Developments in Condominium Law: Shared Facilities Agreements
One-sided SFAs are not illegal or oppressive…as long as you disclose them properly
The recent Ontario Superior Court of Justice case, Toronto Standard Condominium Corp No 2130 v York Bremner Developments Ltd, 2016 ONSC 5393[1] (“York Bremner”) brought to the forefront some of the frustrations that many condominium corporations face when it comes to Shared Facilities Agreements (SFAs), currently referred to in the Condominium Act[2] (the “Act”) as “mutual use agreements”, and may have represented a shift in the condominium case law that has traditionally tended to favour developers.
One of the underlying problems with SFAs is that they are dealt with very sparingly in the current iteration of the Act. The good news is that an overhaul of the Act is forthcoming, and the new amendments (which have not yet been proclaimed) will do much more to address SFAs.
However, under the current legislative regime, the only relief provided for parties to a SFA that believe that the SFA is one-sided or contains provisions that are unjust or inequitable is the following:
- under Section 113, which states that where a corporation has entered into a SFA prior to the turn-over meeting, then within 12 months following the election of a new board at such turn-over meeting, any party to the SFA may make an application to the courts to amend or terminate the agreement if (a) disclosure of the terms of the SFA was inadequate or (b) the agreement produces a result that is oppressive or unconscionably prejudicial to the corporation or any of the owners; or
- the more general provision, Section 135, which permits an application for the oppression remedy by an owner, corporation, declarant, or mortgagee of a unit.
What was interesting about the York Bremner case was that prior to this case, there had been no jurisprudence on the interpretation or consideration of Section 113, and so the Court in York Bremner recognized that it had to approach the case before it on the basis of first principles.
Another one of the interesting things to note about York Bremner, before delving into the facts of the case, is that the applicant, which was the residential condo corporation, sought relief under both Section 113 and Section 135 of the Act.
However, York Bremner was not the first case involving an application for relief under Section 135 in relation to a SFA – a notable case on this provision was in 2010, Metropolitan Toronto Condo Corp No 1272 v Beach Development (Phase II) Corp, 2010 ONSC 6090[3] (“No 1272”) in which a number of applicant condominium corporations sought a declaration that the respondent developer acted oppressively by not establishing a reciprocal cost sharing agreement regarding shared services, and sought an order for payment of the developer’s appropriate portion of costs.
The Court in No 1272, despite finding that Section 135 of the Act has much in common with the oppression remedy found in the Business Corporations Act (OBCA) and that it should similarly be given a broad and flexible interpretation, nonetheless found that there was no remedy available directly against the developer because of the business judgment rule, and that there was no argument related to piercing the corporate veil (the respondent developer was not the declarant, although they shared the same directors and officers).[4] What was important to note about No 1272 is that the applicant condominium corporations in the end were ultimately saddled with 100% of the costs of operating, maintaining and/or repairing various shared areas, services and/or facilities that were also being used by the owner of the ground floor commercial/retail freehold component and its tenants, but without the latter being required to contribute towards the costs due to a lack of a cost-sharing agreement allocating the associated costs. The Court found that there was nothing in the Act that requires a cost-sharing agreement in the context of shared services with non-condo owners (another thing that will be changing with the new Act amendments). The Court concluded by offering up to the applicants that they were not without common law remedies, such as unjust enrichment and restitution, because in the absence of clear contractual provisions to the contrary, the owner of the commercial/retail freehold component would be responsible for paying some of the costs of shared services.
In York Bremner, the applicant condo corporation fared better. In this case, the subject of the dispute was the fairness of the allocation of costs of shared facilities among the owners of various components under the Complex Reciprocal Agreement (“CRA”). The condo corporation claimed that there was oppression due to a conflict of interest inherent in the structure of the CRA and the misconduct of the development company in the management of common facilities. The Court clarified that under Section 113 of the Act, a condo corporation does not have the unilateral right to terminate SFAs entered into prior to the turnover meeting – rather, “the statute allows the condominium corporation to come to court to seek a broad range of remedies if a declarant has foisted on a condominium corporation an oppressive mutual use agreement without clearly disclosing the terms of the agreement in advance”.[5] The Court interpreted clear and adequate disclosure to mean that the disclosure of the terms of an SFA must not just be discernable, but apparent, transparent, and not hidden. There must be an inquiry into what was reasonably foreseeable by the declarant from the content of the provisions of the agreement read in their plain and ordinary meaning, and whether risk of an oppressive result was known to the declarant.
In this case, the Court found that the declarant’s conduct rose to the level of oppression because it failed to make clear and adequate disclosure of the terms of the SFA in its disclosure statement. The declarant used unbalanced terms in the SFA with incomplete disclosure and self-dealing to favour itself – for instance, it was not disclosed that the developer was actually the Common Facilities Manager (CFM), and that the CFM was solely empowered to manage the shared facilities and that only the CFM could set or change annual allocation of common costs absent arbitration, and the CFM would be paid 10% of gross shared costs, among other provisions.
The Court also made sure to note that although the case was presented principally under Section 113, Section 135 could have afforded the applicants equal or better assistance because it provides a more general remedy to the condo corporation where “the conduct of… a declarant… is or threatens to be oppressive or unfairly prejudicial to the applicant or unfairly disregards the interests of the applicant.”[6]
The take-away from York Bremner is that it is not illegal (or inherently oppressive) to have a one-sided contract or even one where parties agree to favour a party with a financial self-interest. What was critical to the applicants’ success in this case was the lack of disclosure of the one-sidedness coupled with the self-dealing, both of which were found to be indicia of oppression by the Court.
The case has been appealed to the Court of Appeal by the respondent declarant, so the end result remains to be seen.
[1] Toronto Standard Condominium Corp No 2130 v York Bremner Developments Ltd, 2016 ONSC 5393 (ONSC) (“York Bremner”).
[2] Condominium Act, 1998, SO 1998, c 19.
[3] Metropolitan Toronto Condo Corp No 1272 v Beach Development (Phase II) Corp, 2010 ONSC 6090.
[4] However, this is also going to change with the new Act amendments once they are in force because the chain of who constitutes the declarant is being expanded.
[5] York Bremner, supra note 1 at para 21.
[6] Condominium Act, 1998, SO 1998, c 19, s 135.