Legal

October 6, 2023 Published by London and Area Chapter - By Kristi Sargeant-Kerr

Disputes Regarding the Declaration - Arbitration vs a Court Application

From the CCI Review 2023/2024-1 August 2023 issue of the CCI London Chapter

Alterations can be a point of contention between a unit owner and the Board of Directors of a condominium corporation, particularly when unit owners proceed with alterations without the approval of the Board. For this month’s e-blast, we will be looking at two related Superior Court of Justice Cases where unit owners made extensive unapproved alterations to their unit.

Waterloo SCC No. 399 v Lee/Yu (2023 ONSC 3807):
Unapproved Alterations to the Unit

In 2009, Lee and Yu bought the unit in question at WSCC399 and proceeded to make extensive modifications, including the addition of a bathroom. In 2017, the Corporation discovered these modifications during a routine fire inspection.

The Corporation applied to the Ontario Superior Court of Justice under sections 98, 117, and 119 of the Condo Act to seek an order that the unit be restored to its original layout, arguing that the unit owners had breached the Declaration of the Corporation by failing to obtain the written consent of the Board before modifying the unit.

Of note, sections 132 and 134(2) of the Condo Act require parties to arbitrate a dispute regarding the declaration before making a court application; however, this does not apply to breaches of the Condo Act.

The Corporation later argued that the modifications to the unit, specifically the additional bathroom, were not in compliance with the Ontario Building Code, and therefore violated section 117 of the Condo Act because they were likely to damage the property or to cause injury or illness individuals.

The Court ultimately agreed with this assertion and ordered the unit owners to either bring the modifications into compliance with the Building Code without encroaching on the common elements or to remove it entirely. Notably, the Court made no orders with respect to the remainder of the unapproved alterations made to the unit.

Waterloo SCC No. 399 v Lee/Yu (2023 ONSC 4223):
Decision on Costs

Upon the Court’s requests for submissions on costs, the Corporation sought full indemnity costs in the amount of $46,432.62 pursuant to the indemnification provisions in the Corporation’s Declaration, or in the alternative, substantial indemnity costs in the amount of $37,479.22. Despite being partially successful in their application, the Court ordered that the Corporation would receive only $5,000.00 in costs from the unit owner because the Corporation failed to arbitrate on the issues involving the breach of the Declaration before making a court application.

As mentioned previously, the Corporation initially applied to Court under sections 98, 117, and 119 of the Condo Act to seek an order that the unit be restored to its original layout.

In coming to this conclusion, the Court noted that on September 21, 2022, the Corporation made a formal offer to settle which was not accepted by the unit owners. Per Rule 49.10 of the Rules of Civil Procedure, if the plaintiff makes an offer to settle and obtains a judgment that is as favourable as or more favourable than the terms of the offer to settle, then the plaintiff is entitled to partial indemnity costs to the date the offer to settle was served and substantial indemnity costs after that date, unless the court orders otherwise. Hypothetically, an offer to settle that is better than or equal the outcome of the decision would entitle the plaintiff to certain costs, but that was not the case in this scenario.

On December 20, 2022, the Corporation submitted a reply factum which requested that the Court issue an order to bring the unit into compliance with the Building Code as a result of a s. 117 breach. This was the only remedy which the Corporation requested that did not first require arbitration, and therefore was the only issue that could proceed before the Court.

Prior to the submission of this reply factum, the unit owners were entitled to take the position that the Court did not have jurisdiction to hear the dispute, as the Condo Act require parties to arbitrate a dispute regarding the declaration before making a court application.

Therefore, the Court ruled that the offer to settle only became reasonable after the reply factum was submitted and the Corporation’s position became clear (namely, that the application was related to a breach of the Condo Act, rather than a breach of the declaration).

Therefore, the Court ordered costs payable by the unit owners to the Corporation in the amount of $5,000.00, stating that this amount was intended to be a fair and reasonable award of costs for litigation occurring after the submission of the reply factum, rather than a reflection of actual costs to the Corporation.

Lessons Learned

These decisions highlight the importance of understanding when mediation and arbitration clauses apply and, when they do apply, ensuring that mediation and arbitration are pursued before making a court application. If an issue that would normally be subject to mandatory arbitration under sections 132 and 143 of the Condo Act could also be resolved through a court application under a different section of the Condo Act, then it is important that this position is articulated early so that any offers to settle can be an effective way to recover costs, if made at the appropriate time.

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Kristi Sargeant-Kerr, LL.B., LCCI is a partner with Scott Petrie, specializes in all aspects of condominium and real estate law, including development, management and litigation and purchase, sale and mortgaging of condominiums. She has extensive experience working with managers and corporations in and around the region and prides herself on finding reasonable solutions to their complex issues.

Kristi is on the local CCI Board of Directors and is co-chair of their Education Committee. She has also been appointed to the Advisory Committee of the Condominium.