employment

Chargebacks and lessons learned in 2020

Not all indemnification clauses are created equal
Friday, November 27, 2020
By Sonja Hodis

No owner wants to hear the word “chargeback” and no condominium corporation wants to find out after they start lien proceedings that their “chargeback“ is uncollectible. Amlani v. York Condo Corporation No. 473 (Amlani), a case from the Ontario Superior Court of Justice which was recently upheld on appeal, provides us with some important guidance on chargebacks and how a condominium should handle them.

It reaffirms that condominiums must take steps to ensure that they actually have the legal authority to charge back before they do so. It also reminds us that condominium corporations need to act reasonably and in a cooperative manner when dealing with owners, especially if the owners themselves are acting reasonably.

Amlani involves a condominium in the Greater Toronto Area. Mr. Amlani purchased a unit in this condominium in 2013, specifically as it did not ban smoking. He was a long-time smoker. In 2015, complaints about smoke coming from his unit were resolved, but in 2017, new complaints were received. Mr. Amlani attempted to resolve these new complaints, but the condominium insisted that he stop smoking. He decided to move out of the unit until the issue was resolved. These new complaints were the basis of the court action.

Under the Condominium Act, 1998 as amended (the Act), there are various provisions that allow a condominium corporation to charge back costs to a unit that are in addition to the monthly common expense fee. If not paid, the condominium corporation can collect those additional charges by registering a lien. Here are a few examples:

  • Insurance Deductible – s. 105
  • Costs incurred to obtain compliance order – under s. 134
  • Maintenance and repair costs when an owner fails to do it themselves – s. 92
  • Costs incurred for an owner’s failure to comply with a s. 98 agreement – s. 98

In addition to the Act, most condominium declarations have an indemnification provision which allows the condominium to charge back certain costs and collect them as they would unpaid monthly common expense fees. However, not all indemnification provisions are created equal. The Amlani case is a perfect example of how relying on an indemnification provision in your declaration is risky business.

In Amlani, the condominium relied on an indemnification provision in their declaration to charge back legal fees incurred to enforce the rules. The subject matter of the dispute centred around smoking in a unit. YCC No. 473’s indemnification provision is a typical one you see in many condominium declarations (especially older ones) unless the declaration was amended and the indemnification provision was strengthened. YCC No. 473’s indemnification provision states:

Each owner shall indemnify and save harmless the corporation from and against any loss, cost, damage, injury or liability whatsoever which the corporation may suffer or incur resulting from or caused by an act or omission of such owner. . . to or with respect to the common elements and/or all other units except for any loss, costs, damages, injury or liability caused by an insured (as defined in any policy or policies of insurance) and insured against by the corporation.

All payments pursuant to this clause are deemed to be additional contributions toward the common expenses and recoverable as such.

At the end of the day, the condominium was not able to enforce their lien for the chargeback of approximately $25,000. They had to pay the owner $9,679.75 in damages under the oppression remedy provisions in s. 135 of the Act, and they had to pay the owner’s legal costs of $113,340. These amounts are in addition to the condominium’s own legal costs incurred.

The condominium, in this case, took a huge risk and the cost consequences which will now be borne by all owners are significant. The Amlani decision is a good reminder of the importance of carefully reviewing your declaration’s indemnification provisions as well as the statutory provisions which allow chargebacks to make sure that you actually have the legal authority to charge back the type of costs you are looking to recover.

Although Amlani is a recent case on this issue, it is not the first case that has disallowed a condominium the ability to charge back legal fees based on similar wording in a declaration. A failure to carefully review your indemnification provisions can be costly, as seen in Amlani.

The Amlani decision also provides a good nudge to all condo directors and managers to have the corporation’s indemnification provisions reviewed in order to determine if an amendment is necessary. Most original indemnification provisions need to be amended as the authority to charge back is very limited. From my own experience, when I was drafting provisions to amend declarations a few years back to include smoking/cannabis restrictions, I advised my clients to take the opportunity and also revise the indemnification provisions in the declaration and strengthen it by expanding the situations in which a chargeback could occur.

A properly drafted indemnification provision may avoid the situation YCC No. 473 found itself in. The courts have upheld charge backs with properly drafted indemnification provisions in the past. See Italiano v. TSCC No. 1507 as an example. In that case, the condominium’s declaration stated:

In the event that the owner of such residential unit fails to abate the noise, the board shall take such steps as shall be necessary to abate the noise … and the owner shall be liable to the corporation for all expenses incurred by the corporation in abating the noise, which expenses are to include reasonable solicitor’s fees on a solicitor and his or her own client basis and shall be deemed to be additional contributions to common expenses and recoverable as such.

Referencing section 1(1) of the Act, which defines a “common expense” to include common expenses specified in the declaration and section 7 of the Act, the court upheld the condominium’s ability to charge back the costs of an arbitration to the unit owner. I do not think that Amlani has eliminated the ability of a condominium to rely on a properly drafted indemnification clause in a declaration to charge back costs that are covered by that clause as a common expense. All that Amlani does is reinforce the long-standing principle that the condominium’s ability to charge back pursuant to an indemnification provision is limited by the wording of that provision.

Unfortunately for YCC No. 473, the indemnification clause they were trying to rely on to justify the chargeback did not cover the type of costs they were trying to recover. In YCC No. 743’s declaration, in contrast to the provisions of the declaration in TSCC No. 1507, legal costs for enforcement steps were not defined as a common expense in the declaration.

Condominiums need to be careful when they decide to chargeback costs to an owner and must ensure they have the legal right to do so before they start lien proceedings. A failure to do so could lead to a significant loss of money for the condominium as illustrated in the Amlani case.

In addition, the court in Amlani, as well as other cases, has made it very clear that the courts will look to the conduct of the condominium corporation when deciding issues. In this case, YCC No. 473 may have received less of a financial hit had it dealt with the owner in a more conciliatory manner to begin with and followed their own bylaws, which required the condominium and owner to use best efforts to resolve any disputes through good faith negotiations.

A final lesson from Amlani is to check your own bylaws and declarations to see if such a provision and obligation exists in your own governing documents. Even if it doesn’t, it would still be in the condominium’s best interest to act in good faith to avoid a claim against them for oppression and the damages that may flow from such a successful claim. In Amlani, it may have saved the corporation at least $10,000, if not more.

Sonja Hodis is a litigation lawyer based in Barrie who practices condominium law in Ontario. She advises condominium boards and owners on their rights and responsibilities under the Condominium Act, 1998 and other legislation that affects condominiums. She represents her clients at all levels of court and Tribunals and offers mediation and arbitration services. Sonja can be reached at (705) 737-4403, sonja@hodislaw.com or via her website at www.hodislaw.com.

NOTE: This article is provided as an information service and is not intended to be a legal opinion. Readers are cautioned not to act on the information provided without seeking legal advice with respect to their specific unique circumstances. Sonja Hodis, 2020 All Rights Reserved

Leave a Reply

Your email address will not be published. Required fields are marked *