Part 2: Top 6 considerations for new condominiums

With the loosening of COVID-19 restrictions and immigration doors re-opening, there should be no shortage of cranes in the ground over the next few years. New condominiums have a host of issues to address within the first couple years of registration.  In Part 1 of our series  we provided two considerations for new condominiums. In Part 2, we provide an additional two considerations for new condominiums.

3. Terminating Agreements

Section 112 of Ontario’s Condominium Act, 1998 (the “Act”) permits a corporation to terminate certain agreements by resolution of the Board within one year of the turnover meeting by providing sixty days’ written notice. The types of agreements that may be terminated under Section 112 include:

• an agreement for the provision of goods or services on a continuing basis;
• an agreement for the provision of facilities to the corporation on other than a non-profit basis; or
• a lease of all or part of the common elements for business purposes.

While a corporation can terminate an agreement under Section 112 of the Act, there are usually three potential impacts of termination that need to be considered: (1) does termination constitute a change in services or a change to the common elements; (2) does the declaration require the corporation to maintain the agreement; and (3) would any penalties be payable to the service provider as a result of terminating the agreement?

In terms of a change in services or a change to the common elements, it is possible that terminating an agreement will trigger the requirements of Section 97 of the Act. Courts have held that the requirements of Section 97 of the Act still apply when an agreement is terminated under Section 112.

Care has to be taken to determine whether any of the approval of the owners thresholds under Section 97 will have to be met to terminate an agreement under Section 112, and the timing to complete those steps should be taken into account when calculating the timing of termination, as the steps under Section 97 should be completed before 60 days’ notice of termination is provided.

The next consideration is whether the corporation’s declaration requires the corporation to maintain an agreement. Courts have also held that Section 112 of the Act cannot be used to terminate obligations set out in the corporation’s declaration. When deciding whether to terminate an agreement, the obligations and duties of the corporation set out in the declaration will also have to be reviewed to determine if the obligations set out in the agreement will still have to be complied with on the basis of the declaration itself.

Turning to the third main consideration of whether any termination costs or penalties set out in an agreement will still apply, Section 112 of the Act does not state that any effects of termination that are contained in the agreement that is to be terminated will not apply. In other words, while Section 112 may provide a right to terminate an agreement the question remains whether any costs or penalties for termination set out in the Agreement will still apply.

Changes to the Act will bring greater certainty in the future, but the fact that the Act is being specifically amended to preclude such charges, penalties etc. could be used as an argument that currently a corporation is liable for charges, penalties etc. under an agreement terminated pursuant to Section 112.

4. Fulfilling Purchase Obligations set out in the Declaration

It is fairly common for a corporation to be required to purchase units, such as a superintendent’s suite or guest suites, from the developer. As the Act is currently drafted, if the obligation to purchase the units, including the costs associated with the purchase, were properly set out in the disclosure statement and included as an obligation of the corporation in the declaration, the corporation will be required to proceed with that purchase.

There are amendments to the Act, however, that are not yet in force that will prevent a declarant from requiring a corporation to purchase units. A new Section 26.1(1) will eventually come into force which provides that until a turnover board is elected, a corporation will not acquire an interest or right in a unit, other real property or personal property, except at no cost, despite anything to the contrary in a declaration, by-laws, agreements or other instruments.

The effect of Section 26.1 will be to restrict the ability of developers, either through the declaration or agreements entered into by declarant-controlled boards, to cause the corporation to purchase property.

For the time being, corporations can continue to be required to purchase units from a declarant. In almost all cases, the purchase price itself is financed through a vendor take back mortgage in favour of the declarant, or in other words the purchase price is not paid or borrowed from a third party by the corporation initially, but rather is paid off over a set term, commonly ten years.

The interest rates on a vendor take back mortgage, as with most private mortgages, are usually significantly higher than rates offered by the big five banks, and many boards will understandably want to refinance the vendor take mortgage shortly after the transfer.

There are two key considerations to look at when looking to refinance. The first is whether the terms of the vendor take back mortgage allow for prepayment of the amount remaining without penalties or additional costs. Many vendor take back mortgages do allow for prepayment without penalties, but if there are penalties for advance payments those costs should be factored in along with any transaction costs when deciding whether refinancing will make long term financial sense.

The second consideration to keep in mind is whether the corporation has adequate provisions in either its general operating by-law or a stand-alone borrowing by-law to refinance the mortgage.

The declarant will most likely have included specific clauses for the vendor take back mortgage in both the declaration and the by-laws, but those clauses may not extend to refinancing the existing mortgage. If the power to refinance is not provided for in the existing provisions, the corporation will have to pass a new borrowing by-law and will need to engage with the owners to explain the cost savings that could be achieved.

Stay tuned for the final Part 3: Top 6 considerations for new condominiums.