condo board

When private interests infiltrate the condo board

Governance issues can arise when directors put themselves before community
Thursday, April 6, 2017
By Josh Milgrom

Why does one become a director? It’s generally not the applause, the pay cheque, or the pleasure of being bombarded in the elevators by other residents’ questions. Some directors cite interest in playing their part to help their home thrive, others blame their neighbours’ persistence, and others are there to fix some old mistakes.

Regardless of one’s original motivation for becoming a director, directors have a tremendous responsibility, including managing the property and ensuring compliance with the condo’s governing documents (the Condominium Act, declaration, bylaws, and rules). Section 37 of the Condominium Act requires directors to act honestly and in good faith in carrying out their duties, and to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

But what happens when personal interests diverge from the interests of the greater good and representatives of private, commercial interests become directors, or worse, compose the majority of the board?

Governance challenges and financial issues abound when directors become motivated by self-interest, instead of looking out for the best interests of the condo as a whole. The power struggles that ensue can have divisive, destructive, and alarming consequences, resulting in corporations embattled with legal issues, in-fighting, disgruntled residents, and rampant non-compliance.

The Condominium Act does not set the bar particularly high to be a director: a director must be 18 years of age, not an undischarged bankrupt, and must be capable of managing property within the meaning of the Substitute Decisions Act. One does not need to be an owner or resident of a condo, or have any affiliation with the condo at all, to be a director. By default, the threshold to be a director is low.

What does this mean in practice? Let’s consider short-term rentals as an example. If a person operates a short-term rental business and is interested in renting out a group of units in a condo, he or she can run for the board. So can that person’s business partners; and with the right campaign (or potential “customers”), it’s possible for these parties to garner sufficient support to get elected.

If the board is stacked in just the right way, these private interests can rule, turning a blind-eye to non-compliance, offering preferential treatment or perks to short-term renters through preferred parking, storage space, or even cleaning services, on the condo’s dime. And the owners could be left in the dark, deceived and lied to, relying on the self-interested directors to provide them with updates and information about the operations of the condo.

But eventually the other owners get tipped off that something might not be right – maybe it’s the neighbours’ excessive partying on the weekends, beer bottles strewn across the corridors, or guests overheard at asking the concierge for an extra bottle of shampoo or how to get to the pool. Communications with management and the board do not seem to resolve the ongoing issues, and concerned owners start exploring their options.

Of course not all short-term guests wreak havoc on a condo. But a condo is empowered by the Condominium Act to be able to establish its own restrictions, within the bounds of the law, on permitted uses of units. Once established, owners have a right to expect the governing documents will be adhered to.

For a corporation who has been infiltrated by a self-interested board refusing to enforce short-term rental rules, the owners or other directors can requisition a meeting to remove the self-interested director or commence an application in the courts.

It can be fairly difficult to remove directors from the board prior to the expiration of their term. The majority of unit owners would need to vote in favour of removing the director at a meeting called for the purpose of removal. The more units are tenanted in the condo, the more difficult this threshold is to reach.

If the corporation has passed bylaws that contain disqualification provisions, the removal might not require an owner vote. If the bylaw permits, directors can be removed for a breach of the code of ethics, for example. Of course, if the self-interested directors compose the majority of directors or are otherwise able to influence the other directors, a breach of the bylaw is unlikely to be sufficient to require the directors to relinquish control, despite a clear breach of the bylaws.

Where removal of a director is not feasible, impractical, or will not adequately protect the condo from damages which may have been suffered, a court application may be necessary. Owners could commence an application for the board’s failure to enforce the short-term rental provisions in the governing documents, and, if there is concern about the manner in which the self-interested directors are governing, a finding that the directors have acted in bad faith or in breach of their obligations. Where a director is found to have acted in bad faith, that director can be held personally liable, and can be responsible for the damages ordered in the application.

In Ballingall v. Carleton Condominium Corporation No. 111 (CCC 111), a group of owners commenced an application against CCC 111 and one of the directors personally for, among other things, a declaration that the director had breached the standard of care required by section 37 of the Condominium Act.

CCC 111 had a declaration provision that required the residential units to be used solely as single-family residences. CCC 111 was located in close proximity to a university, and many units had been rented to multiple, unrelated students. Tension arose between owners who wished to rent units to unrelated tenants and those who were owner-occupants.

CCC 111 attempted passing a rule to further define “single-family residence.” Instead of supporting the decision of the board with respect to a rule further defining “single family,” the director attempted to undermine board decisions and mislead unit owners. He sent a letter to all unit owners (except the other directors) encouraging them to distrust the board, made the board dysfunctional, promoted antagonism and dissent, and put his own economic interest ahead of the interests of all unit owners. Fortunately for CCC 111, there was only one director acting in self-interest.

The director, keen on ensuring he could continue renting his unit to unrelated tenants in breach of the single-family dwelling provision in CCC 111’s declaration, was found to have acted in bad faith and in breach of the standard of care required of directors.

The continuing increase in popularity of short-term rentals and its impact on condos has far-reaching influence, including at the municipal level. The City of Toronto is planning on reviewing the issue of short-term rentals. A report released by the City, entitled “Developing an Approach to Regulating Short-Term Rentals,” outlines the further research the City plans to undertake into the issue, including consultations with the public, key stakeholders, and the need to explore potential options for regulation. Until regulation comes, boards are left to their own devices to regulate short-term rentals in their buildings and to ensure that owners and directors comply with the governing documents.

As a proactive step, the Condominium Act does permit a condo to enact its own bylaws setting out additional qualification requirements for directors. These can include requiring directors to be owners or residents of a unit in the condo or requiring directors sign a code of ethics enshrining certain shared values of the board. These types of additional qualification provisions can help protect a corporation from private interests infiltrating a condo board, or at the very least, may make it easier to regain control if these interests have already gained support.

Josh Milgrom is an associate at Lash Condo Law, practicing exclusively condo law.

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