In a recent decision of the Ontario Superior Court of Justice in Standard Condominium No 2095 v West Harbour City (I) Residences Corp 2013 ONSC 5987, significant limitations were imposed on a condominium corporation’s ability to recover for construction deficiency claims.
The case involved a residential condominium developed and built by West Harbour City (I) Residences Corp. (“West Harbour”). Unit owners purchased units from West Harbour pursuant to agreements of purchase and sale. In these agreements of purchase and sale, recourse against West Harbour was limited and the agreements of purchase and sale stated that the liability of West Harbour to the condominium corporation would be limited in a similar fashion.
When the condominium corporation was organized, its original directors were nominees of West Harbour, which at that time owned all of the units in the condominium. This original board of directors of the condominium entered into an agreement with West Harbour that limited West Harbour’s liability to the condominium corporation. The condominium corporation also enacted a by-law which mirrored the terms of this agreement. The by-law and agreement were registered on title to the condominium project lands.
In this case, the condominium corporation brought an application for an order that the by-law and the agreement were, ultra vires, the board (i.e. beyond their powers) and were also contrary to the Condominium Act, 1998, S.O. 1998 c.19 (the “Condominium Act”). The condominium corporation also argued that the agreement was not in the best interests of the condominium corporation and that no reasonable board of directors would have agreed to it.
In response, West Harbour took the position that, as a builder and developer, it was entitled to limit its liability to the statutory provisions of the applicable legislation as it had done in its agreements of purchase and sale with individual unit owners. West Harbour stated that there was no other practical for it to limit its liability.
With respect to the mandate of the board under the Condominium Act, the court determined that the mandate of the board as set out in section 56(1) of the Condominium Act was broad enough to encompass the ability to limit the liability of the developer. The court noted in this regard that it was within the board’s jurisdiction to assert, prosecute, and settle a claim against West Harbour and that it therefore followed that it was within the board’s jurisdiction not to do any of these things and to embody that decision in an agreement.
Furthermore, the court rejected the argument that the by-law and agreement were unreasonable such that no reasonably prudent person would enter into the agreement or enact the by-law. Section 37(1) of the Condominium Act requires that the board of a condominium act “honestly and in good faith” and also requires it to “exercise the care and skill that a reasonably prudent person would exercise in comparable circumstances”. The court determined that the board had acted reasonably because there was consideration for the agreement limiting potential recourse against West Harbour. The consideration was West Harbour’s agreement to transfer the project to the condominium corporation and the unit owners.
Therefore, the condominium corporation’s application was dismissed. The court concluded that developer/builders are entitled to limit their potential exposure to liability for construction deficiencies through an agreement with the condominium’s board of directors and the by-laws of the condominium corporation. The message to be taken from this case for unit owners is that prior to purchasing a unit in a condominium, they should carefully review any agreements or by-laws disclosed. The applications judge in West Harbour case was of the view that if an agreement is adequately disclosed to prospective purchasers and registered on title, it will be enforced. In the words of the applications judge, “If purchasers did not wish to buy units on this basis, they did not have to do so” (para 16).
Sharon Vogel is a partner in the Construction, Engineering, Surety, and Fidelity Group at Borden Ladner Gervais LLP. She can be contacted at email@example.com. The author gratefully acknowledges the assistance of Rahim Jamal, a student at BLG in the preparation of this article.