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Condos Cannot Lien the Cost of Seeking Compliance

A recent Toronto decision (Amlani v. YCC 473) has made it far more difficult for condo corporations to get indemnified when seeking compliance from owners. The decision is also a friendly reminder for condo corporations to act reasonably and to prefer resolution over litigation.

Facts of the case

The facts are complex but can be summarized as follows.

The condo owner in this matter has been a smoker for some 56 years. For this reason, when he moved into a condo, he chose one where smoking was allowed. All went well for a couple of years.  When some neighbouring owners complained of the smell of cigarette permeating from his unit, the corporation sealed certain openings in the unit at its cost.  Another 2 years went by without any issues.

When new complaints surfaced a couple of years later, the owner was asked to “be circumspect with his smoking”, which he did by limiting his smoking to an enclosed sunroom in the unit. He also used air filters. This was apparently insufficient as the corporation eventually turned the matter to its lawyers.  They sent a compliance letter demanding that the owner immediately cease and desist from smoking in the unit. The compliance letter alleged that the owner was causing nuisance, which was in breach of the corporation’s governing documents.

As is often the case, the letter advised that the cost of the legal letter would be charged back to the unit.

In the months that followed, the owner actively sought to cooperate and dialogue with the corporation in a sincere attempt t0 resolve the issue. He offered to hire an engineering company, at his cost, to report on how the problem could be resolved. He actively sought to refer the matter to mediation.

Rather than accept these invitations, the corporation escalated matters with additional demand letters.  With these demand letters, came increasing request for legal costs being charged back to the owner. In light of this, within two months of the first compliance legal letter, the owner advised the corporation that he was moving out until the situation could be resolved. He leased his unit to tenants, making sure to include a non-smoking provision in the lease (despite the fact the corporation did not have a rule against smoking).  Despite this, the corporation continued to send demand letters, with corresponding increasing legal fees being claimed. The owner continued to demand mediation. One was ultimately held but the corporation left part way through the mediation. The fees continued to increase and, since the owner was not paying these fees, the corporation eventually advised of its intention to force the sale of the unit through a power of sale. By then, the legal fees being claimed exceeded $25,000, the vast majority of them having been incurred by the corporation after the owner had moved out. Indeed, the last demand for payment before the owner moved out was for $863.

The owner retained counsel to stop the sale of the unit and to get the lien discharged.

In the meantime, the Corporation adopted a rule preventing smoking in units, with a grandfathering provision. When the owner sought to preserve his grandfathering right, his request was denied on the basis that the owner had moved out (pending the resolution of this matter).

Question for the court

Ultimately, the main question to be decided by the hearing judge was whether a corporation can use a section-85 lien to recover fees incurred for compliance letters.

Liens are for monthly arrears

Liens are used to collect “regular” (usually monthly) common expenses.  If an owner does not pay its “condo fees”, the corporation can rely on s. 85 to register a lien and collect the arrears, the interests, the legal fees and the actual expenses incurred in collecting the arrears.

This lien process however is not available for corporations seeking to recover the legal fees incurred when attempting to secure compliance through compliance letters.

While section 134 (dealing with compliance) allows condo corporations to recover damages, costs and actual expenses against an owner in breach of the governing documents, the judge concluded that this mechanism is only available if the corporation has first obtained an order from the Superior Court of Justice. On this, the judge wrote:

It is one thing to allow the corporation to enforce, by way of a lien, common expenses that are applicable to all unit holders and that a majority of unitholders have approved. It is entirely another to allow a condominium corporation the unfettered, unilateral right to impose whatever costs it wants on a unitholder, refer to them as common expenses and thereby acquire the right to sell the unitholder’s apartment.

Basically, section 85 and section 134 are two separate and distinct tracks. Prior to being able to register a section-85 lien to recover fees or costs incurred in the context of section 134 compliance matter, the Corporation must first obtain an order to that effect.

The judge also concluded that neither the definition of common expenses in the declaration nor its indemnification provision allowed it to charge back to the owner the legal fees associated with the compliance letters. This was the case in part because the language of these provisions effectively referred to “regular common expenses” chargeable to each unit (rather than cost to be imposed unilaterally on a particular unit) but also because the declaration could not be interpreted in a way which contravened the Condo Act. Indeed, section 134 of the Act only allows the corporation to charge back these expenses if the corporation has first secured an order for damages and costs. The declaration could not change or circumvent that.

Lessons learned

This is a game changer for many corporations who regularly rely on their indemnification provisions to recover, through liens, the fees incurred in the context of preliminary compliance steps. This decision confirms that an order is required under section 134 before a corporation can resort to a lien to recover these fees. Corporations may now have to consider the cost of preliminary compliance steps as “the cost of doing business”, especially in circumstances where corporations have a statutory duty to take reasonable steps to secure compliance.

In our next posts, we will address other important lessons from this case, including the requirement to adequately grandfather a unit owner, and the importance to act reasonably and to attempt to resolve matters through negotiation rather than litigation.

At the time of this blog post, the Amlani decision has not yet been reported.

 

Updated Jan. 16, 2020