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September 27, 2012 Mario D. Deo
Posted in Condo Litigation

The Case for Better Consumer Protection for Condominium Owners

Preventing Condominiums From Sliding into a State of Disrepair

The Government of Ontario must amend the Condominium Act, 1998 (the “Act”) to provide for condominium building classes and the procedures by which a condominium corporation may downgrade to a lower condominium building class. Too may condominium corporations suffer a slow death by a thousand blows, which goes unnoticed from year-to-year, until it is too late. This problem, which is becoming far more predominant, is unacceptable.  It encourages the creation of slum-like communities at worst, and serious injustice to owners at best. All unit owners have a right to expect that their condominium will be maintained at the same standard as it was built. Why is a notice to owners required when a board spends a miniscule 1% to 9.9% of the budget, yet there are no protections in place for owners when a building catastrophically declines in value over time through bad governance?

Here is a story that illustrates the situation. The Baywoods is a healthy and vibrant condominium community that was built 20 years ago.  It is in a very desirable part of town and was constructed as a fairly high-end condominium.  Forest Manor was constructed with the same standards and, in fact, was constructed by the same developer.  It, too, was in a very desirable part of town.  Basically, the profile of purchasers at both buildings was the same, except that the average age of Forest Manor purchasers was much higher.  The average sale price in both buildings was the same 20 years ago.

The Baywoods’ series of boards was meticulous in maintaining the building’s original standard of construction and general appeal.  Common expenses are now about 10% higher than Forest Manor, but the units at the Baywoods now sell for a price which is about 25% more than Forest Manor.  The neighborhoods at both buildings are basically the same.

Forest Manor’s history can be split into two clear segments.  In the first ten years, the boards were also meticulous about the building’s maintenance and repair standards.  However, as more investors and younger families moved in, the pressure to keep common expense increases very low was intense and the subject always took over the board meetings and AGMs.  The original purchasers vehemently disagreed with the declining standards accepted by each subsequent board, but as they were in the minority, they were unsuccessful in convincing the board members to retain the building’s standards.  Forest Manor’s decline was almost unnoticeable, but, over 20 years, was striking when compared to The Baywoods.  Many of the Forest Manor residents who did not like the building’s decline, and who could afford to move, did so.

From a legal standpoint, there is no clear breach of the Act by Forest Manor’s successive boards.  Is this race to the bottom really acceptable?  Unfortunately, the Forest Manor story is repeated over and over again in Ontario.

There needs to be a clear standard given to boards.  Why?  The Act unequivocally recognizes that a change in assets or services over 10% of the yearly budget requires the vote of 66 2/3% of all owners.  Why is it that a vote of owners is not required when the actions of a board are such that there is a 25% reduction in the value of the units?  The effect of the latter, from a monetary perspective, is far greater than a one-time expenditure of 10% of the budget.

The lack of clear building class standards is detrimental to a particularly vulnerable group in our society.  Many retirees today purchase condominium units to live out their golden years.  Retirees are less likely to move every few years and they will therefore bear the brunt of declining building standards more so than any other segment of the population.  This is simply unfair and will become more and more of a problem as our population ages.

The commercial sector has clear standards for commercial buildings.  There are A, B, C, & D buildings that any owner may choose at any time.  Should a condominium board be able to change a condominium from an A to a D building without approval of a super majority of owners (let’s say 65-85%)?  Clearly, this should not be allowed because it runs contrary to the philosophy of a change in services or assets without the express consent of owners, which presently exists in the Act

There can be little doubt that legislation will go a long way to stop the race to the bottom of many condominiums and prevent more condominiums in Ontario from falling into a state of disrepair.

Classification systems and standards for properties are not new. There are classification standards for commercial properties, which have proven to be effective for determining value for many years. There are also classification standards for hotels, ranging from one star to five stars, depending on a list of criteria developed by convention and consumer expectation.

For condominiums, the classification system will likely be based on three categories or criteria:

  1. The physical state of the common elements;
  2. The financial health of the condominium corporation; and,
  3. The quality of the building and the common elements

Each of the criteria will be developed using an independent industry standard. Auditors will be the best professionals to judge and determine the financial criteria while engineers or architects will be the likely candidates to judge and determine the physical state and quality of buildings.

Until Legislation is Enacted, Developers Need to Kick–start the Classification Standard

When a condominium is being developed, a developer also creates an image or a vision of a certain type or class of condominium living, which is marketed to potential purchasers.  The developers need to translate that image or vision into a perpetual standard that is made part of a condominium’s documents so that the standard for the project remains constant over time. Once the criteria are established, translating a developer’s vision into a standard is simple – perhaps just as simple as choosing a meal from a Chinese menu.

It is in developer’s interest to create a standard.  Why? 

  1. A developer may ensure that any unsold units will remain marketable, since the board of directors will have a positive obligation to maintain the building at the standard established by the developer.
     
  2. The classification standards and its enforcement will ensure that the building does not decline in any of the three categories or criteria (financial health, physical maintenance, and physical quality).  This is of the utmost importance for a developer’s branding and reputation over the long term. If marketed to purchasers properly, it appears to be a concept that will sell more condos, all else being equal.
     
  3. Condominium classification can be used as a marketing tool, particularly for the larger developers.  Purchasers are becoming increasingly more informed of which condominiums to invest in, and the condominium market itself has created certain expectations for purchasers. I have never met a single purchaser of a new condominium that does not want the standard of that property to be strictly maintained.

The first developers to embrace this concept will be the leaders in the field and indeed on the market.

Why Will Condominiums and their Owners Want to Have a Classification Standard?

Most condominiums will want to have the classification, because it will create an expectation among all owners and potential buyers in the resale market that a board of directors will not let the condominium’s standard decline. This is extremely important to most (if not all) owners and potential buyers, regardless of whether they are buying a condominium as a place to reside over the long term, or as an investment property.  In fact, owners will likely drive existing condominiums to establish and maintain a classification standard, since buyers and realtors will ultimately demand it.

Accountability and Enforcement

Accountability and enforcement are essential in order to make a classification standard system work. Everyone in the industry knows that one of the most frustrating and difficult things about condominium governance is holding boards of directors accountable for good governance practices and proper financial and physical building maintenance.

We have all heard the complaint or observation that no one is “policing” condominiums and boards of directors. While it is important to develop a classification system, it is equally important to ensure that enforcing that system is clear, simple, and effective, without the need to resort to litigation.

In order to achieve an effective and efficient process for accountability and enforcement:

  1. It will be imperative that developers establish the classification standards and impose a duty on the board of directors to maintain that standard in a condominium’s declaration.
     
  2. The declaration must impose a duty on directors to produce, at each annual general meeting, an independent report prepared by an engineer and a chartered accountant assessing the physical and financial health of the building, and confirming whether the classification standards for the building has increased, declined or remained the same.

    If the report indicates that the standard has declined, then the board of directors will have a period of time (perhaps six to twelve months) to correct the financial or physical conditions of the building and obtain a further report confirming that the classification standards for the building has been attained.

    If the board of directors does not obtain further report, or if the board obtains a report indicating that the classification standard has not been attained, then an administrator will be appointed to step into the shoes of the board of directors to manage the condominium.

There is no question that the above system will function well, even if some minor modifications will likely be necessary. However, the initiation of a classification system by insertion of the protocols in declarations will work well for new condominiums but it will not address the important issue of existing condominiums which are about to enter the abyss of falling classification without unit owner consent. These unfortunate communities may only be addressed by government legislation.

Mario D. Deo

Mario D. Deo Partner

B.A., LL.B.

mdeo@finedeo.com
905.760.1800 x225
905.760.0050

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