As published in the Winter 2009 edition of CM Magazine.
Property managers and boards of directors alike are constantly looking at ways of improving the efficient use of energy in their buildings – as they should. After all, the efficient use of energy benefits a condominium community in the long run by reducing operating costs, and benefits the greater community by conserving energy. What is often overlooked in evaluating a business case for implementing energy efficient initiatives, is the application of the provisions in the Condominium Act, 1998 (the “Act”)relating to changes, additions, alterations or improvements to the common elements.
In certain circumstances, replacing existing less efficient equipment, such as boilers, variable-speed drives for makeup air units, lighting and other components of the common elements with higher efficiency equivalents, will attract the requirements in Section 97 of the Act to either provide owners with prior notice, or obtain the prior approval of owners for the initiative.
Section 97 of the Act sets out the conditions and thresholds for determining when prior notice to owners, or the prior approval of owners is required. More specifically:
1. There must be a change, addition, alteration or improvement to the common elements, a change in the condominium corporation’s assets, or a change in a service that the condominium corporation provides to unit owners.
2. If the total cost to implement the change, addition, alteration or improvement (regardless of whether part of the cost is incurred before or after the current fiscal year) exceeds 10% of the condominium corporation’s current budget, then the condominium corporation must call a meeting of owners, and 66 2/3% of all unit owners in the condominium corporation must vote in favour of the change, addition, alteration or improvement in order for the board of directors to implement it.
3. If the estimated cost to implement the change, addition, alteration or improvement in any given month exceeds 1% of the condominium corporation’s budget for the current fiscal year, then the condominium corporation can only proceed with implementing it after:
a. notice is provided to the owners, which:
i. describes the proposed change, addition, alteration or improvement;
ii. contains a statement of the estimated cost for the proposed change, addition,alteration or improvement, and how the condominium corporation proposes to pay for that cost;
iii. specifies that the owners have the right to requisition a meeting of owners in accordance with Section 46 of the Act within 30 days of receiving the notice; and,
iv. contains a copy of Section 46 of the Act and a copy of Section 97 of the Act.
b. the owners have not requisitioned a meeting of owners within the 30-day period of receiving the notice; and,
c. if the owners have requisitioned a meeting of owners within the 30-day period of receiving the notice, then a majority of those owners present at that requisitioned meeting have not voted against the proposed change, addition, alteration or improvement.
There are a few exceptions to the requirement to either provide prior notice or obtain the prior approval of owners when making a change, addition, alteration or improvement. Those exceptions are very specific:
1. The condominium corporation has to make the change, addition, alteration or improvement in order to satisfy its obligations to repair the common elements after damage or to maintain the common elements. However, the condominium corporation must carry out that obligation by using materials that are as reasonably close in quality to the original as is appropriate with current construction standards;
2. It is necessary for the condominium corporation to make the change, addition, alteration or improvement in order to comply with a cost-sharing, reciprocal or shared facilities agreement;
3. It is necessary for the condominium corporation to make the change, addition, alteration or improvement in order to comply with applicable legislation;
4. In the opinion of the board of directors, the change, addition, alteration or improvement is necessary in order to ensure the safety or security of persons using the property or the assets of the condominium corporation, or to prevent imminent damage to the property or the assets of the condominium corporation; or,
5. The estimated cost of implementing the change, addition, alteration or improvement in any given month is less than 1% of the condominium corporation’s budget for the current fiscal year.
In most cases, it is relatively simple to determine when something is truly a change, addition, alteration or improvement to the common elements. Once that determination is made, the analysis of whether the conditions and thresholds in Section 97 is carried out, and for the most part, boards of directors proceed with either sending the required notice or obtaining the prior required approval of owners.
However, and as we all know, certain determinations are not always that simple, particularly when there is a search to find creative ways to make the case when one of the exceptions in Section 97 of the Act ought to apply to a replacement of the common elements in order to promote energy efficiency and, at the end of the day, achieve the ultimate goal - reduce operating costs. There is an interesting ongoing debate between lawyers, engineers and accountants as to whether an energy retrofit of relatively new, well-performing equipment, can fall within the exception relating to the condominium corporation’s obligation to maintain and repair the common elements to current construction standards. If the exception applies, then the condominium corporation would not need to provide prior notice or obtain prior owner approval and, the cost could be paid from the reserve fund, thereby avoiding a special assessment. The debate is easier to understand by giving a simple example:
A condominium corporation has a low efficiency boiler that is approximately 3 years old. At the time of installation, a higher efficiency boiler was available in the market, but the developer chose to install a lower efficiency boiler (likely to minimize the developer’s costs – no surprise there).
The condominium corporation received an interesting proposal from a company offering to replace the existing boiler with a high efficiency alternative at a significant cost, but a cost that would nevertheless pay itself off in a short period of time. The total cost of the retrofit exceeded the 10% threshold in Section 97 of the Act. The question that was raised was whether a reasonable argument could be made that it was necessary to replace the low efficiency boiler in order to save on future energy costs, and since energy efficient boilers are available in the market, the replacement would be made with materials that meet current construction standards.
In that particular case, the existing boiler was working well (which it ought to have considering its age), the reserve fund study did not call for replacement for at least a decade, and the condominium corporation was not incurring significant costs to maintain the boiler, which may otherwise have necessitated replacement. Unfortunately, in light of those factors, an argument could not be made that the condominium corporation had to make the replacement with a boiler meeting current construction standards in order to satisfy its maintenance and repair obligations. The implication for the condominium corporation, however, was that it could not take advantage of the energy efficient alternative, which would have promoted overall conservation and saved the condominium corporation significant operating costs.
Some would say that having to go through the task of providing notice or obtaining owner approval would be relatively simple – what unit owner would oppose an energy efficient initiative? Managers and boards of directors know, however, that there is not always a logical answer to that question, which leads to the search for finding creative, but well-intentioned, ways to come within an exception. Although the condominium corporation in the example above could not qualify for an exception, that is not to say that there will never be cases that will qualify. In the end, as with many legal questions, the answer often is: it depends on the circumstances.