Board Members Behaving Badly Results in Personal Liability

Part 2 of 2: Professionals’ Opinions Make the Difference Between Payment and Protection

Post by: Khiam Nong

In a recent post, we outlined the cases of two condominium boards of directors who were chastised quite thoroughly by judges of the Superior Court for failing to fulfill their obligations to carry out their duties in a good faith manner.  In the case of Middlesex Condominium Corporation No. 232 (“MCC”), the Board brought two court proceedings in an attempt to forestall the unit owners’ rights to replace the Board.  In Boily v. Carleton Condominium Corporation (“CCC”), the Board ignored not only the will of the unit owners, but also a court order to construct the condominium’s courtyard to reflect its original design.  The members of the two Boards were adjudged personally liable for their actions and ordered to pay legal costs in MCC and construction costs in CCC.

Pursuant to subsection 37(1) of the Condominium Act, 1998 (the “Act”) directors and officers of corporations have a statutory obligation to carry out their duties (i) honestly and in good faith; and (ii) with the care, diligence and skill that a reasonably prudent person would in the circumstances.

While subsection 38(1) of the Act provides that directors and officers of corporations may from time to time be indemnified and saved harmless from liability incurred in the course of carrying out their duties, that protection is not afforded to those who do not act in good faith.

However, directors and officers should be aware that subsection 37(3) of the Act provides a mechanism by which directors and officers can maximize their chances of ensuring the protection built into the Act.  Subsection 37(3) provides:

Liability of directors

(3)  A director shall not be found liable for a breach of a duty mentioned in subsection (1) if the breach arises as a result of the director’s relying in good faith upon,

(a) financial statements of the corporation that the auditor in a written report, an officer of the corporation or a manager under an agreement for the management of the property represents to the director as presenting fairly the financial position of the corporation in accordance with generally accepted accounting principles; or

(b) a report or opinion of a lawyer, public accountant, engineer, appraiser or other person whose profession lends credibility to the report or opinion.

It may not always be financially feasible, necessary or reasonable for Boards to seek the advice of professionals in every situation.  However, in light of subsection 37(3), it is clear that clear professional advice should always be sought out whenever a Board proposes to take a controversial course of action or one that may have significant financial implications.

If directors and officers can demonstrate to a court that they relied in good faith on the opinions of the appropriate professionals, it may mean the difference between a court imposing personal cost consequences and a court granting the protection built into the Act.  In our opinion it would be an unexpected result for a court to find directors personally liable for costs if the directors have honestly and in good faith relied upon clear professional advice.  To do otherwise would frustrate the intention of this part of the legislation, which is to encourage the seeking out of professional advice before acting.

In the case of MCC, both judges noted the former Board’s failure to file evidence that the members of the former Board relied in good faith upon the opinion of a lawyer.  Mr. Justice Carey stated the following:

I have no evidence that the Board relied on legal advice in their actions.  I can only conclude that their legal counsel were instructed to take the steps they did.

His further statement below is somewhat of a concern and may provide some doubt on the protection offered by subsection 37(3).  He stated further:

The Board ultimately is responsible for their own decisions and cannot on these facts hide behind either their counsel or the Enerplan report.

This comment is with respect to an engineer’s report (not the legal advice provided to the Board).  It appears the Board may have been interpreting the report to reach conclusions not supported by the engineer’s report.  This highlights the need for professional advice to be clear in order to trigger the subsection 37(3) protection.

Mr. Justice Bryant stated:

Counsel for the members of the old Board did not file any evidence that the members of the old Board relied in good faith upon a report or opinion of a lawyer.

The statements of both judges suggest that the unfortunate outcome suffered by the directors and officers of MCC may have been avoided had they presented evidence to show that they relied on clear legal advice.

The best way for directors and officers to demonstrate that they took such a course is to present reliable evidence that they sought out and relied upon clear and unequivocal professional advice.  Boards must ensure that such advice is obtained in the form of written opinions and reports.  In court, documentary evidence will always serve as stronger evidence than oral evidence.

If the professional advice is not clear or is equivocal, the provider of the advice should be requested to clarify their opinions and recommend an unequivocal course of action.

If it is not possible to get clear and unequivocal professional advice on a proposed course of action, the Board must either decide to abandon the proposed course of action or accept that if the Board does proceed, the individual Board members may not be afforded the protection of subsection 37 (3).

Directors and officers must also be careful not to “shop” for the opinion that they want nor should they appear as though they are “shopping” for the opinion that best suits them.  It may be reasonable to obtain a second opinion on an issue, but if the second opinion supports the first opinion, seeking a third opinion will likely be viewed negatively by the courts if the third opinion contradicts the first two opinions and is relied upon by the Board in support of subsection 37 (3) protection.

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Converting lands to “Land Titles Absolute” before condominium registration

Post by: Craig Robson

In Ontario, before a condominium can register, the lands must be registered in “Land Titles Absolute” or “Land Titles Plus”.  These are the highest categories of title available under the Land Titles Act.  Most Ontario lands continue to be “Land Titles Conversion Qualified”.  The “Conversion Qualified” category has qualifiers that do not apply to the “Absolute” and “Plus” categories, including the qualifier that “Conversion Qualified” lands are subject to “any title or lien that, by possession or improvements, the owner or person interested in any adjoining land has acquired to or in respect of the land”.

The application to convert requires a title search by the project lawyer and a boundary survey by the project surveyor.  The boundary survey is circulated to the neighbouring land owners with a warning that if they do nothing the boundary shown on the survey will be certified as the true boundary of their property.  If a neighbour does not agree with the boundary, then the neighbour can object to the application.

In greenfield developments there are usually far fewer boundary issues than exist in built up areas. In built up areas, very often fences are constructed “off boundary”, sheds encroach and significant use has been made of the proposed condominium property by neighbours.  If the property has been vacant for some time, this use can be significant and long standing.

It is important to respond to neighbour’s objections in a principled fashion to minimize potential for delays in the conversion process, which if lengthy can also delay condominium registration.

For more on options for responding to objections to your LTA conversion application, check out our earlier blog article here: “Responding to Objections to an Application to Convert to LTA”.

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Case Comment: Demetriou v. Carleton Condominium Corp. No. 59

Post by: Craig Robson

The reasons and result in the recent case of Demetriou v. Carleton Condominium Corp. No. 59 [2012] O.J. No. 465 (Small Claims Court) appear to us be in error, but it is doubtful there will be any appeal taken to correct the error (given the rarity of appeals from Small Claims Court decisions).

The Court in this matter concluded:

“52     The plain meaning of section 89 dictates that a Condominium Corporation has a clear duty to its unit owners to repair a damaged unit to its standard unit type when first built. It excludes an obligation to repair improvements to the unit done by an owner.”

Despite the fact the decision refers to section 89 of the Condominium Act, it appears the provisions of that section were misunderstood by the Court.

The operative part of section 89 states:

89.  (1)  Subject to sections 91 and 123, the corporation shall repair the units and common elements after damage. 1998, c. 19, s. 89 (1).

The Court appears to have completely overlooked the opening qualifier – “Subject to sections 91 and 123…”.  Section 91 of the Condominium Act clearly states:

91.  The declaration may alter the obligation to maintain or to repair after damage as set out in this Act by providing that,

(a) subject to section 123, each owner shall repair the owner’s unit after damage;

(b) the owners shall maintain the common elements or any part of them;

(c) each owner shall maintain and repair after damage those parts of the common elements of which the owner has the exclusive use; and

(d) the corporation shall maintain the units or any part of them. 1998, c. 19, s. 91.

In this case, the declaration of Carleton Condominium Corp. No. 59 clearly provides that the unit owners are to repair their units after damage.

It is hard to understand how the Court could come to the conclusion noted above given the clear wording of section 91 and the Declaration.

The Court’s conclusions on what constitutes a standard unit for the purposes of repair and insurance obligations under the Condominium Act are likewise suspect.

It is to be hoped that this decision does not become recognized authority by any higher Court, given the apparent error in reasons and the result.

http://www.rcllp.ca

Ontario’s New Form 24 Requirement: Further cost for condominium developers and little benefit to lien claimants

Post by: David Sunday

A new provision has been added to Ontario’s Construction Lien Act (section 33.1) to require a Form 24 – Notice of Intention to Register A Condominium to now be published shortly before a condominium description is submitted for approval.

The legislative intent behind section 33.1 appears to be an effort to provide potential lien claimants with notice that a condominium registration is about to occur – the theory being that they will then have the opportunity to register a lien before registration happens.

In the Form 24 notice, the developer is to list the name and address of each contractor that supplied services or materials to the condominium development during the 90-day period leading up to submission of the plans for approval.

While the requirement seems innocuous enough at first glance, the practical reality is that Form 24 is proving to be quite costly.  It also appears as though it will only benefit lien claimants who subscribe to and read the Daily Commercial News, where Form 24 notices are required to be published.

For any project where the condominium developer is contracting directly with trades, the list of contractors, combined with their contact information, tends to be quite long.

Last time we checked, the Daily Commercial News was charging $4.32 per 1/14 of an inch of a 1.625 inch wide column.  In our experience, Form 24 will often run to 40 inches or more of column, which translates into a publication cost of roughly $2,400.00 before taxes.

Depending on the number of contractors, the cost can be higher or lower, but our experience to date suggests $2,000 – $3,000 is a fairly typical cost where the developer has been contracting with trades directly.

The Form 24 requirement is mandatory and there is the potential for civil liability if the requirement is not complied with. Thus, condominium developers can be held liable to any person who suffers damage as a result of their failure to give a proper Form 24 notice.

Condominium developers now need to factor in the Form 24 cost into their development plans or make a business decision as to whether the high publication costs outweigh the risks of increased civil liability if the requirement is not complied with.

It appears that the legislature did not appreciate the significant added cost that this requirement would add to condominium projects and has not balanced that cost against the limited, if any, benefit this new requirement provides to lien claimants.

http://www.rcllp.ca