Legal

November 21, 2022 Published by Toronto and Area Chapter - By Joy Mathews

Callin' In the Condo Sheriff! The Court-Appointed Administrator!

From the Fall 2022 issue of CCI Toronto Condovoice Magazine, Volume 27, Issue Number 1.

What is a Court-Appointed Administrator?
Dysfunctional. Dramatic. Drastic. Diseased. These are some of the adjectives used to describe the extreme financial, social, and political circumstances that a condominium corporation finds itself in to justify the "remedy of last-resort" wherein a judge of the Superior Court of Justice appoints an administrator to take over all important condo decisions.

Instead of the duly elected directors managing the affairs of the corporation, the court will appoint a representative who replaces all of the Board members and makes some (or all) of the decisions on behalf of the condominium corporation. This serious remedy is analogous to that of a court-appointed receiver in a commercial, for-profit corporation context when a company is facing the existential threat of bankruptcy.

The court has made it clear on numerous occasions that a court-appointed administrator is a remedy of last resort since the Condominium Act, 1998 (the "Condominium Act") is a piece of legislation which supports a regime of self-governance by owners, not judicial interference. As aptly stated by the court in Bahadoor v YCC 82 (2006), "Self-governance is the norm; administrators are the exception."

Although this remedy in the Condominium Act is available to "save" condominium corporations from a toxic governance situation, it is not easy to obtain. For example, in MTCC 710 v Owners of MTCC 710 the judge issued the following warning or "wake-up call" to the owners in light of financial problems and factionalism within the condominium community coupled with significant governance difficulties:

"….I am imposing a two week "cooling off period". I encourage the unit owners to put aside their personal disputes and obvious differences and to use the next two weeks to meet informally to try to come up with a realistic plan to address the real financial problems that are staring them in the face. Hard decisions must be made – either significantly cut expenses, or significantly raise common fees, or both. Inaction is not an option. If the level of distrust amongst the unit owners is too high to permit reaching a solution, then perhaps they should think about appointing an administrator who can make the tough decisions for them. I will give the unit owners two weeks to engage in this kind of "reality check" and to explore a common solution."

When Do You Need a Court Appointed Administrator? The Red Flags!
Nevertheless, if you are a concerned unit owner or Board member and believe that your community could benefit (i.e., be saved!) from the appointment of an administrator, then you will need to learn how to do this and when it is necessary.

Since each condominium community has its own distinct set of issues, the first step in this process should always be to consult legal advice, preferably from a lawyer who has expertise in condominium law, and seek guidance whether this is indeed the correct path to resolve your particular governance issues. Sound legal advice earlier rather than later can save you and your coowners considerable legal costs.

When is it necessary? Well, you want a list? Here are some issues that have resulted in this remedy: operating deficits of hundreds of thousands of dollars, millions of dollars in mortgages, illegal use of reserve funds to pay for things other than major repairs and/or replacement, unaudited financial statements, city work orders, unpaid water charges, uncollected common expense arrears, underfunded reserve funds, lack of necessary repairs and maintenance, hostility and frustration amongst owners, serial requisitions to remove directors, verbal and physical threats, lack of adequate security, murders, overcrowding, widespread graffiti, poor garage lighting, misuse of operating funds, silencing of owners during elections, proxy fraud, and creation of division amongst owners.

The above is not an exhaustive list and Section 131 of the Condominium Act governs this process and requires that sufficient evidence is presented by way of a court application which is commenced in accordance with Section 134 of the Condominium Act. Your condominium lawyer will assist with reviewing and preparing affidavit evidence which will be presented to the court and should demonstrate the significant issues for it to conclude the necessity of an administrator on the basis that "it would be just or convenient, having regard to the scheme and intent of the Act and the best interests of the owners".

The key part is the phrase "just or convenient" and, as mentioned, is not taken lightly by the court. In this regard, the court is permitted to order the specific role and powers of the administrator based on the evidence.

Whether or not you will be successful in an application for a court-appointed administrator is based on a careful consideration of the nature, causes and impact of events over time. Specifically, the court has found several problems in the affairs of condominium corporations which may justify the appointment of an administrator such as:

1. A demonstrated inability to manage the corporation;
2. Substantial misconduct or mismanagement;
3. The appointment of an administrator is necessary to bring order to the affairs of the corporation;
4. The presence of a struggle within the corporation amongst competing groups that impedes proper governance;
5. Whether the appointment of an administrator has any reasonable prospect of bringing to order the affairs of the corporation; and,
6. The costs-benefits of appointing an administrator are reasonable based on the circumstances.

So, not all administrators are created alike and will vary from case to case.

The powers of the administrators may vary including the total length of the appointment term, the range of powers from narrow (e.g. managing the repair of specific common elements) to comprehensive (e.g. the administrators takes over all powers of the board of directors).

What will not change, however, is the fact that the administrators are officers and instruments of the court. Accordingly, the administrator must act honestly and in good faith, and it must deal with or manage the property of the condominium corporation over which it has power with the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

When Enough is Enough? How Do You Change or Stop The Administrator?
Once appointed by the court, the specific wording of the court order is critical and can only be overlooked at the owners' peril – in other words: read the court order!

For example, the court admonished an elected group of owners who were clearly misguided thinking that they were in control. First, the court order stated that the administrator's power was as follows, "to manage the affairs of [the condominium corporation] as if the administrator were the Board of Directors….and in place of the Board of Directors…., whose powers be and are hereby suspended, until further order of this Court."

The attempt of the elected board to remove the administrator fell on deaf ears as the court stated,

"Let me comment on how the four moving unit owners described themselves. In their materials they styled themselves as the "Elected Board of Directors". With respect, they are not. Since the appointment of the Administrator on August 28, 2006, the powers of the Board of Directors have been suspended. The court has not given permission to hold formal elections for a new Board of Directors. Accordingly, at the present time no Board of Directors exists….elected or otherwise." [emphasis added]

Although in many cases the condominium corporation brings the application for a court appointed administrator, the owners can present their own story to the court and persuasively argue for their preferred administrator. It is noteworthy that the the legal test to have a replacement of an administrator is the same as that of the appointment. For instance, in MTCC 856 v. All Unit Owners and Mortgagees of MTCC 856 (2011), the owners were concerned that "we sense some connivance between the Board, management and the Administrator" which resulted in the court agreeing to the appointment of an administrator chosen by the owners.

Terminating the administrator will not be straightforward and requires consideration of the impact on other interested persons, including the corporation's creditors and, depending on the circumstances, any entities such as fire or building services (if the building structure is compromised due to disrepair).

How To Avoid a Court-Appointed Administrator?
Retrospective analysis of previous court cases in which a court-appointed administrator was ordered yields very important and useful insights to help future condominium communities.

Here are some common themes:

• Owner Apathy: A common background to most cases is owner apathy and lack of effective participation. A successful condominium relies on owners actively participating in the selfgovernance of the corporation. In this regard, the Condominium Authority of Ontario (see: https://www.condoauthorityontario. ca/) provides a useful database of very common issues that a typical owner and condominium corporation will encounter.
• Board Transparency: Maintaining the Condominium Act minimum disclosure obligations is just that: the minimum standard. Although not necessary, it would be useful to all owners that its elected board of representatives engage the community and provide useful information on a timely basis to avoid owners' anxiety and increase participation.
• Deferring Repairs and/or Maintenance: Unreasonably delaying or deferring major repair and/or maintenance of common elements is an easy way to create governance issues in a condominium corporation. If common element maintenance fees are also kept artificially low, coupled with delaying important maintenance decisions, serves only to postpone difficult decisions and leads to an adversarial environment for the future condominium community.
• Ineffective or Non-Existent Management: Condominiums have become sophisticated regulatory entities and the ability to self-manage may still be available for some communities, but most require the professional expertise of a licensed condominium property management company. Management companies, although licensed, are subject to market driven forces and not all managers have the same level of expertise. A property manager that is not attending to the needs of its community may cause harm that can only be measured and weighed in the future. The Condominium Management Regulatory Authority of Ontario (see: https://cmrao.ca/) regulates all licensed property managers in Ontario and ensures that certain industry standards in the condominium industry are maintained.

The above is not an exhaustive list of common problems which may erode good governance in a condominium. There is indeed no one issue that causes the erosion, rather a matrix of various unresolved issues. An engaged ownership and Board being mindful of the social and political milieu that creates a toxic condominium culture is the first step to avoiding the need for this dramatic remedy.

The remedy of a court-appointed administrator is not often used but much needed to protect all owners and is another tool in the toolbox of condominium self-governance.