Condo board law

Preventing mismanaged finances on condo boards

Tuesday, September 24, 2019
By David Taub

With more people than ever living in condominiums, mismanaged condo boards are becoming ever more prevalent. Is this a symbiotic relationship?

Whether by corruption or incompetence, condo boards that mismanage their multi-million dollar budgets and reserve funds are a recurring problem. Legislation has now been enacted in an effort to rectify some of the problems which, at their core, were permitted by a failure to properly regulate the management and operation of condominium corporations’ board of directors.

The Condominium Act stipulates that the role of the board of directors is to manage the affairs of the condo corporation. In practice, most condo boards delegate the day-to-day management to an independent property manager and focus instead on the governance of the corporation. As a result, boards typically oversee the management process, approve major projects and expenditures, and ensure that the collective and individual interests of the unit owners are being addressed.

In recent years, the industry has seen a lack of transparency regarding the appointment and operations of condo boards, giving rise to financial issues. Money has been stolen by dishonest boards and has been spent recklessly by inept boards. In some of these cases, the directors responsible did not even own or live in one of the condominium’s units.

Corrupt, incompetent, or uncooperative boards.

There have been highly publicized situations where directors have diverted funds from the condo budget to themselves, or received kickbacks where the condo corporation entered into contracts with its various service providers. One such scheme concerned a small group of people who took control of multiple condo boards in Greater Toronto and were accused of orchestrating the theft of hundreds of thousands of dollars from the condos’ operating budgets.

In a separate incident, the unit owners of condo buildings in Thornhill were subjected to a special assessment of $1 million to cover shortfalls in the condo’s budget and reserve fund. The owners said that they had no idea how or where the board is spending their money.

There have also been instances where condo budgets have been depleted as a result of the irresponsible spending of incompetent condo boards. Sitting on a condo board is usually a volunteer job, with the only requirements under the Condominium Act being that the individuals must be over the age of 17, not bankrupt, and mentally competent.

As a result of these minimum qualifications, condo board directors often lack the appropriate knowledge, training, and financial experience to manage the corporation properly.

Amendments to the condominium act

Allegations of corruption and mismanagement can only be resolved by either a police investigation or a lawsuit, both of which are reactive solutions.

In order to proactively address these issues, amendments to the Condominium Act came into effect on November 2017 and January 2018. The amendments were geared towards encouraging increased communication between condo boards and unit owners and enforcing training and disclosure requirements for directors. Four improvements created by the legislative amendments are as follows:

1. One category of amendments is designed to educate both the unit owners and the directors in relation to the role and responsibilities of the condo board. Condo board directors now must undergo mandatory training to assist them in understanding their obligations and to provide them with tools for effective governance. In addition, the Province of Ontario published a condo guide to explain to unit owners how condominiums are governed. These changes help directors become more aware of their duties and increase owners’ awareness of their rights. In turn, this should create
more responsible boards.

2. There are also rules in place to enhance communication between the condo board and the unit owners, and to increase unit owners’ access to condo corporations’ records. Condo boards now must issue information certificates containing information about the condo corporation’s finances, reserve fund, legal proceedings, and other matters. Directors now must make disclosures including whether they own a unit in the building, have a material interest in a contract, own a company that is a supplier to the condo (conflict of interest), or have been convicted of an offense under the Condominium Act. These changes will allow unit owners to monitor the board’s activities and the directors’ motives for sitting on the board. It should also become more difficult for non-owners to sit on the board, which is a desirable result.

3. Other amendments are directed at increasing the financial transparency of the board. These amendments include requirements for the board to pass a by-law in order to borrow money, to prepare an annual budget, and to seek a written opinion from a reserve fund study provider where the amount of money in the corporation’s reserve fund falls below a prescribed level. These changes will allow unit owners to know what the board is actually doing with their money.

4. An online “Condo Authority Tribunal” has been established to settle and decide record-related condominium disputes in a more timely and cost-effective manner. Any condo owner can file a case online for a $25 filing fee. To date, there have been 37 decisions released by the Tribunal, the majority of which have granted record requests from unit owners.

Under the old regime, a unit owner’s only recourse would have been a lawsuit. Lawsuits are slow and expensive. The Tribunal is helping to increase the access of unit owners to information about their condo board’s activities without the expense and delay of a lawsuit.

These amendments are all positive because they increase the overall transparency of condo boards in order to hold them more accountable for their actions, and to expose board members who are abusing or misusing their power. Additionally, they educate directors and unit owners about their roles and responsibilities, which should create more competent boards.

David Taub is a litigator with Toronto business law firm Robins Appleby LLP. This article originally appeared in CondoBusiness Magazine August 2019.

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