Reserve Funds

May 5, 2022 Published by Toronto and Area Chapter - By Alexander Etkin

The Trifecta of a Dysfunctional Condominium Corporation

From the Spring 2022 issue of CCI Toronto Condovoice Magazine, Volume 26, Issue Number 3

The Importance of Adhering to the Reserve Fund Study and Financial Management Duties

Condominium corporations [with collective input and support from (1) the board, (2) management, and (3) owners] that do not raise their common expense fees annually do so at the peril of their fiscal and operational wellbeing.

On January 24, 2022, the CBC published an article about the troubled state of York Condominium Corporation No. 82, which operates a 321-unit residential property in the Jane and Finch neighbourhood.

YCC 82's board of directors recently approved a special assessment totaling $11,235,000, or approximately $35,000 per unit, to cover the cost of numerous repairs, including serious and potentially dangerous structural and building envelope deficiencies. The repairs are estimated to total $14,285,000.

While the CBC article presents a heartbreaking picture of YCC 82 and the financial hardship of the special assessment on its owners, especially seniors who are living on a fixed income, I believe a review of the past and ongoing litigation involving YCC 82 would supplement the CBC's report and give readers a better understanding of what has transpired (and continues to transpire) at this troubled condominium.

All in all, it is important to recognize that YCC 82 did not get to where it is overnight.

This article discusses:

1) the background of YCC 82's current financial troubles;

2) YCC 82's options under the Condominium Act, 1998 (the "Act") and;

3) best practices for the corporate governance of condominium corporations.

PART ONE
The Background of YCC 82's Predicament

YCC 82's poor state of repair today is the result of a troubling history of mismanagement and neglect going back several decades, all set out in the recent decision Jasper Developments v. York Condominium No. 82, 2022 ONSC 768 ("Jasper Developments").

By way of context, the Applicant in this case, Jasper Developments, is a non-resident investor in multiple units in YCC 82 that sought a court order compelling the corporation to call and hold a requisitioned meeting of owners to vote on the removal and replacement of its Board of Directors. The reason for the requisition was ostensibly to bring in a new Board to cancel or modify the above-noted special assessment.

Per Jasper Developments, YCC 82 was insolvent and came under court-appointed administration in 2004. The Administrator borrowed $4 million for numerous repairs and, at the end of the administration in 2007, a new board was elected and borrowed an additional $4 million.

YCC 82's troubles did not end with the election of a new board. Since that time, it was sued by the City of Toronto for outstanding fire, water, sewer, and garbage collection charges. The lawsuit settled in 2017, with YCC 82 borrowing $1,125,000 to fund the settlement.

As set out in Jasper Developments, the additional debt that YCC 82 took on to fund its settlement with the City of Toronto, on top of its pre-existing debt, has resulted in YCC 82 currently paying roughly $960,000 per year in interest alone.

Additionally, years of neglect have left YCC 82's building in what recent court filings have described as a "deplorable" state.

According to a Condition Assessment undertaken recently by YCC 82's engineers, there are defects in the suspended parking garage that "must be repaired immediately to maintain the structural integrity of the structural framing components", and until such time as repairs are made, "temporary shoring is to be installed immediately.

YCC 82's engineers note that, with respect to the building's exterior balconies and railings, "exposed steel reinforcement" is visible and "all loose concrete should be immediately removed and repaired for health and safety concerns." The state of the building's balconies is so dire that YCC 82's engineers recommend that residents not use any balconies with openings in the guards of greater than 100 mm until proper remedial efforts are undertaken. 

As of Spring 2021, YCC 82 had only $1.75 in its reserve fund and $5,164.62 in its operating fund. Its financial position is such that it cannot take on any further debt. As a result, YCC 82's property manager recommended a special assessment of $16,050,000 (or $50,000 per unit). Ultimately, the board concluded that it must pass the current special assessment of approximately $35,000 per unit (or $11,235,000 in total, which is still short of the estimated cost of repairs by approximately $3 million).

All told, YCC 82's predicament appears to be the result of various interrelated factors including: (1) long-term neglect by the corporation of its repair and maintenance obligations; (2) an unwillingness by the board to increase the common expense fees in line with the operational needs of the corporation; (3) a likely unwillingness by the owners to accept the necessity of replenishing the operating fund by either raising common expense fees, taking out a loan or levying a special assessment (or some combination thereof); and (4) payment of the corporation's operational deficits with funds likely transferred from the reserve fund.

PART TWO
YCC 82's options under the Act

A condominium corporation facing a predicament like that of YCC 82 ultimately has four potential options: (1) special assessment; (2) borrow funds; (3) termination on consent; or (4) termination on sale.

The Special Assessment
Readers are no doubt aware that there are times when a condominium corporation may be required to conduct an unexpected major repair or replacement of its common elements or assets.

If there are insufficient funds in the corporation's reserve fund to carry out these major projects, the condo may levy a special assessment on the owners, which amount is in addition to the regular monthly common expense fees paid by owners.

If the owners opposed to the special assessment have sufficient numbers and support, they may requisition a meeting of owners to vote to remove the board of directors and reverse the special assessment.

The Loan
Condominiums that have passed a borrowing by-law may take out a loan to replenish the operating and/or reserve fund. The amount needed to service this debt is in addition to the regular monthly common expense fees paid by owners.

Termination on Consent
Under the Act, a vote of at least 80% of the owners along with the written consent of at least 80% of those persons who have a registered encumbrance against the property (i.e. a mortgage) is required to terminate the government of the corporation's property and assets by the Act.

Termination on Sale of the Property
Under the Act, a vote of at least 80% of the owners along with the written consent of at least 80% of those persons who have a registered encumbrance against the property is required to sell a condominium corporation's property. Where a corporation's property is sold (i.e. to a developer), the property is no longer governed by the Act.

YCC 82 Elected to Levy a Special Assessment Rather than Sell the Property to a Developer
There was insufficient support among the owners of YCC 82 for a sale of its property and YCC 82's evidence in Jasper Developments was that it has no further ability to borrow. As a result, the board felt its only recourse was to pass a special assessment, notwithstanding the potential hardship of this levy on the owners. This is all the more troubling as the CBC article notes that some residents have been forced to take out high-interest loans from private lenders to cover the amount levied.

PART THREE
Best Practices for the Governance of Condominium Corporations

Condominium boards that do not raise their common expense fees annually (unless such corporations are in a surplus position), neglect the corporation's yearly maintenance and repair obligations, and contemplate breaching the Condominium Act by transferring money from the reserve fund for the payment of operational deficits do so at the peril of the building and its owners.

I believe that there are two interrelated reasons underlying this type of approach to condominium governance.

First, as was the case with YCC 82's owners, many owners do not appreciate, and in fact underestimate or are unwilling to accept, the true operational costs of living in and properly maintaining their homes. Unfortunately, recognition may come at a point where the costs to remediate years of neglect are higher than they would have been had the condo undertaken its repair and maintenance duties at regular intervals throughout the years.

Second, some board members may be of the view that it is politically expedient to keep the corporation's common expenses low so as to remain in good standing among the owners and retain membership on the board. The concern among board members in certain communities is that if they vote to increase maintenance fees or borrow money to pay for necessary repair and maintenance projects, then the owners will vote them out of office.

Unfortunately, such short-term thinking can have long-term adverse consequences, both for the integrity of the condominium's property and for the financial wellbeing of the unit owners. Notably, where a condominium's reserve fund is not being funded as per the reserve fund study (resulting in an under contribution of funds), the result is that essential repair and maintenance projects may invariably be postponed to the point where a special assessment or a loan may be all but inevitable.

Prolonged neglect over the years can result in deficiencies in a building's structural envelope and lead to serious, and even disastrous, consequences. A notorious example of such neglect was apparent in the catastrophic collapse of the Champlain Towers in Surfside, Florida in 2021. Reports that surfaced around the time of the collapse indicated that structural defects in the building required timely and substantial repairs valued at around $9 million in 2018. Rather than levy an assessment or take out a loan, the board (likely with significant input from the owners) decided to defer repairs, which ultimately led to disastrous results.

This situation underscores the importance for condominiums in ensuring that a reserve fund study is done every three years and appropriately followed in accordance with the Act. The engineers conducting the study will estimate the cost of major forecasted repairs and replacements of the condominium's property and assets and, on that basis, determine what amount is needed in the reserve fund to fund such repairs/replacements.

Conclusion
A condo's maintenance fees should increase over time so as to be in line with inflation and increased operational expenses. If a condo is properly managed and the board has saved money for exigencies and unforeseen major expenses, then it can avoid the type of predicament faced by YCC 82.

Condo boards that effectively maintain the reserve fund in accordance with a proper reserve fund study can mitigate against the risk of major structural damage to the condo building. Had the board of YCC 82 (with the support of owners) been more disciplined in adhering to its reserve fund study and financial management duties, amongst others, it could have addressed needed repairs earlier and potentially avoided the current unworkable state of affairs.

Revsion: an earlier version of this article referenced "cracks" 100mm wide. This has been edited to read "openings".