One of the first challenges of a new condominium board of directors is the survival of the first fiscal year on a budget set by the builder. When there is a shortfall between this first-year budget and the actual operating expenses incurred by the corporation during that first year, condominium corporations can turn to the declarant.
First year deficit
The Condominium Act requires the declarant to prepare a disclosure statement for every purchaser. This disclosure statement includes a copy of the budget statement, which includes the budget for common expenses for the first year following the registration of the declaration. This budget lists the proposed amount expected for each expense line item. One of the purposes of this disclosure statement is to enable individuals contemplating the purchase of a condominium to have a full understanding of the cost of owning the condo they are about to purchase. Indeed, purchasers rely on this information to do their own personal budget.
So, what happens if the first-year budget is off and the corporation is faced with a first-year deficit?
Section 75 of the Condominium Act provides that a declarant is responsible and must reimburse the corporation any deficit sustained in the first year following the registration of the declaration. The purpose of this section is to provide some predictability and certainty to those purchasing a condominium, enabling them to make an informed financial decision.
How does the corporation make that claim?
A condominium corporation wishing to claim the first-year deficit must act quickly. As soon as it receives the audited financial statement covering the first year, the board shall compare the actual amount of common expenses and revenue with those provided in the declarant’s budget statement. If there is a deficit, the corporation must give written notice of it to the declarant within 30 days of the receipt of the audited financial statement. Note that, under the “new Condo Act”, the corporation will have a more comfortable 90 day period to claim the first-year deficit.
The declarant must pay the deficit within 30 days of receiving this notice.
In the event that the declarant disagrees with the corporation’s claim for reimbursement, the first step is to proceed to mediation. The mediator is not there to make a ruling. He or she is there to help the parties reach a more expeditious and often less expensive resolution. If mediation fails to resolve the dispute, then the parties must proceed to arbitration. Arbitration is like a “private court”, where the parties chose (and pay) someone to adjudicate the matter and render a binding decision.
Can the declarant question some of the condo’s expenses?
The ability to claim the first-year deficit does not give the corporation a licence to spend money during the first year with the expectation that the declarant will pick up the tab. A declarant may be able to question the propriety and reasonableness of some of the expenses which lead to the shortfall. Keep in mind that the declarant is also permitted to set off against the deficit, any surplus in revenue for the use of any part of the common elements, assets or other facilities related to the property. Finally, keep in mind that the declarant will not be responsible for any deficit attributable to the termination of an agreement under section 111 (termination of management agreement entered into by the declarant) or section 112 (termination of other agreements such as those for the provision of goods or services and those for the leases of common elements).
Still, the starting point under the Act is that the declarant is responsible for any first-year shortfall, whether the expenditures are covered in the declarant’s first-year budget or not. The analysis is done considering the total expenditure and not a line-by-line analysis. That is to say that the corporation should compare its bottom line with the budget’s bottom line.
The policy behind section 75 allowing the Corporation to recover the first year deficit helps protect purchasers by preventing a developer from producing an unreasonably low budget statement and misleading purchasers to believe that monthly expenses will be lower than actual expenses.