business judgment rule

Condo boards can rely on business judgment rule

Recent court ruling establishes test for reviewing decisions made by directors
Wednesday, February 1, 2017
By Christy Allen

A recent Ontario Court of Appeal decision confirmed for the first time that the “business judgment rule” applies to decisions made by condominium boards. The business judgment rule “recognizes the autonomy and integrity of corporations, and the fact that directors and officers are in a far better position to make decisions affecting their corporations than a court reviewing a matter after the fact.”

In confirming that this rule applies to condominiums, the Court of Appeal set out the test for reviewing decisions made by condominium boards. The test is to confirm that the directors acted honestly and in good faith, and that the board acted reasonably in coming to its decision. But in determining whether a board acted reasonably, the question is not whether the reviewing court would have made the same decision, but rather whether the board’s decision falls on the spectrum of reasonable possibilities.

If a court concludes that the board did act reasonably (given the circumstances), honestly and in good faith, the court will defer to the board’s decision. In other words, where the test is met, it would be inappropriate for a court to interfere.

The landmark case

The precedent-setting case, Carleton Condominium Corporation No. 375 v. 3716724 Canada Inc., started with an owner’s request to make changes to the common elements. It then evolved into an oppression claim by that owner under Section 135 of the current Condominium Act (1998).

The owner possesses a number of commercial parking spaces located on the first level of the parking garage of CCC 375, which is a mixed-use condominium corporation. The commercial owner wanted to convert the use of the commercial parking spaces from monthly rentals to 24/7 pay-and-display use. This change in use required certain related changes to the common elements, which raised security concerns about the parking garage. In order to make the contemplated changes to the common elements, the commercial owner had to apply to the board for approval, pursuant to section 98 of the act.

As a condition of approving the contemplated common element changes, the board advised the owner that it required a full-time security guard to be hired at the owner’s expense. The owner refused, on the basis that this additional cost would render the parking operation less profitable. The owner instead commenced its court application, alleging that the board had acted oppressively, by favouring the security interests of the residential owners over the financial interests of the commercial owner.

The application judge agreed with the commercial owner, and found that the board had acted oppressively by requiring the commercial owner to hire a “prohibitively expensive” security guard. The application judge found that because there were cheaper security options available to the board, which would, in the judge’s opinion, adequately address the board’s security concerns, the board had acted improperly by insisting on a full-time security guard.

On appeal, CCC 375 took the position that its board had acted honestly and in good faith by requiring a full-time security guard, and that the board’s decision to require a full-time security guard was within the range of reasonable decisions in the circumstances. In overturning the application judge’s decision, the Court of Appeal agreed with CCC 375’s position, and in so doing the Court confirmed that decisions made by condominium boards must be given deference.

What it means

Prior to the CCC 375 case, there was little judicial direction as to the decision-making authority of condominium directors. In particular, it was unclear under what circumstances it would be appropriate for a Court to interfere with a board’s decision.

By confirming that the business judgment rule applies to condominiums, and by articulating the court’s test for reviewing condominium board decisions, the Court of Appeal has provided the condominium industry with much-needed guidance. The court clarified what requirements condominium boards must meet as they exercise their discretion under the act.

The Court’s decision in CCC 375 should give condominium directors some degree of confidence that as long as they act reasonably, honestly and in good faith, their decision will not be overturned.

The decision effectively confirms that dissatisfied unit owners cannot get a “second kick at the can” by bringing their grievance to court on grounds of alleged oppression. Provided the board has met the above-noted requirements, such applications will not be successful. This is particularly relevant today, as the number of claims of unfair treatment made by unit owners against their condominium boards are on the rise.

The CCC 375 decision is also important for all condominium residents because it ensures that their boards understand their decision-making obligations. In particular, it confirms that boards must give fair, reasoned, consideration to all relevant factors surrounding a decision, including competing interests within a specific condominium.

Christy Allen is a condominium lawyer with Davidson Houle Allen LLP, and represented CCC 375 in this matter, both at the Superior Court level and at the Court of Appeal.

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