The Protecting Condominium Owners Act (the “New Act”) and associated regulations (the “New Regulation”) will make several changes to the law relating to the management of the corporation’s financial affairs.
The government has yet to specify a date on which nearly every amendment discussed in this article will take effect and several details concerning these changes remain to be prescribed in the next batch of regulations, which will (hopefully) help to clarify the corporation’s obligations in this area.
This article focuses on what are expected to be the most significant changes in the provisions of the Condominium Act, 1998 (the “Old Act”) respecting financial management: regulation of the corporation and transparency for owners.
Regulation of Financial Management
The Old Act requires every corporation to maintain a reserve fund for the sole purpose of carrying out major repairs and replacements of the common elements and the assets. Periodic (generally every 3 years) reserve fund studies are required to ensure that contributions collected from owners as part of their common expenses are adequate to cover the expected costs of future major repairs and replacements.
The New Act extends the purpose of the reserve fund to include costs incurred on account of compliance with any applicable legislation, regulation or by-law of the corporation, and if the declaration imposes an obligation on the corporation to repair the units, costs incurred on account of major repairs and replacements to the units. It should be easier to determine what constitutes a “major repair” and whether reserve fund contributions are “adequate” once those terms are defined in the New Regulation, although that remains to be seen.
The New Act will also expressly permit the corporation’s board of directors (the “Board”) to obtain further studies (over and above the scheduled studies already mandated), if it deems appropriate, in order to assess whether the funds in the corporation’s reserve account will be adequate for expected costs.
In addition, under the New Act, if the amount in the reserve fund falls below the amount that remains to be prescribed in the New Regulation, the Board will be required to obtain an opinion from a “reserve fund study provider” (also a newly-defined term) regarding the reserve fund and recommendations as to whether an updated study must be completed before the scheduled reserve fund study.
Most condominium declarations contain a general indemnification provision that makes the owner responsible for any damage, loss or cost incurred by the corporation as a result of an owner’s act or omission to or with respect to the common elements or any other unit. Some declarations also make the owner responsible for any such cost that the corporation incurs by reason of an act or omission or breach of the declaration, rules, etc. by the owner or any person or animal for whom the owner is responsible at law (e.g., tenant, family member, guest, pet). These provisions typically provide that the corporation may collect such amounts from the owner “in the same manner as common expenses” including by registration of a lien against the owner’s unit for the subject amount. Inconsistency in the application of these provisions and collection of these amounts (commonly known as “charge backs”) and confusion as to what constitutes a valid charge back has frequently been the subject of disputes between condominium corporations and owners.
It is expected that the New Regulation will require the corporation to notify the owner of any amount charged back to his/her unit. It is also expected that an owner who seeks to challenge a charge back will be required to do so by initiating a dispute resolution procedure within a specific time period, and that collection efforts by the corporation will be “stayed” until the dispute is resolved by way of payment or other resolution. It remains to be seen whether the availability of these procedures will help to more efficiently resolve charge back disputes or simply encourage a greater number of charge back disputes that are otherwise without merit.
Transparency in Financial Management for Owners
Changes Made Without Notice
Under the Old Act, a corporation can make an addition, alteration or improvement to the common elements, a change in the assets of the corporation or a change in a service that the corporation provides if, among other things, the estimated cost of the change in any given month, is no more than the greater of $1,000 and one percent (1%) of the corporation’s annual budget.
The New Act amends the cost requirement by providing that notice to owners will not be required where the cost of the “modification” (a newly-defined term) is no more than the lesser of three percent (3%) of the annual budget and $30,000, regardless of whether part of the cost is incurred before or after the current fiscal year.
Although the Old Act does not itself explicitly require the corporation to develop and adopt a budget for any given fiscal year, almost all corporations’ by-laws require the corporation to adopt a budget for general or operating expenses and to provide an annual notice of assessment to the owners.
On and after a date that remains to be specified, the New Act will require the corporation to have an annual budget for its general fund and perhaps more significantly, its reserve fund, both of which will need to be prepared in accordance with the New Regulation. The New Act also makes provision for the delivery of notices of annual budget assessments to owners. The Board will also be required to provide owners with notice prior to incurring an expense that exceeds, in a proportion to be provided in the New Regulation, the budgeted amount for that expense.
The Declarant’s Disclosure Obligations
In the first annual budget prepared by the declarant under the Old Act, the declarant often defers certain expenses until after the end of the first fiscal year in order to lead prospective purchasers to believe that the common expenses will remain relatively low.
In view of this practice, the New Act will require declarants to disclose any costs that they know, or ought to know, will be incurred within a period, to be determined by the New Regulation, after the end of the first fiscal year.
The New Act will bring many changes to how a corporation manages its financial affairs. We hope this brief summary has been of assistance and look forward to working with you through this process.
Prepared by Puja Walia
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