90 George Street Ltd. was the declarant of OSCC No. 815, a 16-storey residential condominium corporation with 104 residential units. 90 George Street Ltd. provided "first purchasers" (being those who bought units directly from the developer before the condominium was registered) with disclosure statements describing the project, as required by Ontario's Condominium Act, 1998.
The disclosure package given to first purchasers included a first year budget statement setting out the common expenses that OSCC 815 was expected to incur during its first year of operation. Developers are required to prepare and deliver a first year budget to those purchasing new condominium units so they will know the costs to be incurred during the condominium's first year.
The audited financial statement for OSCC 815's first year revealed that the actual operating expenses exceeded the budgeted amount by $115,669.00, or approximately 15%. This averages $1100 per unit, although the exact amount payable by each owner is determined by the owner's proportionate share as set out in the Schedule D of the corporation's declaration.
First year budget deficits can be caused by new or unpredictable costs, by negligence in the budgeting process, or by a deliberate strategy to make common expenses appear low in an effort to sell more units. Ontario's Condominium Act protects consumers from unanticipated first year common expenses by requiring the declarant to "make good" the difference between the actual first year expenses and the budgeted amount. This obligation exists irrespective of the cause of the first year budget deficit.
When OSCC 815 learned of its large, first year budget deficit, it promptly demanded reimbursement from 90 George Street Ltd. The budget shortfall was caused almost entirely by security expenses, which were 25% over budget, and superintendent costs, which were 200% higher than the budgeted amount. The declarant refused to pay the shortfall, claiming that the security and superintendent costs were excessive and unreasonable.
The dispute proceeded to mediation and arbitration in accordance with section 132 of the Condominium Act, 1998. The arbitrator found in favour of the condominium corporation. 90 George Street Ltd. was ordered to pay OSCC 815 the entire $115,669.00 shortfall, interest at the corporation's rate of 3% plus prime compounded monthly, plus legal costs and disbursements on a substantial indemnity basis totalling $124,934.89.
At first instance the arbitrator held that he was precluded from considering the declarant's defences because a declarant was "fully liable" for any shortfall. The arbitrator went on to say that had he been required to consider defences, he would have rejected the developer's "excessive costs" defence because the president of the developer sat on OSCC 815's board of directors for over a year. During that time, he or she failed to complain about the expenses and was "opposed to any reduction in services".
90 George Street Ltd. appealed the arbitration award to the Superior Court. The arbitrator's decision was upheld in its entirety. The Superior Court's interpretation of section 75 of Ontario's Condominium Act, 1998 contains valuable lessons:
- Disputes about first year budget deficits must proceed to mediation and arbitration. An arbitrator's decision must be correct, failing which it can be appealed to a judge of the Superior Court;
- A declarant (developer) is accountable to a condominium corporation for the entirety of the first year budget deficit, even if some of the costs incurred during the first year were not contemplated in the original budget. Arbitrators are however permitted to consider defences such as the propriety and reasonableness of the expenses;
- Amounts owing by a declarant for the first year budget deficit should be treated as common expense arrears which are subject to the corporation's rate of interest as provided in the by-laws (or declaration). Interest begins to accrue 30 days after the demand for payment is made;
- Mediation costs are considered to be part of or related to the arbitration. The party who succeeds at the arbitration can also claim reimbursement of its mediation costs;
- A declarant should not be penalised in costs for challenging the propriety and reasonableness of items included within a condominium corporation's first-year audited statement;
- A party who fails to accept a reasonable offer to settle will likely be penalised by having to pay its opponent's legal costs on a substantial indemnity basis.
Using the mediation and arbitration procedures mandated by the Condominium Act, 1998, OSCC 815 and its owners were able to successfully recover the first year budget shortfall and most of their legal expenses. However, it took almost three years and over $100,000 in legal costs to resolve the dispute.
The case provides valuable insight into recovery of first year budget deficits. If you have concerns about the first year budget in your new condominium corporation, we recommend you do the following:
- As soon as your audited first year financial statement is available, check to see if the actual amount spent by your corporation in the first year exceeds the budgeted amount.
- If the amount spent in the first year is over budget, the condominium corporation should immediately send the declarant a written demand for payment of the shortfall.
- If the declarant refuses to pay the shortfall, the condominium corporation can initiate the mediation and arbitration procedures set out in section 132 of Ontario's Condominium Act. Mediation and arbitration can be expensive, and consequently a corporation should consider the amount it is likely to recover before embarking on the process.
- Be reasonable! OSCC 815 was rewarded for making multiple attempts to settle the budget dispute on a reasonable basis. Reasonable efforts to settle any legal dispute can help your corporation to recover its legal costs or – even better – could help your corporation to avoid those legal costs altogether. [90 George Street Ltd. v. Ottawa-Carleton Standard Condominium Corp. No. 815] (2015 ONSC 336)
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