Canada: Deference To Reasonable Decision Made By Condo Boards

Reassurance From The Ontario Court Of Appeal



Directors and officers, acting as a manager of a condominium, have a number of obligations and responsibilities that they are required to carry out. Section 37 of the Condominium Act, 1998 sets out the standard of care which directors and officers are held to:

37. (1) Every director and every officer of a corporation in exercising the powers and discharging the duties of office shall,

  1. act honestly and in good faith; and
  2. exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

If a director or officer fails to meet its standard of care prescribed by the Condominium Act, the courts may rule that the director or officer is in breach of its fiduciary duty and could be held personally responsible for any resultant damages.

Over time, the principle underlying the Business Judgment Rule in the corporate context has developed in the circumstance to challenge decision making of Condominium Boards.

Business Judgment Rule

The Business Judgement Rule refers to the principle that directors and officers of a corporation are motivated in their conduct by a genuine concern for the interests of the corporation they have been entrusted to manage. The principle that courts should be reluctant to second-guess business decisions made by directors and officers has long been established.1 The rationale for the Business Judgment Rule is that directors and officers are in a better position than the courts to make decisions to effectively deal with the interests of the corporation.

Applicability to Condominium Directors

The Ontario Court of Appeal recently adopted and applied the Business Judgment Rule in 3716724 Canada Inc. v Carleton Condominium Corporation No. 375, (2016) ONCA 650. In this case, the Ontario Court of Appeal recognized for the first time, that condominium directors are in a better position than judges to make decisions dealing with their own buildings.

Carleton Condominium Corporation No. 375 was a mixed use building comprised of both commercial and residential units. The other party to the action, "371", owned commercial parking units in the building which it rented out on a month-to-month basis. Party 371 requested the condominium board approve changes to its common elements to allow the company to rent the parking spaces on an hourly basis, as opposed to its current practice of renting them out on a monthly basis. In order to alleviate some of the anticipated concerns of the board, 371 proactively offered to install a garage loop detector and replace the exterior door to allow customers access to the new short-term rental spaces.

The condominium board stipulated that it would not agree to the changes to the parking spaces unless 371 hired a full-time security guard to monitor the parking lock. It prefaced this by explaining that the building was located in a "high-crime" area of Ottawa, which could affect the overall security of the building and potentially expose the board to liability. Party 371 informed the board that hiring a full-time security guard would be prohibitively expensive. The board therefore denied 371's request.

The application judge agreed that requiring 371 to hire a full-time security guard would be prohibitively expensive and ordered the board to permit the changes requested by 371. The condominium appealed.

The Court of Appeal overturned the application judge's ruling and refused to permit the changes to the common elements on the grounds that the application judge should not have interfered but should have deferred to the board's decision. The Court of Appeal's reasoning was due to the Business Judgement Rule: judges cannot substitute their judgement for that of the board`s if the board's decision fell within a range of reasonable choices.

In this case, the board acted in good faith; it balanced the interest of 371 and the residents of the building when determining that the changes to the common elements could only be made if 371 hired a full-time security guard.

Conclusion

Prior to 3716724 Canada Inc. v Carleton Condominium Corporation No. 375, there had been few court rulings extending deference to condominium boards' discretionary decisions.

This decision bodes especially well for condominium directors and managers in Ontario as the Ontario Court of Appeal has been clear that judges should not be interfering with the board's decision, as long as the decision-making process is fair and reasonable. The anticipated effect of this case is that it should give some degree of confidence to the condominium boards going forward when making decisions.

Despite the added assurance that the decisions of condominium officers and directors will be harder to impugn due to the deference offered by the Business Judgment Rule, they should nonetheless continue taking measures to substantiate the reasonableness of their decisions, and not assume that the Business Judgment Rule will operate as an impermeable shield from liability. There still needs to be evidence that their decisions were grounded and reasonable, therefore they should document their rationales driving their decisions (whether by comprehensive meeting minutes or otherwise) and communicate the same effectively with all stakeholders such as other board members, tenants and unit owners. In addition, officers and directors would be prudent to budget efficiently and understand the condominium's By-Laws and regulations.

Footnote

1. Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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