited by an independent auditor.

Condominium corporations should also consider the feasibility of appointing an audit committee to review financial statements and otherwise comment on the financial operations of the corporation. Appointment of an audit committee will facilitate involvement in the corporation's financial activities of those owners who because of their financial interest in the condominium corporation otherwise would be prohibited from acting as auditors.

Recommendation No. 87:
The Condominium Act be amended to provide:
A. That financial statements be provided to all owners prior to annual meetings.
B. By regulation, the minimum content of the statements.

Recommendation No. 88:
Condominium boards consider appointing audit committees to assist the board in managing the financial affairs of the corporation.

Reserve funds
While all condominium corporations that submitted briefs to the Study Group prepared budgets. only a minority made provision for owner contributions to a contingency or reserve fund that is used to finance the repair and replacement of major components of the common elements such as roofs, roads, parking lots and elevators. More than one brief, in fact, was concerned with misuse of the reserve fund by the board to finance current expenses. An adequate reserve fund is essential for effective property management.

The purpose of the fund is to provide money necessary to maintain the common elements of the corporation at their original level; it is not to finance the improvement or expansion of the capital equipment owned by the corporation. If the owners agree that, for example, addition to the recreation facilities or remodelling of the entrance lobby is desirable, a separate capital reserve fund should be established.

Since the need to maintain common elements continues throughout the life of the corporation, it is necessary to maintain the reserve fund at an adequate level and replenish it when it is depleted by extraordinary expenditures. Corporations that have a reserve fund may be able to use it as security for raising a loan to finance major repairs that would otherwise seriously deplete the fund.

The reserve fund should be an integral part of the budget, the balance sheet and the income/expense statement. The budget statement for the fund should identify the capital items covered by the budget along with estimates of their replacement cost, their expected physical life and the annual allocation for the expense.

The corporations that do have reserve funds apply different formulae to fund them. Some calculate the amount to be contributed to the fund as a percentage of the total common expense requirement exclusive of reserve fund. Others base the contribution on the appraised value of the building A third method, whereby the annual requirement of the reserve fund is based on the replacement cost of the major capital items, is the most appropriate.

While the other formulae may have the benefit of administrative convenience and do ensure that some money is available in the reserve fund, a fund which reflects the anticipated annual replacement expenditures is most likely to provide adequate funds at any one point in time.

Whichever method is selected, the owners’ payments to the fund are made in the same proportion as their common expense payments. Those existing corporations without reserve funds will find it difficult to impose the “initial lump sum” contribution on the owners. The contribution should, nevertheless, be required and could be collected over a maximum twelve month period.

Recommendation No. 89:
The Condominium Act be amended to require:
A.
That all corporations have a reserve fund for the replacement of major capital items, the money to be deposited with a chartered bank or trust company in a trust account separate from the corporation operating accounts.
B.
The developer establish the account in the corporation's name with an initial deposit equal to three months common expenses and transfer the account to the board of directors at the first annual meeting.
C.
The annual contributions to the reserve fund be based on the cost and life expectancy of major capital items as disclosed by the developer or as modified by a subsequent appraisal.

Audited statements
The Condominium Act does not require the audit of financial statements of condominium corporations. While several corporations indicated in their briefs that their financial statements are audited, many more do not have their statements audited. This is a serious omission which severely restricts the ability of unit owners to obtain a comprehensive evaluation of the financial affairs of the corporation. The auditor reports to the owners on the financial operations of the corporation. He is, in effect, a financial watchdog over the Board of Directors. His background in accounting enables him to act as an advisor in preparing financial statements and managing the corporation's financial transactions.

The Business Corporations Act (sections 168, 169, 170 3nd 171), The Corporations Act (sections 62, 63 and 64, which are not yet proclaimed) and The Canadian Business Corporations Act (sections 155-164) all require the appointment of an auditor and deal with the responsibilities and authority of the auditor. These sections could act as a model for comparable provisions in The Condominium Act.

Audited financial statements should be required by statute. In addition to requiring the appointment of an auditor, the enabling legislation should identify who can be appointed, define the auditor's duties and describe the authority of the auditor, such as access to corporation records and attendance at board meetings. The requirement for an auditor should be optional for small corporations—those with less than 10 units where the assets controlled by the corporation are not large and the financial transactions are relatively few in number and simple in nature.

Recommendation No. 90:
The Condominium Act be amended to provide for the appointment of an auditor for each corporation of more than nine units. The auditor should have the authority and responsibility provided for auditors appointed under the Business Corporations Act.

Repair of unit
In The Condominium Act, the cost of the repair of a unit is not included as part of the common expenses. Section 16(7) states that although an owner is deemed to have consented to having repairs effected in his unit, there is no provision in the statute which enables the condominium corporation to recover the cost of these repairs; it is

iT.o Croly imp!i8d or inc!~J~-!cd i:1 condominium
(Needs correction from orignal document—editor)

Naturally the condominium corporation has the right to sue someone who causes damage but lawsuits are expensive and time-consuming.

Recommendation No. 91:
The Condominium Act be amended to allow the corporation to assess the cost of repairs, carried out by the corporation to a unit, as common expenses chargeable to the unit and collectable by way of lien.

Common expense funds
Common expenses are the costs incurred by a condominium corporation in maintaining the common elements of the property and in carrying out its legal obligations. Section 15b(4) of The Condominium Act states that all money received for the payment of the common expenses relating to property shall be held in trust. The intention of this section was to ensure that a management firm receiving the money would do so on behalf of the corporation.

The possibility exists that a condominium corporation's common expense fund, if it is in the name of the management firm, might be converted to other uses. It is possible that the creditors of a management firm could seize funds in an account in the name of the management firm. It is also a matter of concern that a condominium corporation, whose funds are in an account in the name of the management firm, might be forced to bring a court action to recover monies rightfully belonging to it if the management firm were dismissed. These are not merely theoretical concerns as there have already been cases where such situations have threatened.

Recommendation No. 92:
The Condominium Act be amended to ensure that trust accounts created in accordance with Section 15b(4) are in the name of the condominium corporation.

It was suggested at public hearings that any cheque written on a corporation's trust account should be co-signed by at least one officer of the corporation. This is a sound policy.

Recommendation No. 93:
All cheques drawn on the corporation's trust account be co-signed by at least one officer of the corporation.

As condominiums have become more prevalent, a growing number of developers are including commercial space in their projects to provide amenities for the owners. Where commercial space, which forms part of the common elements of a corporation, generates income or the condominium corporation generates any income, this money becomes an asset of the corporation. Some confusion has arisen over what should be done with these funds. Should they be used to reduce common expenses, be added to reserve funds, or be paid out to the owners?

These monies should be retained in the corporation, rather than distributed to the owners. Condominium corporations should not be operated for profit purposes, as businesses are. Administratively, the paying out of this income to owners would be most difficult and could lead to possible tax problems for the corporation and the owners.

Recommendation No. 94:
The Condominium Act be amended:
A.
To define income other than income received from common expenses. (We recommend the term “common surplus”.)
B.
To provide that these monies be applied against either future common expense payments or reserve funds, but not be distributed to the owners unless there is termination of the condominium.

Common expense arrears

It became increasingly apparent with each public hearing that one of the major problems facing condominium corporations today is their inability to collect common expense payments assessed against unit owners.

The problems arise in three situations:
a)
a unit owner decides not to pay because he feels the corporation is not carrying out its duties.
b)
a unit owner is unable to pay his common expenses.
c)
absentee owners who either knowingly or unknowingly fail to remit their payment.

A unit owner who fails to remit common expense payments because he is not satisfied with the way the corporation is performing its duties, does so without any legal basis. There is no provision in either The Condominium Act or a condominium corporation's documents which entitles a unit owner to withhold payments for any reason. A unit owner's failure to make his payments can jeopardize the cash flow of a corporation. If a failure to pay continues for any extended period of time, this could affect the remaining unit owners.

Condominium corporations in Ontario have been experiencing sharp increases in common expense assessments over the last few years. These increases are due to a variety of factors including lowballing, higher utility costs, construction prob1ems, or mismanagement. These condominium owners, who are unable to meet their payments, are the cause for greatest concern. If they have little equity in their unit. They may choose to just walk away and let the mortgage company and the corporation fight it out themselves. (see chapters on Lending Institutions and Housing Choice).

Priority
Under current legislation, it is assumed that a first mortgage has priority for arrears on the mortgage over the corporation for arrears in common expense payments. In circumstances where the unit owner “walks away” from his unit and there is very little equity, if any, remaining, the condominium corporation, which ranks subsequent to the mortgage on a sale, will very likely recover none of the money owing to it This loss of revenue to condominium corporations is a serious factor affecting the other unit owners who will, as a group, have to make up the operating and reserve deficit.

Recommendation No. 95:
The Condominium Act be amended to provide that a lien for unpaid common expenses has priority over all encumbrances except municipal taxes.

The Study Group appreciates the fact that many lending institutions will not react favourably to this recommendation. In many situations, where the market is temporarily slow, this may affect the mortgagee's ability to recover the full amount owing to it. The effect of this recommendation is that future condominium projects should be financed in such a way that buyers will be required to make larger down payments to protect the mortgagee's financial position (see chapter on Lending Institutions).

Tenants
The absentee owner who doesn't pay common expenses is also a cause for concern to the condominium corporation. While the absentee owner collects rent from his tenant, the corporation may find itself in cash flow difficulties because the common expense payments are not being made.

Recommendation No. 96:
The Condominium Act be amended to provide that where a tenant occupies a unit in a condominium, and that unit is in arrears of common expense payments, the corporation shall have the right to collect the common expense payments from the tenant, who will be entitled to deduct the amount paid to the corporation from the rent he pays the owner.

Interest
At present there is no provision in The Condominium Act that interest charged on common expense arrears and costs of collecting them should be included in the amount of lien and collectable in the same manner. The documentation of a majority of condominium corporations does provide for charging interest on arrears and for recovery of collection costs. There has been great uncertainty regarding the authority of these provisions in condominium corporation documents. It is our opinion that the corporation should not be charged with the costs of collection.

Recommendation No. 97:
The Condominium Act be amended to provide:
A.
That interest may be charged on arrears and the cost of recovering common expense arrears be included as a common expense attributable to that unit.
B.
By regulation, the rate of interest on common expense arrears be 12 per cent per annum.

There is a danger that such an amendment will encourage certain members of the legal profession to charge very high fees to unit owners for registering liens.

Recommendation No. 98:
The law associations consider establishing a suggested maximum fee to be charged for the registration of a common expense arrears lien.

Procedure for collection of common expense payments
Before legal action is taken by the corporation against a delinquent unit owner, the corporation should adopt a consistent method of collection. The following method, as an example, could be applied:

Ten days after the date the payment is due, a notice of arrears and request for payment should be sent to the delinquent unit owner.

If no payment is made within the next 15 days, the president of the board should send a second letter by registered mail.

If payment is not forthcoming within the next 10 days, the board should advise the property manager, if any, that they wish him to discuss the arrears with the unit owner.

Continued failure to remit payment should lead the board to turn the matter over to the corporation's counsel. The lawyer should be instructed to send a letter demanding immediate payment to the unit owner. If a unit owner still fails to pay, then the solicitor, or agent of the corporation should register a lien against the unit for the arrears in common expenses.

Registration of a lien
To facilitate the collection of common expenses, Section 13(4) and (4a) of The Condominium Act provide that a corporation has an unregistered lien for three months. When registered in the Land Registry Office, this lien gives a corporation protection for three months’ worth of common expense arrears.

In Regulation 98 of The Condominium Act, Form 10 states that a lien secures any further defaults beyond the three months referred to in Section 13 (4a).

There is a conflict between Section 13 (4a) and Form 10. Since the statute supersedes the regulation, cautious corporations should be registering new liens for arrears every three months. Once a lien is registered it should cover all future defaults.

Recommendation No. 99:
The Condominium Act be amended to give statutory authority to Form 10 of Regulation 98 which allows the lien to secure future defaults.

Section 13 (5) of The Condominium Act provides that a lien may be enforced in the same manner as a mortgage. There is no disagreement with the theory of this section. However, its wording has led to numerous inquiries as to whether foreclosure is available to enforce a lien.

The lien can be enforced by way of power of sale. What should be clarified is that the procedural steps to be applied are to be those set out in The Mortgages Act. This point should be clarified in the legislation.

Recommendation No. 100:
The Condominium Act be amended to state that the procedural steps to enforce the common expense lien are those set out in The Mortgages Act.

Expropriation
An amendment to The Condominium Act is necessary to deal with the possibility of an expropriation of some portion of a condominium corporation's common elements. Currently, the Act is unclear as to whether proceeds resulting from an expropriation should be paid to the corporation or to the owners in accordance with their percentage of ownership of the common elements. The mechanics of the expropriation are not of concern, for these matters are adequately dealt with the existing legislation. The Act should be amended to clarify what is to be done with the proceeds of any expropriation, since it is the property of the owners that is being expropriated.

Recommendation No. 101:
The Condominium Act be amended to provide that proceeds received as a result of an expropriation be paid to the unit owners in accordance with their percentage of ownership of the common elements as set out in the declaration.

The Condominium Act was amended in 1975 to require a corporation to supply a certificate of arrears--an estoppel certificate--to a purchaser who requested it with the consent of the owner. Several problems have arisen as a result of this amendment.

If an owner requests the certificate, in place of the purchaser, is the corporation still estopped against the purchaser? This issue has not come before the courts for determination. However, this point should be clarified in the legislation. It was also suggested that the Act be amended to require the vendor to supply the certificates. The problem with this suggestion is that if the vendor fails to supply it, the purchaser is not protected vis-a-vis the corporation.

Recommendation No. 102:
The Condominium Act be amended to provide that either an owner or a purchaser may request a certificate and once the certificate is supplied or is not supplied within the time limits in the Act, the corporation will be estopped from claiming against the purchaser where the purchaser has relied on inaccurate or insufficient information.

If accepted, the recommendation that either a vendor or purchaser be entitled to request a certificate, would leave it to the parties in the transaction to decide who, in fact, will supply it.

The Act uses the word "give" with respect to the estoppel certificate. The legal definition of the word "give" is "to provide at no charge''. Many corporations however, are charging for supplying the prescribed form of certificate, as it is a means of recovering their costs and the fee is not substantial enough that the parties are prepared to delay a transaction on this account.

The options the Study Group was faced with on this issue were to make it clear that no fee would be payable for a prescribed certificate, or improve the form of certificate, or require the corporation to supply documents and set a maximum fee which could be charged.

Since the purchase of a condominium unit involves much more detailed information than a single-family home, purchasers must be supplied with, or given access to, all the relevant materials which could affect their decision.

Estoppel (Status) certificate
Included in the material to be supplied should be a more extensive certificate of estoppel. It should set out the total amount the corporation had in reserve at the end of its last fiscal year, whether any of those funds had been used in the current year, whether the corporation knows of any major repairs which are required to be carried out, and whether any substantial changes in the common elements or assets of the corporation are contemplated. Additional matters may also be necessary for inclusion, and further consideration should be given to this matter to ensure that the purchasers are fully informed.

Along with the certificate, the corporation should supply copies of the declaration, by-laws, rules and regulations, audited financial statements as of the end of the previous fiscal year and a current budget. This will help ensure that purchasers in a resale are given every protection possible.

Recommendation No. 103:
The Condominium Act be amended to prescribe:
A.
A maximum fee of $25.00 for the provision of the estoppel certificate and accompanying documents.
B.
An expanded certificate.

Resale: cooling-off period
The principle of cooling-off should apply to a resale condominium unit, as a purchaser on a resale must be fully informed. However, in a resale situation, the 10 days should run from the later of signing of the agreement, or the provision of the estoppel certificate, if one is requested in accordance with the agreement of purchase and sale.

Notwithstanding the rescission period recommendation, a purchaser should not have the right to rescind a purchase agreement if he received a copy of the certificate 10 clear days prior to the execution of the purchase agreement.

The 10 day cooling-off period will be an automatic right of rescission, without the need to show a breach of the agreement, and will entitle the purchaser to the full refund of any deposit he may have made.

Recommendation No. 104:
The time period for rescission on a purchase from a developer apply to a resale (see chapter on Purchasing a Condominium).

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