To Borrow or Not to Borrow? How Does the Process Work: Borrowing By-laws

Condominiums have three ways to raise money
  1. Increasing monthly common expenses;
  2. Special assessment of owners; or
  3. Borrowing money from a lender.
As we noted condominiums typically use borrowing by-laws when they have to raise a substantial amount of money within a short period of time. There can be a multitude of reasons a condominium may want to consider a borrowing by-law: an unexpected need to complete a major common elements repair/maintenance project before projected in the reserve fund, unexpected damage from a significant weather event (ex. the significant windstorm in southern Ontario in May 2018), or the desire to complete replacements related to a major common elements project (ex. installing new windows as part of a building envelope EIFS project). The Process 1. The Board (most often via the Condominium’s Property Manager) will typically seek the opinion from the Condominium’s engineer regarding the project, and if the Board approves the project as necessary it will often have the engineer commence a tendering process for contractors. The Board should keep owners informed whether via a community newsletter, website form, and/or notice board that it is considering the project. 2. Once quotes for the project are received (or sometimes simultaneous with the tendering process), the Board will contact lenders regarding financing the project. 3. Lenders will provide a commitment letter to the Board that often outlines the terms, including the amortization period, interest rate, and options for repayment of the loan. 4. The Board will contact the Condominium’s lawyer to draft a borrowing by-law to be presented to owners. The Board approves the draft by-law to be presented to owners. 5. The Board calls a special owner’s meeting or adds the borrowing by-law as an agenda item for the upcoming Annual General Meeting (AGM). The timing for calling an owner’s meeting or waiting for the next AGM can often depend on the urgency of the project. As a reminder owners must receive a copy of the draft by-law in the formal notice of meeting package. 6. At the meeting, typically the Condominium’s professionals (engineer, lawyer, and proposed lender) are invited to present and answer questions regarding the project, loan, and by-law approval process. A recent case has created some controversy within the condominium industry regarding the voting threshold for the passage of a borrowing by-law. We will discuss this case later this week in another post. Note: a common misconception at meetings is that owners have to put up their homes as collateral for the loan before the lender will advance the Condominium loan financing. This is incorrect. There is no security granted by the owners. No mortgage. No lien. The security is granted by the condominium and typically includes a general security agreement over any equipment, assets, and other property owned by the condominium. The only items registered on title to owners units (if a borrowing by-law is approved) is the new by-law. Note: some of the most contentious meeting and votes on borrowing by-laws seem to occur when owners have not been previously informed the Board was considering loan financing to complete a common elements repair/maintenance/replacement project. Sometimes (given an urgent situation) advanced notice before calling the meeting is not an option, but in most situations the Board in conjunction with the lender and/or engineer can have an informational meeting or send a letter to owners before the draft by-law is prepared/approved. A little forewarning especially if the anticipated loan is for a significant sum can be all the difference in persuading owners to vote for the proposed by-law. 7. If the by-law is passed by a majority of all units within the condominium at the meeting, the Condominium’s lawyer will have the Board execute the draft by-law and then register the by-law in the Land Registry Office (LRO) against all units in the Condominium and notify the Board. 8. The Board will then work with the lender regarding advances of the funds for the project. This may include preparing additional documents, completing registrations, and providing opinions to the lender regarding the loan. Hopefully the above guide is useful in explaining the borrowing by-law process.