Contracts Entered into By the Declarant – Can You Terminate Without Penalty?

Developers often enter into agreements on behalf of the condominium prior to turn-over of the condominium to the unit owners. There are various legitimate reasons for doing this, such as ensuring proper maintenance and repair of the property is completed. Unfortunately, sometimes these agreements are not desirable for the condominium and heavily favour the contractor or developer.

It is well-accepted that the Condominium Act, 1998, is consumer-protection legislation designed to protect unit owners from the developers and others. This means the Act must be interpreted generously in favour of the consumer to achieve its consumer protection objectives.

As a result of its consumer-protection purposes, there are numerous provisions that deal with the termination of agreements entered into by developers prior to the turn-over meeting, including:

• Section 111 which allows condominiums to terminate management agreements with 60 days notice in writing to the manager.
• Section 113 which allows condominiums to amend or terminate mutual use agreements (reciprocal or cost sharing agreements) if they apply to the Superior Court of Justice within the 12 months following the turn-over meeting and the judge is satisfied that the agreement was not properly disclosed and it produces a result that is oppressive or unconscionably prejudicial to the condominium or its owners.
• Section 114 which allows condominiums to terminate insurance trust agreements with 60 days notice in writing to the insurance trustee.
• Section 112 which allows condominiums to terminate other agreements that provide for goods or services on a continuing basis (e.g. landscaping), facilities, or a lease of part of the common elements for business purposes with 60 days notice in writing to the contractor.

Some companies have argued that while these provisions allow the condominium to terminate these agreements with notice the condominium is still responsible for paying damages for terminating the agreement before the term has expired. As many of the agreements are the type that require mediation/arbitration under the Condominium Act, 1998, there are very few reported cases that provide any insight into whether damages are payable or not. Fortunately, the question has been definitively answered in a recent decision.

In Lee Management Solutions Inc. v. Waterloo Standard Condominium Corporation No. 744, the condominium terminated the contract entered into by the declarant on its behalf with the management company by providing 60 days notice pursuant to section 111 of the Act. The manager argued it was entitled to damages for the condominium’s termination. The arbitrator agreed and awarded the manager $151,628.76 for “early termination” damages. The condominium appealed the decision and was wholly successful in its appeal and was awarded $14,000 in legal costs for the appeal from the manager.

The decision of Schabas J. sets out the numerous reasons for why the only reasonable conclusion is that section 111 of the Condominium Act, 1998, must allow a condominium to terminate an agreement entered into by the declarant prior to turn-over without paying damages. The highlights of the decision are as follows:

• Paragraph 24 – “The explicit purpose of s.111 is to protect purchasers from being bound by agreements made by the developer.”
• Paragraph 25 – regarding section 176, which states the Act prevails despite any agreement to the contrary, “Put another way, like other consumer protection legislation, one cannot contract out of the provisions of the Act.”
• Paragraph 30 – regarding the arbitrator’s finding that there was no inequality of bargaining power between the declarant or manager, “This misses the point. The section exists to protect the unit holders, who did not bargain for the contract in the first place, not the declarant, or Lee. In fact, s. 111 is there to protect the unit holders from “sweetheart agreements” between the declarant and managers: Lexington on the Green at para. 42.
• Paragraph 34 - “The right to “terminate an agreement” in s.111 of the Act is unconditional. It would make no sense, and be contrary to the purpose of s. 111, if the Condominium remained obligated to pay for the services in the contract after terminating it. Indeed, in this case there would be little point in terminating the contract.”
• Paragraph 35 - “The Arbitrator’s reference to and reliance on promoting “efficiency and security in commercial transactions” in finding that the liquidated damages provision survives a termination, is also misplaced. Section 111 gives the Condominium the power to “terminate an agreement” on 60-days notice. The Arbitrator erred in law in conflating a statutory termination with a breach of contract.”

This is a great decision for condominiums in Ontario. It is now clear that condominiums are not required to pay damages when terminating contracts entered into by the developer prior to turn-over so long as they follow the processes set out in sections 111 to 114 of the Act.

What does this mean for managers? You should ensure that you are paid by developers for services you provide prior to turn-over. Do not defer your compensation by charging the future condominium higher fees to account for the services rendered to the developer. If you do, you are doing so at your own risk as the condominium could terminate and you will be entitled to nothing.