Condo Loses Priority Over $1.3M With Directors Failing to Pay their Condo Fees and Falsifying Status Certificates
We recently blogged on how to ensure condo fees are paid before the mortgage in cases of default and we explained the importance of complying with the strict deadlines and notices imposed by the Condominium Act, 1998 (the “Act”). The recent case of Trez v. Wynford reminds us that the same is true even when condo directors are the ones in arrears and the ones who failed to register a timely lien on their own units. An expensive lesson for a board who allowed two (2) directors to control the corporation.
Factual background
MTCC 1037 is a commercial condominium unit comprises of 119 commercial units and 361 parking units. Wynford Professional Ltd. (“Wynford”) was the registered owner of 83 of these units and of 297 of these parking spaces. Wynford was controlled by Norma Walton and her husband Ronauld Walton. Eventually, these two assumed control of the board of directors, with Norma becoming the president and with Ronauld becoming the secretary. The board was also composed of three (3) other directors.
In March 2013, when Wynford sought to refinanced its units, its lender obtained two status certificates from MTCC 1037, both signed by Norma in her capacity as president of the corporation. The status certificates stated that Wynford was not in default of payment of common expenses on their units. Unfortunately, the reality was very different. At the time of the issuance of these status certificates, Wynford’s units were in arrears by $811,841. Eventually, this amount grew to nearly 1.3 million dollars.
In December 2013, the other directors of MTCC learned that the Waltons may have breached their statutory duties and standard of care in their role as directors and officers of MTCC 1037. Two months later, at a court ordered annual general meeting, the Waltons were removed as directors and a new board of directors was elected. At the meeting, the other unit owners learned for the first time that Wynford was in arrears and that no lien had been registered against its units. By then, it was too late to register a lien of any use since the arrears dated many years and a lien would only cover the prior three (3) months worth of arrears.
The condominium corporation seeks priority over the mortgage
In the context of this proceeding, MTCC 1037 brought a motion seeking priority over the mortgage for arrears in common expenses. MTCC 1037 sought namely an equitable lien or, alternatively, the right to revive its statutory lien rights under the Act.
Pursuant to section 85 of the Act, if an owner defaults on his/her obligation to contribute to the common expenses, a condominium corporation can register a lien against the owner’s unit for the unpaid amount, together with all interest owing and all reasonable legal costs and reasonable expenses incurred by the corporation in connection with the collection or attempted collection of the unpaid amount. The lien captures up to three (3) months of common expense arrears and, once registered, captures all future unpaid common expense arrears.
Furthermore, pursuant to section 86 of the Act, a condominium lien has priority over all mortgages, even if they existed before the lien was registered, as long as that the condominium corporation complied with the prescribed notice.
The court denied MTCC 1037’s request for an equitable lien. The court was of the view that the Act clearly sets out the corporation’s right to a statutory lien for common expense arrears and therefore it was not proper for the court to create an equitable lien in its place.
The court was also of the view that even if an equitable lien was available, it did not have priority over the mortgage. The court found that the evidence did not establish that the lender and mortgagee had notice of MTCC 1037’s equitable lien for common expense arrears and rejected the corporation’s argument that lender should have “looked behind” the status certificates even if the status certificates did not provide up to date information like recent financial statements. The court was satisfied that the lender carried out satisfactory due diligence and it was reasonable for the lender to rely on the statement that Wynford had no common expense arrears:
[38] As noted, prior to advancing the Loan, Trez did extensive due diligence, both by itself and through its lawyers. It had a prior business relationship with the Waltons and Rose and Thistle and had no basis to believe that there were any problems or issues in respect of them, Wynford and MTCC 1037. The Waltons were involved in running a substantial successful real estate business at the time. Further, the fact that the Waltons were in control of Wynford and on MTCC 1037’s Board was not unusual or cause for suspicion. They were just two of five directors and given the units that Wynford owned, it was not unusual that the Waltons would be on the Board and hold positions as officers of MTCC 1037. Finally, Trez received both the Status Certificates and the Statutory Declaration, which expressly stated that Wynford was not in default of its common expense fees.
Rather, the court criticized the other directors and the other unit owners for not being more diligent about what was going on with the management of the corporation:
[50] For the above reasons, I do not consider that MTCC 1037’s criticisms of Trez’s due diligence are well founded. As between Trez and MTCC 1037, it is the latter, in my view, that was in the better position to have discovered Wynford and the Walton’s failure to pay common element fees. It is no answer to say that the minority directors were kept in the dark. As Board members they had a duty to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (the Act, s. 37(1)(b)). They should not have acceded full control of the Board to the Waltons. Nor should they or the unit holders have acquiesced in the failure to provide up to date financial statements. (emphasis added)
The court also denied MTCC 1037’s request to revive its lien rights under sections 85 and 86 of the Act via a compliance order under section 134 of the Act. The court relied on the recent decision of the Court of Appeal in TSCC 1908 v. Sefco Plumbing where the Court of Appeal held that the section 85 lien rights cannot be revived because to allow that would be inconsistent with the purpose of the Act and the intention of the legislature. Click here to read our blog on this decision.
At the end of the day, MTCC 1037’s motion for priority was denied and the condominium corporation was ordered to pay the lender $51,535.23 in costs.
Lessons learned
Sure, this case reminds all of us of the importance of timely registration of condominium liens. Any delay by a condominium corporation to register a lien can be fatal.
More importantly, this case reminds us that directors should not give control to one or two board members. The affaires of the corporation must be supervised by the entire board and the board should meet regularly. Directors have a duty to make sure that their condominium corporation is managed properly, that all prescribed documents are available and that all required meetings are held. Things may have unfolded very differently for this corporation had the other directors been more proactive and more careful in their role.