The directors of a condominium corporation sometimes determine that it’s in the best interest of the corporation to borrow money for purposes related to its affairs.
Often, borrowing money is seen as a more palatable alternative to issuing a special assessment where repairs to the common elements are required and there is insufficient money in the reserve fund. Occasionally, the directors decide to borrow funds required to meet an unexpected expense. Such cases could include the premature failure of some components of the common elements, or the requirement to pay a judgment against the condominium corporation in a lawsuit where insurance is unavailable.
When a condominium corporation elects to borrow, the loan transaction is somewhat unique. For example, the corporation doesn’t grant a mortgage to the lender since the corporation typically owns no real estate or other assets of any value. In essence, the loan transaction proceeds on the corporation’s promise to repay the loan (also called a “covenant” to repay).
Financial institutions, including banks, require the board of directors to execute various documents as evidence of this covenant. These documents give the lender the comfort that the amount of the money loaned will be paid back over what is usually a lengthy time frame, without regard to the fact that the composition of the board and the identity of unit owners will change a number of times during the life of the loan. Loan repayments are included in subsequent budgets along with all the other common expenses of the corporation, until such time as the loan is repaid.
A lender should be satisfied with the covenant of the condominium corporation to repay the loan, even without any “hard security” that would typically characterize a bank loan. Why? Because the board has access to virtually limitless money through the mechanism of the condominium lien, which all but guarantees payment of common expenses including special assessments.
Also, if there were to be a default — and the lender were to sue the condominium corporation and obtain a judgment — the Condominium Act provides that a judgment against the condominium corporation is a judgment against all unit owners in the same proportions, as set out in Schedule D to the declaration.
So the real risk to the lender is that an advance of monies is made without properly obtaining an enforceable covenant from the condominium corporation to ensure repayment of the loan. For that reason, lenders are very careful about lending to a condominium corporation.
In some cases, a specific bylaw is required to authorize the specific borrowing. The lender will carefully review the bylaw and the declaration of the borrower, and will require a legal opinion from a lawyer. Experience indicates that lenders’ loan documents sometimes contain provisions which run contrary to the provisions of the Act.
For example, it’s unlikely that a condominium corporation has a right to assign its lien rights to a lender to facilitate the direct collection of the loan by the lender from the unit owners in the event of a default. This would be akin to a municipality borrowing money and assigning to its lender the right to levy real property taxes.
The purpose of the loan should also be carefully described. For example, monies borrowed and then placed in a reserve fund must be used only for capital repair and replacement, so if the borrowing is required for a number of purposes including non-reserve fund expenses, the loan proceeds need to be the subject of careful accounting and can’t be co-mingled with reserve funds.
Care must also be exercised to ensure that all aspects of the use of the borrowed monies are properly documented. A bylaw that authorizes borrowing, for example, is not a substitute for the requirement to provide the necessary notice and unit owners’ consent where funds are to be used to make an improvement to the common elements.
The authority to borrow is provided to a condominium corporation by a specific provision in the Act. Provided that a board is prepared to comply with the formal requirements of the Act, borrowing can be a useful tool for the board in managing the financial affairs of the condominium corporation.
Ray Mikkola is a partner in the commercial real estate department at Pallett Valo LLP in Mississauga.
Great article, thank you. Our condo board borrowed a large loan in 2011 to remove and repave our entire parking lot and curbing within our condo complex. At the time, our reserve fund & study for the complex had budgeted replacing the parking lot over the next four years in stages, each year pulling money from the reserve fund to do so. After much debate amongst the homeowners, it was decided that the board would obtain private financing via a loan and replace the parking lot all at one time which was done. We were told at that time, that going forward, loan repayments would be made via the reserve fund that had been established and continued to be topped up over the coming years with our monthly contributions. Now we are being told by the board/property management that the reserve fund cannot be used to repay this loan that was for capital expenditures of common elements and we have now all received a substantial increase to our monthly condo fees to cover this expense. So my question is, why can the reserve fund not be used over the coming years to repay the loan, if the loan was taken soley and 100% for this large capital expenditure. Are the board/property management wrong about this?
The Condominium Corporation that I manage would like to borrow funds for a major capital expense.
I am looking on how to word the Ordinary Resolution to send out to the owners
Is there a sample wording document that I could reveiw?
My Condo wants to borrow to replace all the Windows and sliding glass doors. They hired an Engineer and recieved quotes. The Cost is 3.2 million. They threaten us either Vote to take a Loan or we will Special Asccess you all. The Vote is for a 2 million line of credit over 10 years, the threatened Special Assessment is for 1.6 million. There is one qustion on the proxy and that is to change the borrowing bylaw. The reserve Fund Study said this that was done in 2016. The windows were observed to be in fair condition. When the windows are scheduled for replacement it recommended that this be done in a phased program in order to reduce the impact on the Reserve Fund.” What can we do to stop this and Save the money, our Reserve Fund has 1.1 million init with contributions of 900 grand a year. It is an building built in 1982
I am a Director on a Standard Condominium Board in Ontario. Over the past two years, we have received enormous increases in insurance premiums. The problem we face is we collect the funds over a 12 month period to pay for insurance. Unfortunately, we have to pay for it in a given month or finance the amount. We have financed the last two years, however, even the financing is not spread over 12 months. We have to come up with approximately 18% of the total in one month which is still problematic. We approached our bank about borrowing the total amount plus interest and paying for it in 12 monthly payments. They turned us down stating that we should have this covered in our budget.
Well, we do but we receive the amount in 12 equal payments. I do not understand why the bank will not loan us the money.
We can put through an approx 25% (this includes all other necessary increases) increase in condo fees and then have the amount needed to pay within terms without financing. Homeowners I am sure will have a problem with this. Another alternative is, we can put forward an approx. 12% (also includes all other increase) budget that will have the estimated downpayment available when we need it.