Consumer protection has been a main focus of condominium law since the first Condominium Act was passed in Ontario in 1967. On November 1, 2017, the first phase of the Protecting Condominium Owners Act (“PCOA”) will come into force, bringing into force a number of new measures intended to further protect Ontario condominium owners.
This article will focus on four new provisions: prohibitions on the declarant and declarant con-trolled boards acquiring property on behalf of the corporation, a prohibition on declarant con-trolled boards limiting a corporation’s remedies against the declarant, and stronger disclosure requirements for first year budgets. Finally, Tarion warranty coverage for conversion developments and proposed changes to the Tarion New Home Warranty Program itself, which will have significant impact on condominium corporations’ deficiency claims, will also be reviewed.
First year budget
Under Section 72 of the Condominium Act, 1998 (the “Old Act”), a declarant is responsible to provide each purchaser with a disclosure statement that includes a first year budget for the corporation. Section 75 of the Old Act makes the declarant liable to the corporation for any difference between the proposed first year budget and the actual common expenses of the corporation during its first fiscal year.[i]
While the current budget disclosure requirements have provided purchasers and condominium corporations with a general sense of the corporation’s operating expenses, many corporations find that budgets increase substantially following the first year. Real estate lawyers often advise clients purchasing before registration or during the first year following registration to budget for increases in common expenses after the first year as a matter of course.
PCOA will institute further protections for the first year budget statement provided to purchasers and for any deficit in a first year budget. Section 72(6)(e) will be amended to provide that the portion of the common expenses to be paid into the reserve fund must be in accordance with an amount prescribed by the regulations. Section 75 will be amended and Section 75(1.1) will be added to provide that the declarant will be responsible to pay to the corporation the amount of the contribution to the reserve fund prescribed by the regulations, regardless of whether the first year budget properly disclosed an amount calculated in accordance with the regulations.
While the regulations for calculating the amount to be paid into the reserve fund in the first year have yet to be released, they will likely prohibit nominal contributions to the reserve fund during the first year. Such nominal amounts result in corporations having to ‘play catch-up’ to properly finance the reserve fund in future budget years.
PCOA will also add Sections 72(3)(q.1) and (q.2). These new Sections will require that declarants provide a statement of circumstances that the declarant knows, or ought to know, that may result in an increase in the common expenses after the first budget year in disclosure statements. A statement of the potential increase to the common expenses as a result of those circumstances must also be provided.
These new provisions should help reduce the amount of increases to the common expenses after the first budget year. While condominiums naturally cost more to operate as physical structures age and require maintenance and repair, routine and foreseeable expenses, such as maintenance contracts or the operating costs of amenities that are not complete at the time of registration, should be disclosed under these provisions.
PCOA unfortunately does not provide any new statutory remedies for failure to disclose circumstances that may result in increases after the first year. Accordingly, disputes concerning Section 72(3)(q.1) and (q.2) will almost certainly result in litigation.
Restrictions on acquisition of property
Many newer condominium corporations, either through provisions in their declaration or subsequent agreements entered into by a declarant controlled board, are obligated to purchase property such as guest suites, recreational facilities or generators. The property the corporation is obligated to purchase is often owned by the declarant or its affiliates and expenses in connection with such property do not begin to be incurred until one year after the declaration is registered, shifting the expense into future budget years when the declarant will likely be responsible for a much smaller share of the cost, if at all.
Under the Old Act, the disclosure statement provided for by Section 72(4) required the declarant to disclose whether the corporation would be required to purchase units or assets, acquire services, or enter into agreements or leases with the declarant or its affiliates. For property or services acquired by the declarant board following registration, Section 40(1) requires directors with an interest in the declarant to disclose their interest in a proposed contract or transaction; however, Section 40(6)(b) allows those directors to vote on the proposed contract or transaction notwithstanding their interest.
The provisions of the Old Act effectively only required the declarant to provide a general description of the property to be purchased, and the services or agreements that a corporation would be required to enter into with the declarant. The exact cost to the corporation is often unclear and purchasers typically focus more on the details of their own residential suite rather than on the wide variety of common facilities and services that form part of many condominium corporations.
PCOA will introduce a new Section, 26.1(1), which provides that until a board (described in Section 26.1(2)) is elected a corporation will not acquire an interest or right in a unit, other real property or personal property, except at no cost, despite anything to the contrary in a declaration, by-laws, agreements or other instruments.
Key to this new protection is the definition of the “board”. Section 26.1(2) defines the “board” as the board elected at a turnover meeting held pursuant to Section 43 (the “Owner-Elected Board”), which must be held within 21 days of the date that the declarant no longer owns a majority of the units. The Owner Elected Board is further defined to exclude a board that has a majority of directors who were elected at any time that the declarant or its affiliates, individually or together, owned a majority of the units.[ii]
The effect of Section 26.1 will be to restrict the ability of developers, either through the declaration or agreements entered into by declarant-controlled boards, to cause the corporation to purchase property. What may seem to many purchasers as a minor matter of purchasing a guest suite can later be found to have a material impact on the corporation’s budget. While it is likely, and reasonable, that developers will simply factor the expense of guest suites and similar property into the initial purchase price of a unit, Section 26.1 will hopefully provide purchasers with a better understanding of the true cost of a unit and avoid the cost and time of financing and re-financing the subsequent purchase of such property on the part of the corporation.
It is not yet known, however, when Section 26.1 will come into force, and it can be amended by future regulations. Developers will likely need time to adjust their marketing and pricing strategies to comply and it may therefore be several years before the benefits of this new Section begin to be realised.
Restriction of Remedies
PCOA will also restrict the ability of a declarant to limit the legal remedies that condominium corporations can exercise against the declarant following registration. Similar to Section 26.1, Section 26.2(1) provides that until an Owner-Elected Board is elected, nothing in a declaration, a by-law, an agreement or other instrument may limit the remedy that a corporation may have at law against a declarant or its affiliates.
Under the provisions of the Old Act, it was permissible for a declarant-controlled condominium board to enter into an agreement with the declarant that limited the declarant’s liability to the corporation. For example, some declarant-controlled boards have entered into agreements with the declarant, which provide that the declarant’s liability for construction deficiencies, including individual units, is limited to the amount warranted by Tarion.
Legal challenges to this practice have previously not been successful, as Ontario courts have rejected arguments that such agreements are beyond the power of a condominium corporation, or that no board with proper regard for all owners’ interests would have entered into such an agreement.[iii] Section 26.2 appears to be the government’s response to this practice and the public reaction to the legal decisions finding it to be permissible. As with Section 26.1, however, it is not known when Section 26.2 will come into force and, once again, it can be amended by future regulations under PCOA.
Proposed Changes to Tarion
The Old Act required that only new build condominium projects had to be registered under the Ontario New Home Warranties Plan Act (“ONHWP”). Purchasers of conversion projects, such as lofts constructed in an old factory, currently have no coverage under the ONHWP despite the fact that most of the physical structure of the units and common elements are often new con-struction.
PCOA will add Section 2.1 to the Old Act, which provides that a residential condominium conversion project shall not be registered unless the project, the units and the common elements are enrolled in Tarion and the builder and vendor are registered under the ONHWP. It is not yet known when Section 2.1 will come into force, as well as the related amendments to the ONHWP which are required to fulfill PCOA’s requirements for conversion projects. It is almost certain, however, that only buildings that were previously used for non-residential purposes will be covered. For example, a former warehouse that is turned into a residential condominium would be covered, while a former rental apartment building converted into a condominium would not.
Pre-existing building elements will also likely be excluded from the one-year warranty period coverage for workmanlike construction with materials free from defects, while being covered under the remaining warranties provided by Tarion, such as coverage for a major structural defect. While these changes may reduce the number of condominium conversion projects, as warranty coverage may be difficult to obtain for older buildings, the conversion projects that do proceed will enjoy warranty coverage against construction defects, subject to what appear to be reasonable exclusions.
While not part of PCOA, changes to the ONHWP and Tarion are expected that will have significant impact on corporations’ construction deficiency claims. The changes may be several years away; however, major recommendations from former Justice John Cunningham’s review have been included in Bill 166 – Strengthening Protection for Ontario Consumers Act, which passed its first reading on October 5, 2017.
One key measure will be to provide that the source of a defect does not need to be established; rather, it only has to be proven that there is a defect. This change should help to reduce protracted technical audits and disputes over whether a defect is covered by Tarion or not, hopefully decreasing the time between the discovery of a defect and the undertaking of repair or replacement work. Clarifying the ‘standard of proof’ needed to establish warranty coverage for defects and streamlined dispute resolution processes should lessen the expense and effort that new condominium corporations presently expend on the Tarion warranty process.
Prepared by Justin McLarty
© Deacon, Spears, Fedson + Montizambert, 2017. All rights reserved.
[i] There are exceptions for costs associated with terminating agreements entered into by the declarant as well as a standard of reasonableness.
[ii] The Board of a phased condominium corporation elected within 30 days of registering amendments to the declaration required to create a phase, regardless of whether the declarant still owns a majority of the units, is also excluded.
[iii] See for example Toronto Standard Condominium Corporation No. 2095 v West Harbour City (I) Residenc-es Corp., [2013] ONSC 5987, subsequently upheld by the Ontario Court of Appeal in 2014.
