Sky High Reform to Condos
Canada’s Public Policy Forum, the independent, not-for-profit organization that has been tasked with coordinating the Ontario Condominium Act Review, just released their Stage II Report setting forth the major themes that the government will be pursuing in its “comprehensive approach to reform.” Now, to those who have been following the condominium law reform movement, there really isn’t anything shockingly new about the Stage II Report themes, but for those who haven’t been privy to the growing juggernaut of the condominium law reform, the Stage II Report should bring home to condominium builders and developers some very real changes in how they are going to bring their products to market.
First and foremost, the Stage II Report is calling for fairly radical changes to the disclosure process. Euphemistically referred to as “smarter disclosure”, the Stage II Report has a large number of recommendations, all under the rubric of “consumer protection”, that speak directly to the disclosure process.
Some of these recommendations are arguably cosmetic. So, for instance, one of the recommendations calls for the creation of project-specific searchable websites where the disclosure statement and other relevant documents would be posted. Most developers already have project-specific websites and a teenager could upload the disclosure document in a searchable format in the time it takes to finish reading this article.
Another of the “smarter disclosure” recommendations calls for the standardization of disclosure statements across all condominiums so that unit boundaries, maintenance and repair obligations, and insurance requirements are uniform across the province. The implications of a one-size-fits all declaration are beyond staggering for the condominium development industry, but the Stage II Report did include some concessions to commercial reality by allowing developers to “add one or more schedules imposing additional duties or obligations on the condo corporation or on specific unit owners.” Alas, this saving exception is important. The right to add schedules to alter the one-size-fits-all paradigm will be seized by all developers as a way to have their constating documentation suit their projects. Indeed, the proposed reform, as currently drafted, will do nothing other than convert the drafting of declarations into the drafting of countermanding schedules — what seems like a dramatic paradigm shifting reform might be nothing more than a word processing exercise.
Some of the recommendations, however, reflect an absolute sea-change in the condominium development world. Many condo projects include amenities as powerful selling features of the building. Such amenities can typically include one or more guest suites, exercise facilities, party or event rooms, lockers, bike storage area, etc. Almost all modern condominiums are structured so that these amenities are sold (or sometimes leased) back to the corporation after turnover, with payment deferred for five, 10 or even more years. This is almost always fully disclosed in the declarations and disclosure statements, and this approach to condominium pricing was approved by the Court of Appeal in the Lexington on the Green case [Lexington on the Green In. v. Toronto Standard Condominium Corporation No. 1930, 2010 CarswellOnt 8602]. The Stage II Report views the practice of selling or leasing back such assets as an unnecessary source of tension between buyers and developers and recommends a prohibition on developers selling or leasing back to the condominium corporation amenities and assets. Instead, the Stage II Report recommends that all amenities and assets will need to be included in the condominium’s common elements, this includes: recreational amenities; guest suites, superintendents’ suite, manager’s office or any recreation administrator’s office; any lobby, stairwell, service room/area or storage room/area; and any heating, cooling, plumbing, drainage, mechanical, ventilation and/or servicing equipment or other facilities needed for the proper functioning and day-to-day operations of the condo property (except certain prescribed “green energy equipment”).
Almost every single condominium corporation that has come on stream in the recent past has included some assets to be purchased by the condominium corporation from the developer. This law reform will radically change the way that condominiums are marketed. Not all developers will lament the restriction against sale backs and lease backs. Some developers feel that sale backs and lease backs distort pricing so that it makes it hard for customers to compare apples to apples, so to speak. Other developers argue that the practice is so well engrained in industry practice and so pervasive in the marketing of condominiums that consumers already reflect the cost of the acquisition of such assets in the cost of ownership and will actually be confused by the sudden unit price increases to pay for the resulting expansion of common elements.
Although not discussed in the Stage II Report, these authors fear that many developers will simply refuse to develop some amenities if they are not allowed to sell or lease them back to the corporations after turnover. This was largely the debate surrounding green energy equipment — environmentally friendly technology which will ultimately benefit unit owners and the environment, but which was expensive to install up front). Some progressive developers were willing to build this technology into their buildings, but only if they could be sure that the corporations would eventually be required to pay for the technology. If the law required the developers to include green energy equipment in the common elements (rather than selling it back to the condominium over time), that condominium project would have become un-competitively priced. Since developers are in business to make a profit, many developers would have been inclined to replace the green energy equipment with initially cheaper, but less environmentally-friendly, HVAC technology. Likewise, we fear that, if some amenities cannot be sold back to the corporation after turnover, such amenities would suffer the same fate as green energy equipment (but for its carve-out from the proposed restriction). Developers might simply not provide any such amenities or, more likely, provide pared down amenities in lieu of the more premium ones that they would otherwise have provided.
The Stage II Report provides a plethora of additional recommendations that will impact developers, including amendments to the calculation of the initial reserve fund contribution in the first year budget (which amendments will almost certainly increase those initial reserve funds to reflect a truer cost of condominium ownership), as well as clarification of what will constitute a “material change” sufficient to trigger purchasers’ rescission rights. Builders and developers who have not been following the condominium law reform process should sit up and take note of some of the changes coming down the pike that might really change their business worlds.
Jeffrey W. Lem is a partner in the Toronto/Markham offices of Miller Thomson LLP, a national law firm with 11 offices across Canada. Jeffrey is Certified by the Law Society of Upper Canada as a Specialist in Real Estate and can be reached at [email protected].
Odysseas Papadimitriou is an Associate at Miller Thomson LLP, specializing in all aspects of condominium law, including document preparation, compliance issues, operations, and corporate governance.