Board Members Behaving Badly Results in Personal Liability

Part 1 of 2

Post by: Khiam Nong

Recent decisions of the Ontario Superior Court of Justice demonstrate that members of Boards of Directors of condominium corporations who do not carry out their duties in a good faith manner risk personal liability as they will not be afforded the protection of the indemnification provisions of the Condominium Act, 1998 (the “Act”).  The Boards of two condominium corporations have learned this lesson the hard way after being ordered to pay thousands of dollars out of their own pockets.  The former members of one Board were ordered to pay legal fees after unnecessarily bringing court proceedings against unit owners.  The members of another Board were ordered to pay for the costs of construction necessary to comply with a court order.

Middlesex Condominium Corporation No. 232 v. Middlesex Condominium Corporation No. 232 (Owners and Mortgagees of)

Middlesex Condominium Corporation No. 232 (“MCC”) required extensive repairs to the building envelope.  In 2011, the then Board obtained a quote from one contractor only, who eventually determined that repairs could be made for $755,000.  At the time, MCC’s reserve fund had only $143,000.  The Board prepared a “borrowing” bylaw whereby it proposed to borrow the balance of the funds required for the repairs.  The Board planned on putting the bylaw to a vote at the annual general meeting (“AGM”).

Prior to the AGM, a group of unit owners requested copies of documents relevant to the repairs, requested that the Board suspend negotiations with the contractor to allow them time to review the documentation and requested that they be allowed to post a notice regarding the plans.

The Board advised, through its lawyer, that it would allow supervised access to some documents but not all, that it would not suspend negotiations with the contractor and that it would not engage in a consultation process.

Thereafter, the unit owners requisitioned an owners’ meeting pursuant to s. 46 of the Act, to be held concurrently with the AGM.  They moved to defer the vote on the bylaw and to replace the existing Board with a new Board.

At the AGM, the proposed bylaw was defeated.  Before the election and unit owners’ requisition to remove the Board could be heard, the Board ended the meeting.

The Board then brought an application in the Superior Court pursuant to s. 131 of the Act requesting that an administrator be appointed and a subsequent motion for an injunction to prevent the unit owners’ requisition from being heard prior to the appointment of an administrator.

The injunction motion was heard first by Mr. Justice Bryant, who outright rejected the Board’s submissions that the unit owners were frustrating the work of the Board, and that allowing the requisition meeting would create instability and jeopardize the safety of the building occupants.  He found that the sole purpose of the Board’s application was to prevent the unit owners from exercising their statutory right to have the Board removed, which motive is clearly inappropriate and inconsistent with the Act.

After the injunction hearing, the unit owners held a meeting and a new Board was elected.  The former Board refused to accept the validity of the meeting and instructed its lawyers to proceed with the application to appoint an administrator.

That application was heard by Mr. Justice Carey.  While the Board materials characterized MCC as “ungovernable” and “stumbling into the ‘abyss’ in ‘chaos,’” Justice Carey stated that the language used in the Board’s materials was “exaggerated” and “alarmist.”  He confirmed that the unit owners’ actions in the circumstances were reasonable, considering the behaviour of the Board.

Justice Carey held that the election of the new Board was valid and that there was no reason why an administrator should be appointed.  He stated that s. 131 was designed as a last resort and that it was “not intended to be used to allow a board which has lost the confidence of the majority of owners to get their way regardless of the democratic will of the owners.”

Both judges released their decisions on the costs of both hearings in February of this year.  Both rulings demonstrated the courts’ displeasure at the board members’ abuse of power and refusal to carry out the will of the majority of unit owners.

Mr. Justice Carey described the former Board’s behaviour as “deliberate, egregious and requir[ing] sanction.”  He ordered the former Board members to pay $21,300 in costs.

Mr. Justice Bryant held that the injunction application was unnecessary, tenuous, without merit and improper as it was an attempt to deprive the unit holders of their statutory right to remove a board with which it was dissatisfied.  All of this behaviour was found to be in contravention of the Board’s duty to act in good faith.  In the result, the five members of the former Board were ordered to pay $15,000 in costs.

As noted by Mr. Justice Bryant, had costs been awarded against the former Board instead of against the individual directors, it would have produced a “perverse result” as a condominium board acts on behalf of the Corporation.  Awarding costs against the Corporation would have unfairly prejudiced individual unit owners as the structure of condominium corporations requires that unit owners bear a corporation’s costs.

Boily v. Carleton Condominium Corporation 145

In a similar, and maybe more baffling saga, the Board of Carleton Condominium Corporation No. 145 (“CCC”) decided not only to disregard the will of the unit owners, but also the will of the Court.  In so doing, the Board members were chastised quite severely by the Court for their behaviour.

In this case, the condominium complex required extensive repairs to the garage, which repairs affected the courtyard landscaping of CCC.  The Board advised the owners that it intended to put in place a landscape design that differed from that in place prior to the garage repairs.  Some owners were of the view that such modification required approval of 66 2/3% of the ownership.  The Board was of the view that the modification was maintenance, which did not require a vote.

A group of owners requisitioned a special owners’ meeting so that a vote could be held.  The Board refused to provide a list of registered owners which was required to organize the meeting.  The Board then called its own special owners’ meeting to submit its proposed landscape configuration and put it to a simple majority vote.  The Board also advised that it would commence demolition the following day regardless of the outcome of the vote.

The owners brought an urgent motion for an injunction to stop the Board from holding its meeting and to stop any modifications to the courtyard landscape until further order, which motion was granted.  The issue of whether the modification was a substantial change that required 66 2/3% approval was adjourned to a later date.

Thereafter, the parties reached a settlement whereby the owners’ meeting was permitted to proceed.  The Board’s proposed modification would be put to a vote requiring 66 2/3% approval.  The settlement was reflected in executed Minutes of Settlement.

The vote took place and the proposed modification failed to achieve the requisite level of owner approval.

The Board then took the position that there was no settlement agreement and sought to continue with the application in court.  The owners responded by bringing a motion to enforce the Minutes of Settlement.

Mr. Justice Beaudoin found that there was indeed an agreement in place and that it should be enforced.  He ordered that the courtyard landscaping be reinstated to its former design and advised the parties that they should seek further direction from him should they require it.

In spite of the Court’s clear direction, the Board went ahead and reinstated the landscaping in accordance with its own design, in complete disregard of the will of the other unit owners.  The unit owners brought a contempt motion.  They asked that the Court: (i) find the Board members in contempt of court; (ii) order the Board members to comply with court’s order; (iii) order the Board members to reinstate the courtyard landscaping to its original configuration; (iv) order that costs of additional work be borne by the Board members personally; and (v) order that costs of the motion be borne by the Board members personally.

Mr. Justice Beaudoin found that in substituting their own landscaping design, the Board members clearly and unequivocally breached his previous order, and that such breach was intentional.  He stated the they “acted neither honestly and in good faith, nor as a reasonably prudent person.”

In considering the issue of costs, he stated that it was necessary to hold the Board members accountable for their actions, as a failure to do so would result in all other unit owners paying for the restoration of the courtyard landscaping through common elements fees, which would be unfair in the circumstances.

The individual Board members were ordered to personally bear the additional costs, including labour and material, of reinstating the original landscape configuration.  While the issue was not addressed in the decision, it is likely that the restoration work will amount to a significant personal cost for each Board member – a high price to pay for a preferred landscape design.

Final Comments

Board members must always remember that they have been elected to serve the will of the unit owners.  Board members should not take such a task lightly and must ensure that they understand the remedies available to dissatisfied unit owners and the willingness of courts to enforce those remedies against Boards that do not carry out their duties in good faith.

 

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