Legal

January 30, 2024 Published by Newfoundland and Labrador Chapter - By David Cumming

Some Thoughts on Condominium Legislation

From the CCI Newfoundland and Labrador Winter 2024 Condo Chronicle Newsletter

This article conveys some thoughts on the most important legislation governing all facets of managing condominiums in the province of Newfoundland & Labrador – the Condominium Act 2009 and Regulations.

Some suggested potential amendments to sections of the legislation that could benefit NL condo owners are included. Other recommendations are also provided to processes and procedures that could benefit a condo Corporation.

1) Condo Board of Directors

There are currently cases in NL where the majority of the owners in a condominium corporation lease their units and all the elected members of the Board are investors of which none live on the property. The only reason these owners own a unit is to maximize the profit on their property investment. This often results in a strong inclination by these investors to reduce costs to a minimum to increase their profits to the point where there is a negative impact on the overall living environment due to a reduction in paid services, a scaling back of Common Elements maintenance, and a reluctance to enforce the By-Laws and Rules for use of the Common Elements resulting in an adverse effect on all the owners – especially those owners who do live in their units. In an extreme situation, this has the potential to deteriorate into a serious conflict of interest situation where the Board members are acting very much in their own best interest rather than the best interest of the Corporation.

In Ontario, the Condo Act requires that one position on a condo Board of Directors be reserved for an owner who lives in a unit on the property.

Notice of owner-occupied position:
Ontario Condo Act: Sect. 28 (3) (a) ...a statement that one position on the board is reserved for voting by owners of owner-occupied units,

There is no similar restriction on Condo Board members in NL as all Directors are elected in a free election where:

NL Condo Act Sect. 21 (1) All voting by owners shall be on the basis of one vote per unit and voting may be done by proxy.

At least if there is a requirement in the legislation that one owner on the Board of Directors must live in their unit, the minority owners who live in their units will have a voice on the Board to advocate for their interests and also perhaps provide a vehicle to furnish information on the strategy of the Board that may be having a negative impact on the property asset as well as the overall living environment.

Amending the NL Condo Act to ensure at least one elected Director lives on the property warrants consideration.

2) Reserve Fund Investments

In the Condo Act, there is a restriction with respect to how the assets built up in the Reserve Fund can be invested:

NL Condo Act Sect. 49 (8) All contributions collected for a reserve fund shall be paid into the reserve fund and used only for those purposes referred to in subsection 49 (1) and the reserve fund shall be deposited and maintained in a chartered bank or a credit union in the province or invested in securities in which trustees are permitted by law to invest trust funds.

Below is the equivalent section in the New Brunswick (NB) Condo Act Sect. 38(1):

Reserve fund - substantial repair and replacement
In this section, “eligible security” means a bond, debenture, guaranteed investment certificate, deposit receipt, deposit note, certificate of deposit, term deposit or other similar instrument that (a) is issued or guaranteed by the Government of Canada or the government of a province of Canada,
or
(b) is issued by an institution located in the Province insured by either the Canada Deposit Insurance Corporation or the New Brunswick Credit Union Deposit Insurance Corporation.
38 (3) All contributions collected for a reserve fund shall be paid into the reserve fund and deposited and maintained in a bank, credit union or trust company in the Province or invested in an eligible security.

Thus in NB, there is an expanded definition of how contributions collected for a Reserve Fund are deposited and maintained, as well as increased protection for any funds invested in a Reserve Fund.

When I was President of the Imperial Condo Corp., I remember one AGM where an owner suggested that our Corp. could make more money on our Reserve Fund investments if changes were made to these investments. This owner suggested converting the investments to higher yield (which generally means higher risk) investments. This could mean much higher risk investments such as a precious metal fund or Bitcoin.

So what would happen if a Board did change these investments as this owner had suggested and the market took a down turn to the point where the Reserve Fund falls below the minimum amount recommended in the Reserve Fund Study?

Referring to Sect. 49 (6) of the NL Condo Act:

49 (6) Where an updated reserve fund study is completed in accordance with this section and the amount of the reserve fund of the corporation is less than the minimum amount that the reserve fund study recommends that the fund ought to be, the corporation shall assess and collect contributions from the unit owners in an amount that shall result in the reserve fund amount recommended by the study being achieved within the period of time recommended in the study and continuing to be at least the minimum amount recommended in the reserve fund study.

It is important to note that an assessment levied under Sect. 49 (6) of the Act differs from an assessment levied under Sect. 18 (3) (h) of the Act where:

18 (3) (h) A corporation may, with the consent of the owners of at least 66% of the common elements,
(h) levy special assessments for extraordinary common element expenses.

NO CONSENT of the owners is required to impose an assessment under Sect. 49 (6). Thus the owners of a condo would be very unhappy if they were forced to pay an assessment with no input or consent simply because the Board adhered to the advice of an owner and invested the Reserve Fund inappropriately.

It should be noted, however, that the Board members may be covered by Directors’ and Officers’ Liability Insurance in this situation, depending on the coverage of the insurance. This insurance protects the Board members against actual or alleged errors, omissions, misstatements, misleading statements, neglect or breach of duty while acting within the scope of their duties.

When one reflects upon the day-to-day potential controversy attendant upon condominium Board members carrying out their duties, one can see that insurance protection is essential. Some of the exposures that may be covered by Directors’ and Officers’ Liability Insurance include:

• Failure to maintain a sufficient Reserve Fund
• Negligent handling of investments

If a condo corporation was compelled to make an insurance claim to elevate the amount in the Reserve Fund due to negligent handling of investments by the Directors, this could result in higher insurance premiums paid by all owners of the Corporation.

3) Updating the Reserve Fund

NL Condo Act: Sect. 49 (3) Where a corporation has, as one of its objects, the management of a property consisting of 10 or more units, the corporation shall
(a) complete a reserve fund study before the sale of the first unit;
49 (5) Where this section requires that a reserve fund study be completed, the corporation shall, within every 10 years from the completion of the previous reserve fund study.
(a) complete an updated reserve fund study...

For many years the Bank of Canada was successful in containing inflation rates to a range of about 1 to 3%. Over the last few years however, the Rate of Inflation has seriously escalated, skilled labor is getting harder to find and supply chain issues are negatively impacting the Reserve Fund.

According to the Consumer Price Index (CPI), consumers in Newfoundland and Labrador paid 4.1% more for goods and services in September 2023 than in September 2022. As such, if a Condo Corporation carried out a Reserve Fund Study 10 years ago as is specified in the Legislation, the Reserve Fund could be seriously underfunded due to factors not taken into consideration in the Reserve Fund Study. Thus many provinces across Canada now require that the Reserve Fund Study be updated and/or redone with greater frequency:

Ontario: Timing and Frequency: The regulations in Ontario require that a Reserve Fund Study be conducted within the first year of the condominium corporation's existence. Subsequent studies must be conducted at least once every three years.

Alberta ServiceAlberta.ca: Updating the reserve fund study every five years, condominium corporations must conduct a new reserve fund study. Once completed, the board must develop and adopt a new reserve fund plan. Before implementing the plan it should be presented to the unit owners for their information.

CMHC, Nova Scotia Reserve Fund Studies must be updated in each five-year period after completion and entirely redone every 10 years by a professional engineer who meets specific requirements.

Thus there are many Condo Corp. in NL that appear to be diligently adhering to the requirements to update a Reserve Fund Study every 10 years that may unknowingly be contributing to a Reserve Fund that is inherently underfunded.

4) Lack of Condo Architectural or Structural Plans

Waiving the requirement for Architectural or Structural Plans:

Ref. Contents of the Description NL Condo Act: Sect. 11 (2) ….the registrar may, upon proof satisfactory to the registrar, waive the requirement for architectural or structural plans.

The decision to waive the requirement for a new Condo Corporation to have architectural or structural plans appears to be a decision made solely at the discretion of the Registrar.

Question: Does the Registrar really understand the implications of permitting a Developer to proceed with a condo project without having architectural or structural plans?

I live in a condo that was built over 100 years ago (c.1906) and it has become apparent that the developer applied, and was granted, a waiver precluding him from having to provide architectural and structural plans due to the age of the property as well as the lack of existing plans available during the property renovation period (1996). I assume that there are other condo corporations consisting of older renovations or repurposed properties in NL that have been granted a similar waiver. Typically, these condo corp. have plans that are restricted to:

• A survey of the property that involves a comprehensive examination of the site's topography, soil type, vegetation, climate, existing structures and utilities, and surrounding land use
• Site services plan – plan of water main and sewage piping to/from the property
• Floor plans for each unit and the common elements

The consequences of not having architectural or structural plans is that major repair or replacement of the common elements as well as updating the Reserve Fund Study can become a more difficult and complex challenge as contractors retained to carry out these tasks are generally not familiar with the property. The people who are most familiar with the property are the owners that have lived in the condominium for many years however there are restrictions imposed on the declarant and owners carrying out the Reserve Fund Study under Sect. 8 of the Condo Regulations presumably to prevent/deter a conflict of interest situation:

Sect. 8. A person shall not, without the written consent of the owners of all of the units in the property, prepare a reserve fund study for a corporation if that person

a) is the declarant or a unit owner, director, officer, employee or manager of the corporation;

b) is a partner, employer or employee, spouse, son or daughter of the declarant, or of a unit owner, director, officer, employee or manager of the corporation;

c) has an interest in a contract or proposed contract to which the corporation is a party; or d) is a person who lives on the property managed by the corporation.

Thus I do not agree that granting a waiver for the requirement for Architectural or Structural Plans is in the best long term interest of the condo owners.

Is there an Alternative? The Registrar could compel the Developer of a proposed condo corp. to carry out a detailed survey of the property followed by the preparation of architectural and structural plans deemed acceptable to the Registrar. In addition, prior to accepting these plans, the Registrar could add a requirement that these plans be reviewed by a qualified independent third party.

The Developers that have been granted a waiver in the past have often generally acquired a derelict property very inexpensively and allocating sufficient funds to renovate or re purpose the property. In some cases, the property has been purchased simply by paying, at a public auction, the arrears of taxes owed to a municipality.

Thus requiring a survey could increase the cost of creating a condominium to the point whereby the initiative is no longer a viable business opportunity as the proposition can no longer be considered profitable or expected to generate an acceptable positive return on the investment.

5) Condominium Insurance

Condominium insurance is a subject that sparks much debate within the condominium community as most condo Directors consider insurance a complex, intractable problem.

Insurance (Condo Act Sect 56 (1)) The corporation shall obtain and maintain insurance, on its own behalf and on behalf of the owners, for damage to the units and common elements that is caused by major perils or the other perils that the declaration or the by-laws specify.

The major perils are listed in Sect. 56 (2): ...means the perils of fire, lightning, smoke, windstorm, hail, explosion, water escape, strikes, riots or civil disturbance, impact by aircraft or vehicles, vandalism or malicious acts.

Wind Damage to an owner’s vehicle at Hillshire Manor Condo Corp. - 2017

A condo corporation may include additional perils in their governing documents such as flood insurance if the property is located on or close to a flood plain. Our changing climate may also precipitate changes in insurance coverage over time if a property is located close to a shore line where rising sea level and storm surge become increasingly prevalent.

What types of insurance should an owner carry?

• The owner should always have coverage for the contents of their unit. Insurance that pays for damage to, or loss of, an owners possessions while they’re located in their condo or temporarily away from the property. (for example, when the owners possessions are with them while they travel or are in their vehicle. All personal belongings are excluded from the corporation’s coverage in all circumstances.)
• If the owner is storing possessions in a condo storage locker, these possessions should also be included in their insurance coverage.
• The owner should obtain insurance coverage for all betterments and improvements done to their unit. Taking photos and recording the renovation date and major purchases as well as costs is recommended. Maintain a list of all major possessions or if there is a significant renovation to a unit such as replacing a vanity, flooring, removing an electric fireplace etc.
• Coverage for liability is also important in the event that someone is injured within a unit.
• If there are any high-value items, adding specific coverage for these items should be considered. Things like memorabilia and art are sometimes overlooked or not covered by a policy. It’s also a good strategy to make sure the pay-out for high-value items isn’t capped by a maximum pay-out.
• The owner should have coverage for the corporation’s insurance deductible in the event that the damage is deemed to be the fault of the owner due to neglect or lack of maintenance.
• Examples: if the owner is aware of a leaking pipe, if the leak is ignored and it blows, this is lack of maintenance. If there is a pot on the stove turned on and it causes a fire this is neglect.
• The owner should make sure they are covered for alternative accommodation in the event that they are unable to occupy the unit while it is being restored after damage.
• Loss assessment coverage is an optional endorsement that you can add onto a condo insurance policy. It helps protect an owner where an owner is responsible for a portion of damage or loss in a common area. This does not cover the type of assessment to top up a reserve fund as described in sect 49 (3) (b) of the act, however.

Deductible Ref.
Condo Act Sect 58 (1): Where an insurance policy obtained by the corporation in accordance with this Act contains a deductible clause that limits the amount payable by the insurer, the portion of a loss that is excluded from coverage shall be a common expense.
Sect. 58 (2) ...where an owner, a lessee of an owner or a person residing in the owner's unit with the permission or knowledge of the owner through an act or omission causes damage to the owner's unit, the amount that is the lesser of the cost of repairing the damage and the deductible limit of the insurance policy obtained by the corporation shall be added to the common expenses payable for the owner's unit.

In recent years, some condo corp. are increasing the deductible limit in their insurance policy to mitigate their insurance costs when an owner or a person residing in the owner's unit with the permission or knowledge of the owner, through an act or omission, causes damage to the owner's unit.

Property Appraisal Period: Most condo governing documents include a section in their governing documents specifying the requirement for periodic property appraisals such as:

For the purpose of maintaining the insurance required thereof to the full insurable value on a replacement cost basis without deduction for depreciation, the Corporation shall obtain every three (3) years an appraisal of the full replacement value of the Buildings situated on the Land including the Units and Common Elements but not improvements made to a Unit by an Owner after the registration of the Declaration and Plan. The expenses of such appraisals shall be a Common Expense.

This is to ensure owners are protected in the case of major peril where the property is deemed a total loss. The full replacement cost, known to appraisers as the Total Insurable Value, is to include the building structure, all common facilities and assets, and any insurable improvements. Many corporations who do not comply with their provincial codes can be left at significant risk of being under-insured and responsible for any shortfall in coverage.

The same factors that are impacting the frequency of carrying out a Reserve Fund Study are starting to influence the property appraisal frequency – swings in interest rates, construction costs, supply chain issues etc. Some appraisers are now advocating for annual update services to keep a comprehensive insurance appraisal current for more than one year. This is a cost effective way for corporations to ensure that they maintain adequate insurance coverage given the volatility of construction costs in recent years.

6) Standard Unit Definition

A Condo Corporation is required to establish a Standard Unit Description for each class of unit under Sect. 35 1 (g) of the Condo Act:

35 (1) (g) to establish what constitutes a standard unit for each class of unit specified in the declaration for the purpose of determining the responsibility for repairing improvements after damage and insuring them;

The Corporation does carry insurance that allows the corporation to restore a unit to the standard unit definition however often owners (or previous owners) make upgrades to the units which they become responsible for. An example would be if the unit came with builder’s grade carpeting that was removed and replaced with hardwood flooring. The owner is now responsible for insuring the new flooring.

The Standard Unit Description defines what is included in a Standard Unit and generally consists of a list of the original amenities provided by the Developer when the structure(s) was/were either built or converted into a condo, and may include a description of such things as:

• Appliances (refrigerator, stove, dishwasher)
• Interior finishes (vinyl flooring, wall to wall carpeting)
• Electrical features (electrical panel, outlets, lighting, hot water heater)

Anything not specifically included in the description of the Standard Unit shall be deemed to be an improvement. Unitholder(s) shall be responsible to maintain and repair their unit as well as any improvements in a prudent and responsible manner after normal wear and tear but does not include the obligation to repair after damage (Ref. Sect. 55 (2) of the Condo Act).

With the exception of minor repairs, maintenance and servicing, all other repairs, maintenance and servicing shall be performed by an accredited professional. In all circumstances, repairs, maintenance and servicing shall be performed in a good and workmanlike manner in compliance with all applicable laws and with any consent required pursuant to the Corporation's Declaration. If repairs are needed in a condominium unit due to damage (not normal wear and tear), the Corporation will pay for them but only to bring it to the standards defined by the Standard Unit By-law. If the current owner, or any previous owner, have upgraded the unit, damage to these upgrades will not be repaired by the Corporation as they do not conform to the definition of the "Standard Unit".

Many Condo Boards of new Corporations are at a loss regarding how to develop a Standard Unit Description. Often much of the Standard Unit Description can be determined by examining the marketing materials provided by the Developer. The marketing materials describe the amenities that the buyer can expect upon purchasing a condo.

It is recommended that the Corporation take photos of each component of the standard unit and store them where the corporation file their records with a second copy stored in a separate location such as with the Property Manager as the difference between the Standard Unit and the current unit is not always clear from a written description. Example – Standard Unit: Interior Finishes - Vinyl flooring (laundry/storage room, bathrooms and kitchen), wall-to-wall broadloom elsewhere in Unit.

It is only after comparing the photos of the Standard Unit carpeting to the carpeting now in the unit that it becomes obvious the carpeting has been changed/upgraded.

Standard Unit Carpet - 1996

Existing Carpet in Unit - 2017

7) Insurance – Risk Mitigation

Information and guidance related to risk mitigation and management of a condominium property. Note that insurance companies think positively regarding condo corporations that take a proactive position regarding mitigating risks to their property. Some steps to take to mitigate risk are outlined below:

1. 1Keys to units: all the keys to the Units and Common Elements should be stored in a security lock box located on the property. Two residents living on the property have keys to the lock box and can access any Unit or common element at any time if it is felt that there is a fire, fluid leak, medical emergency etc.
2. Carry out a unit inspection every few years. The condition of a unit would be determined during an inspection and any issues addressed before they became expensive problems. The installation date should be marked on all water heaters and the water heaters should be changed every 5 years in a multi-story building. If a unit has a water shut off valve, a sign should be affixed to the wall adjacent to the valve noting its location. This is particularly important if the unit is leased as the lessee may not be familiar with the shut off valve’s location.
3. It is recommended that a monthly Inspection of the common elements be carried out with a report sent to the Board.
4. A qualified, experienced roof inspector should be retained to inspect the roof annually and provide a report to the Board and/or Property Manager of any deficiencies and recommendations.
5. Elevator Inspection/Servicing: It is recommended that a qualified elevator service contractor carry out an inspection of the elevator every month. The Provincial elevator inspector also inspects the elevator every year or so and provides a certificate that should be displayed in either the elevator or a location noted in the elevator.
6. Fire Inspection: Contractors should be retained to inspect fire safety equipment (fire alarms. fire extinguishers, fire hoses, fire panel, smoke alarms, emergency lighting, heat sensors etc). and sprinkler system every year. It is recommended that a fire drill be carried out twice/year (generally in the Spring and Fall) under the direction of a Fire Marshall (ideally an owner living on the property) appointed by the Board.
7. Ventilation System Maintenance/Inspection: carried out annually by a qualified ventilation system contractor.

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David Cumming served on the Board of Directors of The Imperial Condominium Corp. located in downtown St. John’s (see the Feature Condo article in the Spring 2016 CCI-NL Newsletter) and is a long time Director of CCI-NL.