The timely payment of common expenses (commonly referred to as “condo fees”) is essential to the survival of condominium corporations. For this reason, the Condominium Act has put in place various mechanisms to facilitate the collection of these common expenses. One of these mechanisms is the corporation’s ability to register a lien on the defaulting unit. This lien gives the corporation priority over the mortgagee. By registering a lien, the corporation essentially becomes a secured creditor. However, to benefit from the protection of such a statutory lien, the corporation must register the lien within 3 months of the owner’s default to pay the common expenses. Any delay by the corporation to register its lien can be deadly.
To illustrate this, let’s have a look at the TSCC 1908 case. In this case, while nobody disputed the fact that the common expenses were in serious arrears, TSCC 1908 failed to register its lien within 3 months of the owner’s failure to pay the common expenses. The delay in identifying the existence of arrears was the result of the Declarant’s failure to turn-over the corporation and to disclose financial documents in a timely manner. By the time the arrears came to light, they were nearing $50,000. When TSCC 1908 registered its lien, the lien only protected the prior three months of arrears. The rest of the arrears may still have been collectible against the owner, but the corporation could not rely on the lien to preserve its priority over the mortgagee.
The problem in this case was compounded by the fact that the owner had also failed to pay his mortgage. BDC, the lender, commenced enforcement proceedings and obtained a default judgment against the owner in excess of $1M. BDC sold the units but suffered a deficit of several hundred thousand dollars. This deficit gave rise to a priority dispute between the lender and the condominium corporation. Creatively, the corporation brought a compliance application, under s. 134 of the Condominium Act, alleging that the owner’s failure to pay the common expenses constituted a breach of the corporate documents and of the Condominium Act. The corporation was hoping that the court would consider the arrears as constituting “damages” pursuant to s. 134(5). More importantly, the corporation hoped that such damages would be added as common expenses, which would then have priority over the mortgagee.
Unfortunately, the court concluded that the corporation could not revive a lost lien through an application for compliance. The Court of Appeal confirmed that corporations’ ability to gain priority over mortgages is conditional on the corporation fulfilling its obligations to register the lien and to provide notice to mortgagees in a timely manner. An early notice to the mortgagee exists to allow mortgagees to protect their interests by paying the common expenses, treating the failure to pay them as a default under the mortgage and commencing enforcement proceedings.
By failing to register its lien in time, the corporation lost its priority over the mortgage.
A corporation who fails to register its lien in time, can consider recovering the balance of the arrears in the context of a law suit. Still, such a claim must be commenced within 2 years of the default. Indeed, the standard limitation period in Ontario is 2 years, after which the creditor may lose the ability to claim. Lawsuits can be costly, risky and lengthy. It is far easier to register a lien. To ensure things are properly done and done on time, a corporation should contact its lawyer well in advance of the 3rd month anniversary of the default. Keep in mind that we will need to send a notice of lien to the owner 10 days prior to being able to register the lien.