CONDOBYTE - Condominium Classification

As published in the Spring 2009 edition of CondoVoice.

The editorial in our last issue underlined the unacceptable situation of a condominium suffering a low 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?

A New Concept

A new concept is in the works, which will involve developing a classification system for condominiums.

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 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 judge and determine the financial criteria and engineers or architects will judge and determine the physical state and quality of buildings.

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 standard that is made part of a condominium’s documents so that the standard for the development 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? Well:

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 developers branding and reputation over the long term
    
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 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 are all tired of hearing that there is no one “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, easy 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.

It is really a shame that the industry has to take care of this on its own when some simple legislation will do the trick – I hope someone in government will take notice.

Anyone that is interested in providing their comments or suggestions on the idea of establishing a classification standard for condominiums, please send your comments in writing to the Editor at ccitoronto@taylorenterprises.com. All communications will be acknowledged.

Mario Deo, LL.B.