Should you buy a condominium unit in a condo corporation that is involved in litigation?
Toronto Star
Bob Aaron
05 November 2016

What should a buyer do when the status certificate for their condominium purchase shows that the corporation is involved in litigation?

That was the question a client of mine faced last month after I reviewed a status certificate for his intended purchase of a unit on Dundas St. E. in Toronto.

Constructed around 1940, the building was originally a factory that later became the Imperial Optical lens factory, and was eventually converted to 41 brick-and-beam-style loft condos in 2000.

The status certificate disclosed that, in 2006, discovered beneath the building was a tunnel built for utilities. At about two metres high and 20 metres long, it requires major structural repairs. Until they can be undertaken, the corporation has temporarily shored it up to prevent damage to the building above it.

When residents noticed a bad smell throughout the building about a dozen years ago, they discovered the tunnel.

The owners sued the builder, two engineers, Enbridge Gas, the architect and the City of Toronto for as much as $3 million. They allege the tunnel has compromised the structural integrity of their building.

Their claims have not been proven in court and the trial is set to start February 12, 2018. In order to cover legal fees for the case, the condominium board last year raised $75,000 by way of a special assessment which all the owners had to pay off over 12 months.

In reviewing the status certificate, I pointed out to my client that if the actual damages came to the full $3 million being claimed, and the corporation lost the case, the owners would be responsible for legal fees and the repair of the tunnel. On a $650,000 purchase, this unit’s roughly 4 per cent share of $3 million would be $120,000.

If damages and legal fees were “only” $1 million, this unit’s share would still be a hefty $40,000.

Faced with the potential costs, my client invoked the status certificate condition and let the deal die.

A few days later, however, he had second thoughts and decided the live-work unit was exactly what he was looking for. He and his agent restructured the deal and the buyer and sellers agreed to a $10,000 holdback. Frozen in trust, the money will be used to pay any special assessments resulting from the litigation at any time within three years after closing.

He emailed me to give permission to write about his purchase and to explain his reasons for going ahead with the deal.

He did a risk/benefit analysis. He loves the unit, he told me, and figures it was “undervalued.”

“Even factoring in the worst-case scenario,” he wrote, “I’d still be spending less with this unit. I figure with the money I will be saving instead of getting into another obscene bidding war, I will set aside a contingency fund for any special assessments over $10,000,” he said.

“I also plan to keep this property for the long-term and will most likely use this as an investment rental, if I decide to move on,” he added.

The takeaway from this story is that when a status certificate discloses that the condominium corporation is involved in litigation, it may present a unique opportunity for a buyer.

The unit may be just what the buyer wants, it may be priced right, it will probably not be the focus of a bidding war and the seller may be willing to contribute to future litigation expenses.

In my client’s case, the unit may well turn out to be a diamond in the rough.

My take on this?
I would be extremely cautious about buy a condo unit in a corporation that is involved in ongoing litigation. One large condo, south of Union Station has spent $1,700,000 in legal bills. Hard to say how much they may recover; if any of it. Another condo corporation buy Humber Bay recently levied a Special Assessment equal to their annual maintenance fees to replenish their legal fees to fight a legal dispute that has been going on for years.

A small condo in Vaughan has undertaken legal action against the builder and dozens of other parties. As the court Application has just been recently filed, it is hard to tell how long this burden will hang over this corporation, how much they will have to pay in legal fees and if they will have any success at all.

In all of these cases, the owners are having a hard time selling their units, prices are lower than they should be and the long term liabilities are hard to assess.

If the litigation is over minor issues such as examining the corporation's records or Human Rights disputes, you have to be concerned about the corporation's politics, transparency and the board's relations with the owners.

Personally, if I saw that a condo corporation was involved in litigation, I would look elsewhere.
—CondoMadness


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