Director breached duties in disagreement with the board

A case recently released provides a great summary of enforcement principles in condominiums. Briefly, it was an application by a group of owners against the condominium and one of the directors. The owners claimed that the condominium was not enforcing its single family residence restriction. There appears to have been a battle in the condominium over the single family residence restriction, which came to a head shortly after the Court of Appeal confirmed that single family residence restrictions were enforceable in Kilfoyl. A few months after the Kilfoyl decision was released, the board moved to amend the condominium's rules to create a broader definition of single family. The proposal included "grandfathering". There were various letters exchanged by the opposed groups, some of which included the opinion of the condominium's lawyer. The proposed rule was eventually voted down by the owners at an owners' meeting. The condominium notified the owners that it had to enforce the definition from Kilfoyl and more conflict ensued. The Court discussed many important enforcement principles in this case. The owners and occupants must comply with the Act, the declaration, by-laws and rules. The documents are vital to the integrity of title acquired by the unit owners. In response to the assertion that when they purchased their units they were not told by their real estate agents or lawyers that the declaration contained a single family residence restriction, the Court said:

There is no reason why those who purchased a unit at CCC 111, with the knowledge of, and in reliance upon, the single family residence restriction in the Declaration should be expected to forego the benefit of such a restriction because other purchasers did not read the Declaration before purchasing the unit or were not told about the restriction by the real estate agent or lawyer they retained.  

It is great to see the Court dismiss this argument. A condominium should not be prevented from enforcing against an owner because that owner neglected to review the condominium's documents. He is the author of his own misfortune. The board has a duty to enforce the declaration, by-laws and rules. The duty is set out in section 17(3) of the Act. The Court referred to the previous case of York CC No. 137 v. Hayes where it was said that "the general message should be that enforcement will be expected and exceptions will be rare." A condominium is not necessarily prohibited from enforcing its documents because it failed to do so in the past.  The Court confirmed that historical non-enforcement was not a bar to enforcement in this case because:

1. the owners had prior notice of the declaration, whether they chose to review it or not, and none of them were misled to believe that it would not be enforced;
2. the condominium did not turn a "blind eye" to non-compliance. It had taken steps to enforce the provision, including previous rules passed by the condominium;
3. it was not a case of "massive non-enforcement...and then an attempt to have a sudden crack-down";
4. the declaration contained a non-waiver clause, which stated that any failure to enforce by the condominium would not act as a waiver of the rights of the condominium or any owner in respect of any violation of the documents.

When reviewing a rule or proposed rule, the court should only substitute its own opinion if the rule is clearly unreasonable or contrary to the Act or regulations. The Court also confirmed that the threshold for overturning rules reasonably made in the interests of the owners is a high one. Grandfathering clauses in a rule may be enforceable, but they must be reasonable and consistent with the declaration.  In this case, the grandfathering clause gave the owners ten years to comply with the declaration. In addition, it was not restricted to the current occupants of the units; the owners could enter into new leases to unrelated persons after the rule was passed as long as it was within the ten year period. The Court found that the clause was unreasonable and inconsistent with the declaration for many reasons, including:

1. Many of the owners who purchased their units relying upon the single family restriction would never see a benefit from it;
2. There was inconsistent language used within the grandfathering clause as to the persons entitled to occupy the units;
3. It would apply to all owners, regardless of whether they were renting their unit and the type of occupants they rented to, which could reduce the enforcement of the declaration instead of helping the corporation move to enforcing it;
4. A ten year period could not "reasonably be described as a transition period";
5. A ten year period was basically the board "trying to do by the back door what it cannot do by the front door; namely, amend the Corporation's Declaration regarding the single family restriction".

The Court offered the following suggestions for grandfathering to the condominium:

1. existing occupancies only;
2. existing landlord owners for a period of time less than ten years (a "range of three to five years strikes me as being reasonable") as long as the owners purchased prior to January 2012 (1 month after the Kilfoyl decision was released);
3. the occupants would live as families with some shared bond or relationship beyond being strangers in the same place;
4. there would be one lease; and
5. no boarders or roomers.

The passage of a rule is not oppressive conduct. The board must balance the private and communal interests of the unit owners. The Court was not satisfied that the board acted oppressively in passing the rule. It was clear from the evidence that the board had difficulty balancing the competing interests of resident and landlord owners, but there was no evidence to suggest that in passing the rule it acted oppressively, unfairly disregarded the interests of the owners, or unfairly prejudiced any of the owners.  A director may be found to have breached his duties when he opposes a decision made by the board in a way that is not in the best interests of the condominium. The Court found that the director breached his duties because he undermined the board's decisions, misled owners, encouraged owners to distrust the board, undermined advice received from the condominium's professionals, made the board dysfunctional, promoted antagonism and dissent on the board, and threatened other directors. He also put his own economic interests (in being able to lease his units to unrelated persons) ahead of the legitimate interests of all owners. The Court said that "a reasonably prudent director would seek a compromise that respected the disparate, but legitimate, interests of all unit owners in the context of the community established by the Corporation's Declaration, By-laws and Rules." The Court found that the director did not act as he was obligated to under the Act until the application was commenced. By then, it was too late. This was a well-reasoned decision with a great summary of the relevant principles. It will be interesting to see what the Court decides for the costs of the application. Stay tuned!