Cashing-in on Common Element Conversions
The aging of Ontario’s condominium stock is beginning to manifest itself in a number of ways. Condominium legislation has been available in Ontario for decades, and has gone through at least one massive, top-to-bottom overhaul in 1998, and is about to go through another massive overhaul any day now after an exhaustive public consultation and review process which began in fall 2012 and ended in January 2014. The Ontario government’s goal was to have residents and business experts work together to identify issues and develop recommendations to modernize the Condominium Act, 1998, and by all accounts, this collaboration has been a smashing success — the real estate community is now waiting with bated breath to see how the government will convert this extensive public input into exciting new condominium legislation.
The continuing evolution of the condominium world, especially in Ontario, can be seen in other ways as well. Many condominiums have seen a change in the use of common elements since the inception of their buildings. So, for instance, some condominiums with large common element parking structures or other automobile-centric infrastructure are finding that, especially in urban environments served by public transit, the demand for such automobile-centric facilities has been eclipsed by other needs (say, for instance, the need for extra locker space). Sometimes, the evolution goes the other way — outdoor and underground spaces formerly dedicated to recreational uses (such as, for instance, a tennis court complex which seemed like a good idea at the time) goes unused when residents are, instead, clamoring to buy outdoor parking spaces situated near the building. In other examples yet, outdoor common elements, whether exclusive use or not, are often better utilized when added to the units themselves. So, for instance, common element backyards and balconies might better serve the residents if they are closed-off and added to the adjoining units themselves.
Underlying many of these decisions, is the financial desire to raise some much needed cash. While some common elements go chronically underutilized, common expenses are chronically going up, especially for some older buildings using older technologies or simply facing the reality of years of deferred capital spending. For many of these older condominiums, it is not simply a matter of utilizing common element space in a way that better suits residents’ needs, it is instead a desperately needed source of cash (whether it is to top-up reserve funds or to spend immediately to alleviate pending increases in common expenses or, worse, the dreaded special assessments).
While condominium corporations have care and control of all common elements for the benefit of the unit owners, the directors of these condominium corporations, even if they are unanimous, cannot themselves convert common elements into saleable units simply by passing a resolution. This type of major amendment requires a supermajority vote by unit owners. For instance (and greatly paraphrased) Section 107 of the Condomium Act, 1998 requires a 90 per cent vote of unit owners for such a major amendment, no simple task in almost any condominium corporation these days, let alone in the case of some of the really big condominium corporations that exist now in excess of a thousand units! Similar legislation exists in all other jurisdictions that have statutory condominium ownership, and rightly so — changing common elements into saleable units can be a drastic change to the character, value and use of a building, and it is one of those major decisions that does seem to cry out for unit holder super majority buy-in.
Although amendments to declarations to convert underutilized common elements into saleable units are steadily increasing, they are not without some legal intricacies. In some jurisdictions, common elements are owned by the condominium corporation itself. This is not technically the case in Ontario. While it is fair to say that the condominium corporation has care and control of the common elements for the benefit of the unit owners, the common elements are actually owned, for all other intents and purposes, by the unit owners collectively, each in accordance with their respective percentages. So, in a hypothetical condominium of 100 units, all of which are the exact same size and each of which contributes 1/100th to the common expenses, the common elements are technically owned by all of the unit owners, as co-owners, each as to an undivided 1/100th interest! Moreover, even after the residents have gone through the hassle of getting 90 per cent vote on the conversion, at least in Ontario, immediately after the condominium common elements are converted from common element to saleable units, those resulting saleable units are then owned in the same way that they were owned immediately before the conversion — in other words, by all of the unit owners, as co-owners, each as to an undivided 1/100th interest!
To sell the converted common elements, all 100 such owners will then have to sign a deed! Step back and consider the logistical hurdles that this resulting legal construct creates. While a vote of 90 per cent of unit holders is extraordinary enough as is, getting 100 per cent of the owners to do anything is almost impossible, even in fairly small condominiums. At the very least, there is always the owner that never seems to be around — either he/she is an offshore investor, spends most of his her/time in Florida, or simply refuses to sign anything. More nefariously, there are those owner(s) who realize that they are the “last man standing” and might want to be somehow “compensated” for the premium that the “last man standing” will often be entitled to as a matter of Machiavellian economics! For whatever reason, it makes selling these resulting units practically all but impossible.
Of course, this quirk of real estate law should not and has not deterred condominiums from converting such underutilized common elements into unit space. There are a number of legal “fixes,” but the most elegant and perhaps the cheapest such legal “fix” is for the condominium corporation to apply to the courts for a vesting order confirming that the title to the newly formed units be owned by the condominium corporation itself, and not the unit owners collectively as co-tenants. From a policy perspective, there is no reason why a court should not confirm the conversion and allow the condominium corporation to own the new units until they can be sold off to buyers (or sometimes the court order will put the title directly into the names of the new buyers, with the proceeds payable to the condominium corporation, in those cases where the buyers are already ascertained) since this type of vesting order would merely make practical what the legislation seems clearly to have intended in theory.
Even with such logistical hurdles to go through, the frequency of such condominium common element conversions continues to rise, a testament to the changing demographics and demands of unit owners, and proof of the adage that “over time, everything changes.”
Jeffrey W. Lem is an Editor-in-Chief of the Real Property Reports and the Director of Titles for the Province of Ontario. The opinions expressed in this article are personal to the author and not attributable or referable to the government of the Province of Ontario.