Can the initial board of directors appointed by a condo developer turn around and insulate the very same condo developer from liability if, say, the common elements are constructed deficiently? In a recent decision that is bound to upset current and future unit owners, the Ontario Court of Appeal essentially said the answer is yes.
Under Ontario’s Condominium Act, the “declarant” of a condo corporation must appoint an initial board of directors within 10 days of registering its declaration with the land registry office. Generally, the declarant is the condo developer and the initial board members are its nominees. The initial board, like subsequent boards, has very expansive powers, including the power to make by-laws and the power to “govern the conduct generally of the affairs of the corporation.”
In the case of Toronto Standard Condominium Corporation No. 2095 v. West Harbour (I) Residences Corp., the initial board of directors passed By-Law No. 2. This by-law required the condo corporation, TSCC 2095, to enter into an agreement with the developer. The agreement would “neither be terminated nor terminable” and would state that “the Corporation’s only recourse against the Declarant for a final and binding resolution of any outstanding, incomplete or deficient construction items…shall be through the process established for and administered by Tarion Warranty Corporation.” (Among other things, the Tarion process caps the amount of compensation available for poor construction and imposes deadlines for reporting construction deficiencies.)
The same day that By-Law No. 2 was passed, TSCC 2095 and the developer entered into the agreement mandated by this by-law. Later on, after a new board was elected, TSCC 2095 identified alleged construction deficiencies that it claimed might not be warrantable within the Tarion process (this was never substantiated). Either way, the agreement with the developer, which had been mandated by By-Law No. 2, seemed to prevent TSCC 2095 from seeking compensation from the developer. TSCC 2095 had essentially tied its own hands.
In subsequent court proceedings, TSCC 2095 tried to argue that By-Law No. 2 was void, in part because it was inconsistent with the Condominium Act and was plainly unreasonable. TSCC 2095 then argued that, absent a properly enacted by-law, the initial directors had no authority to enter into the agreement with the developer, and that the agreement was therefore invalid. Unfortunately for TSCC 2095, the Court of Appeal disagreed and required the condo corporation to adhere to the agreement its initial board had made with the developer.
The Court of Appeal said the initial board had the legal power under the Condominium Act to pass By-Law No. 2 and give up its right to sue the developer for any construction deficiencies. This was because of the very broad discretion conferred on condo boards by the Condominium Act. Moreover, the court said that giving up the right to sue the developer did not violate the board’s repair and maintenance obligations, because the board was simply limiting its options for how to meet those obligations rather than trying to avoid the obligations altogether. The court said the initial directors did not act improperly, and pointed out that they did not owe a fiduciary duty to the purchasers of condo units.
The role of initial directors, the court said, “is not to try and obtain the best possible agreement for the condominium corporation or for the purchasers of units.” Instead, their role is simply to “organize the affairs of the condominium in the manner anticipated by the declaration and agreed to by the purchasers of the individual units.” The court said the limited warranty was properly disclosed to all purchasers in their agreements of purchase and sale and elsewhere, and that there was absolutely no evidence of deception or misrepresentation by the developer. In conclusion, the court remarked, “there is nothing inherently unreasonable in a declarant limiting its liability for construction deficiencies in the manner done here.” The court said it was bound by existing law, and that it was up to the provincial legislature to change the Condominium Act and other statutes. This is “a matter of policy for the legislature and not one for judicial determination,” said the court.
Prospective purchasers of units in new condominium projects (or their lawyers) should be carefully scrutinizing the disclosure documents and the agreement of purchase and sale to see if the developer has in fact limited its liability. If so, purchasers should take this into account when making their decision to buy into the project. As the Ontario government is now in the process of making major revisions to the Condominium Act, it will be interesting to see if the government will address this issue in the new legislation.