ARTICLE ON BUDGET

February 13, 2015

BUILDER BEWARE!

Condominium developers beware – If you try to sell preconstruction condominium units with a “too good to be true” maintenance fee, the condominium corporation may come after you to recover the shortfall.   In a recent decision of the Ontario Superior Court of Justice, the courts ruled just that – a developer was ordered to pay $115,659 plus interest to the condominium corporation when the budgeted expenses for a new condominium proved to be too low.

In the case of 90 George Street Ltd. v. Ottawa-Carleton Standard Condominium Corporation No. 815, the first year budget accompanying the Agreement of Purchase and Sale as part of what is known as the “Disclosure Statement” contemplated annual operating expenses for the first year term of $756,912.00.  At the end of the first year, the audited financial statements found that the annual operating expenses were $882,571.00 meaning there was a shortfall of $125,659.00 (less a $10,000 deductible which the Developer [(also known as the Declarant)] paid to the Condominium Corporation).  The Developer had substantially under-budgeted for security and concierge costs. The court was silent on whether the “under budgeting” was intentional.

Section 75 of The Condominium Act of Ontario provides that a Declarant is responsible to reimburse a condominium corporation for any shortfall in the first year budget except “for those [costs] attributable to the termination of agreement [where the new agreement] exceeds the total budgeted amount.”   In other words, if the Declarant enters into an agreement for a property manager and the board within the first year terminates the property management contract in favour of a new management contract with higher management fees than budgeted, the Declarant is not responsible for a shortfall where the shortfall is due specifically to higher management fees.   Alternatively, if the budgeted cost for a security contract was “x” but the actual cost was “y”, the Declarant is financially responsible.

The courts held that (i) the provisions of the Condominium Act [and the Ontario New Home Warranties Plan Act] “provide consumer protection, as well as predictability and certainty to those purchasing a condominium” and (ii)  the Budget that is provided to purchasers as part of the Disclosure Statement must ensure that condominium unit purchasers have a “full understanding” of what their monthly costs will be.  In the pre-construction purchase, the courts deem the Developer to be the expert and the purchaser is considered the lay person needing consumer protection.

The key point for Developers to remember is to take a few extra minutes to review the condominium budget accompanying your Disclosure Statement to ensure that you are satisfied and adequately protected.

Michelle R. Frost

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