Canada’s Most Widely Read Condominium Magazine
DAMAGE CONTROL What to do when your condo makes the news
October 2015 • Vol. 30 #7
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The finance issue Reserve fund investing in a low-interest-rate PA R T O F T H Eand environment, much, much more
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Contents FOCUS ON: FINANCE
18
Demystifying reserve fund studies By Bruce Davidson
31
Investing with bonds By Daniel Correia
36
A practical alternative to the dreaded special assessment By Lou Natale and Paul Pittana
FEATURES
14
24
DEPARTMENTS
42
Legal All in the ‘family’ By James Davidson and Christy Allen
46
The so-called fourth level of government By Eric Laxton
48
Management Fees: The race to the bottom By Andreea Dolnicianu
50
Governance A checklist for setting budget priorities By Van Smith
54
Maintenance Defogging windows By Dale Kerr
Bill 106: Second reading By Armand Conant and Joel Berkovitz Breaking News: Your Condo Here By Michelle Ervin
IN EVERY ISSUE
10 58
Ask the expert Smart Ideas
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EDITOR'S LETTER /condomediaedge /condobusiness
Associate Publisher Mitchell Saltzman
/condomediaedge
When your condo makes the news Would you know what to do if a
cameraman got out?
news van rolled up to your property and a reporter and
Naturally, the circumstances would factor into the equation. Are owners publicly protesting a common element fee increase? Did glass fall from the building and shatter on the pavement below? Is the board waging a court battle to enforce a no-smoking rule? This represents only a sampling of real-life stories grabbed from Canadian headlines in the last few weeks. The more people live in condos, the more we can expect to see condos in the news — especially given the conflict that commonly erupts when people live in close quarters. All of which is to say: Boards and property managers ought to have a good idea of what do to when a journalist requests a comment. For that reason, this month’s cover story investigates the dos and don’ts of handling media attention. One important lesson for boards is to deliver a unified message through a designated spokesperson. Ultimately, the corporation should consider it a matter of reputation management, with a view to maintaining and even building the community’s brand for the sake of unit prices. Another major influencer of how much condos in a particular building will net is a corporation’s fiscal health. For this, CondoBusiness’ annual finance issue, we present a package of articles on demystifying reserve studies, investing reserve funds in a low-rate environment and considering loans as an alternative to special assessments. Plus, lawyers Armand Conant and Joel Berkovitz highlight some of the issues raised during the second reading of Ontario’s Protecting Condominium Owners Act. The proposed legislation is sure to garner continuing media attention given the recognized need to update condo law to reflect the current landscape. Unlike the Condo Act overhaul, most condo corporations that find themselves in the news cycle will leave the public consciousness as quickly as they entered it. That’s the good news. The bad news is: Mismanage media attention and make repeat appearances and a corporation’s reputation will suffer. Michelle Ervin Editor, CondoBusiness WB_toronto Ad banner september michellee@mediaedge.ca
Editor Michelle Ervin Advertising Sales Sean Foley, Stephanie Philbin, Rory McEntee Senior Designer Annette Carlucci Designer Jennifer Carter Production Manager Rachel Selbie Production Coordinator Karlee Roy Contributing Writers Christy Allen, Joel Berkovitz, Armand Conant, Daniel Correia, Bruce Davidson, James Davidson, Andreea Dolnicianu, Dale Kerr, Eric Laxton, Lou Natale, Paul Pittana, Van Smith Digital Media Director Steven Chester Subscription Rates Canada: 1 year, $60*; 2 years, $110* Single Copy Sales: Canada: $10*. Elsewhere: $12 USA: $85 International: $110 *Plus applicable taxes Reprints: Requests for permission to reprint any portion of this magazine should be sent to info@mediaedge.ca. Circulation Department Maria Siassina circulation@mediaedge.ca (416) 512-8186 ext. 234 CONDOBUSINESS is published eight times a year by
President Kevin Brown Accounting Manager Samhar Razzak Group Publisher Melissa Valentini 5255 Yonge Street, Suite 1000, Toronto, ON M2N 6P4 (416) 512-8186 Fax: (416) 512-8344 e-mail: info@mediaedge.ca CONDOBUSINESS welcomes letters but accepts no responsibility for unsolicited manuscripts or photographs. Canadian Publications Mail Product Sales Agreement No. 40063056 ISSN 0849-6714
2015 OUTLINES CROPs.pdf
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2015-09-04
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All contents copyright MediaEdge Communications Inc. Printed in Canada on recycled paper.
THIS MONTH’S ONLINE EXCLUSIVES ALL THE BUZZ
Condo Act reform bill clears second reading The Ontario government unanimously carried the Protecting Condominium Owners Act on Oct. 7 in its second of three readings, with the qualified support of the opposition parties. The provincial legislature referred Bill 106, as it is known, to the standing committee on finance and economic affairs.
In September, the Canadian Real Estate Association upwardly revised its forecast thanks to better than expected homes sales activity in B.C. and Ontario.
FROM THE GREEN BIN
Mixed-use project meets old-soul community When the City of Guelph proposed a plan to develop the former site of an appliance manufacturing plant, residents worried the character of their mid-19th century community would disappear. Now known as The Metalworks, the urban project aims to complement Guelph’s Downtown Secondary Plan.
GTA condo developers feeling bullish: report Condo developers in the GTA are feeling bullish in the face of record completions and warnings of potential overbuilding. So found Fortress Real Developments in its fourth edition of The Market Manuscript, released last month.
A new student residence planned for UBC will be one of the tallest wood buildings in the world.
EXPERT ADVICE
Karlyn Knafo talks about the sustainable features of fiberglass.
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ASK THE EXPERT
Follow the money
Condo corporations are prime targets for fraud,
what with the amount of money f lowing into their bank accounts each month. The Ontario government has recognized this with new
safeguards embedded in its proposed Protecting Condominium Owners Act.
In the meantime, condo fraud continues to make headlines. But not all fraud runs into the multimillions of dollars; some occurs on a small scale. And there are steps corporations can take to minimize their risks, both large and small. We asked auditors: What is one common deficiency in internal controls you see when reviewing financial statements for condo corporations? Conflict-of-interest policies One of the most common deficiencies in internal controls for condo corporations — both real and perceived — is a prescribed process for identifying related party transactions. This term refers to transactions between two or more parties with an existing relationship, whether familial or business. The risk here is that related parties will put their interests before the interests of the condo corporation. To mitigate this risk, create written conflict- of-interest policies along with sanctions for non-compliance. Then, educate boards and managers, set a tone of intolerance for related party transactions that have a conflict of interest, and for non-disclosure, and regularly communicate these expectations. Currently, condo corporations rely too much on boards and managers to disclose related parties to a transaction without any guidance. Edmund Leong, partner, Tator, Rose & Leong, Chartered Accountants
10 CONDOBUSINESS | www.condobusiness.ca
ASK THE EXPERT
Accepting cash as method of payment A common saying in the business world is “cash talks, nobody walks!” In the condo world, the saying should be “cash walks, nobody talks!” because most condo accounting systems do not recognize the sale of miscellaneous items like fobs, filters and short term rentals, until payment is received. If the purchaser pays by cash, it is possible that the cash will not make its way into the condo’s bank account, as nobody is expecting it. The cash literally walks out the door, and nobody knows. To correct this situation, the condo should not accept cash as a12:02 method of payment. MJW_halfPage_island_V2_BLEEDS.pdf 1 2015-03-12 PM Glenn Daurio, partner, Daurio & Franklin LLP, Chartered Accountants
Reviews of monthly financial reports The importance of internal control, exercised by those charged with governance, cannot be stressed enough. One of the greatest controls exists when a board meets to review monthly financial reports. Board members should view the statements critically, taking whatever steps necessary to verify the figures. Reports should be supported by bank reconciliations, original bank statements and aged lists of common element assessments outstanding. C Variances against budgets should be investigated thoroughly. Directors should M always be mindful of their exposure to legal Y liability if they fail to carry out their fiduciary CM responsibilities with diligence and due care. MY
Peter K. Harris, partner, Harris & ChongCY LLP, Chartered Accountants CMY
K
October 2015 11
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Reserve Fund Planning Fundamentals: Strategic Thinking
ADVERTORIAL
Budgeting is a process of developing a financial plan for the corporation’s activities for a given period of time. Budgets are an important tool to the success of any corporation as this gives the Board of Directors an understanding of how those activities affect the unit owners financially. Once in effect, any given budget can provide a basis for evaluating the actual financial performance of the corporation. The following are a few of the more common budgets associated to condominium corporations: •
Operating Budget
•
Maintenance Budget
•
Administration Budget
•
Improvement Budget
•
Reserve Fund Budget
•
Contingency Budget
Since each of the budgets above recognizes a specific function of the corporation it is important to tie them together to see what the outcome will be. Collectively these budgets form a master budget. This master budget is intended to provide information to make informed operating and financial decisions. Reserve fund budgets (also referred to as a Reserve Fund Study) are generally considered long-term planning tools simply because they incorporate potential financial requirements that can span over multiple years. However, any given budget is generally a snap shot of the corporation’s expectations at a given time and it should be understood that budgets will change over the course of time and will require attention and re-evaluation to account for our changing environment. This is where strategic planning helps to bring awareness to the corporation’s vision and priorities in response to a changing environment and ensures that members of the corporation are working toward the same goals. A reserve fund budget helps address strategic thinking through basic questions like, “where do we want to be?” and “how are we going to get there?” Basic questions that many condominium corporations have not asked in the past. When they do, the end result is the corporation collectively does a better job.
The following are some simple but basic strategies that commonly evolve from a reserve fund study:
Strategic planning does not predict the future. It bases decisions on what is needed today and places emphasis on “foreseeable” changes. For example, significant changes in the economy can have an impact on expenditures projected in the reserve fund calculations.
Reserve fund studies are required to be updated based on a provincial statutory time frame. Recognizing a changing economy can give a Board the opportunity to respond accordingly. Instead of waiting for the stipulated period to elapse, plan to perform more frequent updates. This approach would reduce significant changes that can occur over long periods of time. TIME IS MONEY!
Strategic planning helps incorporate coordination into the reserve fund budget. Coordination forces a Board to recognize relationships between common property components - the duties of a contractor, the duties of maintenance staff, unit owner responsibilities, and corporation responsibilities as a whole. This recognition tends to shatter the perception of “this is the way we do things around here.”
Reserved fund study with strategic coordination can identify obstacles and opportunities for the Corporation. This may lead to a change in the way things are done or it may help prepare for something originally unforeseen. For example, maintenance plans may be revised or possibly developed to compliment the timing set forth in the expenditure schedule.
Strategic planning helps with the implementation of decisions affecting the day to day operations. The level of strategic coordination accepted by a Board should be easily identified by owners once a reserve fund study is finalized. Although changes to the plan would be anticipated, efforts to maintain the coordination within that plan will be a factor of the unity between individual expenditures and a clear understanding of the reasoning behind the plan. Unit owners should know and understand the desired effects of the plan’s outcome before making decisions.
In summary, improved reserve fund studies incorporate basic strategies such as coordination of expenditures. This higher level of planning is anticipated to improve the Board’s decision-making process and in turn improve the management of the corporation funds as a whole.
Author: Jamie Murphy is an Associate with Read Jones Christoffersen Building Science and Restoration practice. For over a decade, Jamie has provided consulting services in the evaluation and restoration of existing building envelopes and structures, as well as, design and quality control for new building envelope systems. He has been involved in reserve fund studies for the past years and is a past Board member with Canadian Condominium Institute – Northern Alberta Chapter. Jamie is currently a Director for the Construction Specifiers of Canada (CSC) and volunteers as an instructor training a course for CSC called Level 1 Principals of Construction Documentation.
FEATURE
Bill 106: Second reading On Sept. 14, Bill 106, the Protecting BY ARMAND CONANT AND JOEL BERKOVITZ Condomin ium O w ners Act, 2 015, entered second reading. Industry stakeholders who attended the provincial legislature that day were pleased to hear the two opposition parties say they will support the bill’s passage through
second reading despite plans to seek amendments later. The bill passed second reading as this article went to print. A s m a n y m a y k n o w, t h e O n t a r i o government introduced Bill 10 6 into the legislature on May 27, which is when it received first reading. Though collectively known as the Protecting Condominium Owners Act, 2015, the bill actually consists of two statutes: An Act to Amend the Condominium Act, 1998, and the C ondominium M anagement Ser vices Act, 2015 (which provides for the licensing of condo proper t y managers). It also proposes to amend other st atutes, the most imp or t ant of which is the Ontario New Home Warranties Plan Act (i.e. Tarion). What follows is an overview of some of the comments and issues raised to date about the draft legislation, a very brief update of the reform process, and a look at what’s next. “No fault” insurance deductible bylaws Many condo corporations have passed what have become known as “no fault” insurance deductible bylaws under section 105 of the present Condo Act. In essence, these bylaws allow corporations to recover from unit owners the lesser of the cost of damages and the corporation's
insurance deductible where an owner causes damage to units or the common elements. (The default under the present Act is recovery only for damage to the owner’s unit.) These bylaws also eliminate the need for the corporation to prove fault of the owner or someone for whom the owner is responsible. Bill 106 proposes to revise section 105 to clarify that the corporation has the right to charge back the insurance deductible where the damage is to the common elements or other units. This is good for the industry; however, it still requires proof of fault. The bill goes on to say that this requirement to prove fault can only be amended or changed via the declaration (as opposed to a bylaw). Many stakeholders worr y that this will invalidate existing “no-fault” bylaws and prevent them from being enacted in the future. This is concerning because (a) it narrows the scope of damages that most corporations will be able to recover against unit owners, and (b) it will make it harder to recover against unit owners, because proving fault is usually extremely difficult. For example, picture the unit owner who accidently
14 CONDOBUSINESS | www.condobusiness.ca
overflows their tub and causes damage to the unit below them. If the unit owner drains their tub, mops up the water and denies any wrongdoing, it will be difficult to prove that they caused the damage. Thus the other innocent owners in the building will be forced to shoulder the cost of the deductible. The Condominium Authority Tribunal Stakeholders have also raised some concerns about the Condominium Authority Tribunal (CAT), a proposed body that would hear certain types of disputes between condo corporations, owners, residents, mortgagees, and others. The issues include: 1. The g o a l of t h e C AT i s to t a ke many legal matters involving condominiums out of the civil courts and provide faster, cheaper dispute resolution. However, because the range of issues that it can adjudicate on is going to be set out in regulations that are not yet drafted, it is too early to predict whether it is likely to bring significant change. 2. Currently, Bill 10 6 provides that
FEATURE the CAT can order a party to pay compensation for damages up to the greater of $25,000 (the current monetary limit for small claims court) or an amount to be prescribed. If the regulations do not raise this amount, it is unclear whether a party who seeks damages in excess of $25,000 for a matter within the CAT’s purview will be able to apply to the Superior Court for the full amount of their damages. And if not, will they be forced to reduce their claim to the maximum allowable by the CAT? 3. W i l l t h e C A T b e s u f f i c i e n t l y funded so that it c an be staf fed at a level which will allow it to q u i c k l y re s o l ve m a t te r s? It is anticipated that fees the C o nd o minium Author it y c o lle c t s from condominium unit owners will be its main source of funding. The government has floated a charge of approximately $1 per unit per month as the likely amount of the lev y. This works out to around $8 million per year. While this may sound like a lot of money, it is relatively small when compared to other administrative tribunals in Ontario. The E nv i r o n m e n t a n d L a n d Tr i b u n a l spends about $18 million yearly, w h i l e t h e L a n d l o r d a n d Te n a n t B o a r d h a s a n a n n u a l b u d g et of around $28 million. User fees (pay to play) will also be a source of r e v e n u e . S t a ke h o l d e r s h o p e t o see the C AT empowered to lev y enough funds to operate smoothly while maintaining transparency and avoiding becoming an unnecessarily large bureaucracy. Owner-requisitioned meetings Bill 106 proposes to improve the process that empowers a group of owners to remove the board or a director by providing a standard form of meeting requisition and by requiring boards to give a reason when they deny a requisition. These changes will in some ways make it easier for owners to successfully requisition meetings, but may also add several layers of complexity to the process. Currently, boards have 35 days to call and hold a meeting after receiving a valid requisition, failing which the requisitionists
Additionally, Bill 106 proposes to restrict can call the meeting, and the corporation must cover the reasonable costs. Bill 106 the right to requisition meetings to: proposes to change this process so that 1. Information meetings at which no vote will be taken on any matter other than boards must respond to a requisition within routine procedure; 10 days and either confirm that they will call and hold the requisitioned meeting or state 2. Removal/election of directors; and/or that they will not do so because of a defect in 3. Any other purpose permitted by the Act or regulations. the requisition (and state the defect). Bill 106 also proposes to remove the provision for requisitionists to call their own meetings. It Currently it is a relatively common practice is unclear what recourse owners would have to take a non - binding ‘straw poll’ at JermarkPIPE_Condo_Apr09.pdf 4:00:12 PM meetings so owners can make if a board were to confirm that it will hold5/1/09 a information their opinions known to the board. It is meeting but then never actually holds it.
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FEATURE
not clear whether a straw poll would be considered a ‘vote’ and whether owners could requisition an information meeting at which a straw poll would be taken. T he ab ove discussion represents just a sampling of some of the comments so far from stakeholders. In the authors’ view, Bill 106 contains significant improvements to the current Condominium Act and many stakeholders are generally very pleased with it.
What’s next After the bill passed second reading, it was sent to the standing committee on finance and economic affairs, where stakeholders and members of the public will be invited to make comments (depositions) at the hearings. The joint Canadian Condominium Institute (CCI)/Association of Condominium Managers of Ontario (ACMO) legislative committee is currently analyzing Bill 106, and along with other stakeholders will be submitting its suggestions to the
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16 CONDOBUSINESS | www.condobusiness.ca
Ministry of Government and Consumer Services and speaking at the standing committee hearings. After the standing committee hearings wrap up, the ministry will consider all submissions and comments as it decides what, if any, changes it will make to the draft legislation. Next, the bill will be tabled in the legislature for third reading and, upon passing, given royal assent — hopefully by the end of 2015. The Act will not become law until it is proclaimed, which will occur once the regulations are drafted by the ministry and approved by cabinet — hopefully by the end of 2016 or very early 2017. The bill will ideally provide a solid legal foundation for the condominium industry for years to come. However, like any new legislation, it will not cure every problem and will probably create some new ones too. Bill 106 is still being debated and there is much work to be done in drafting the regulations over the next 15 months, so stakeholders should submit any comments or concerns they have about Bill 106 as quickly as possible to CCI/ACMO, the government, and/or their local MPP. 1 Armand Conant is a partner and head of the condominium law group at Shibley Righton LLP. He is past-president of the Canadian Condominium Institute (Toronto), and chairman of the joint committee that prepared the legislative brief to the Ontario government regarding the Condominium Act, 1998. Joel Berkovitz is an associate in Shibley Righton’s condominium law group. He articled with the firm in 2013-14 and was called to the bar in 2014. Joel assists Shibley Righton’s condominium clients with a broad range of legal issues, including board management, compliance and enforcement, and contract negotiation.
For the latest on the Condo Act reform, visit
WINDOW PROBLEMS? Do not replace them!
FINANCE
Demystifying reserve fund studies Even before 2001, when the BY BRUCE DAVIDSON c u r rent C ondom i n iu m Ac t started to require reserve fund studies at least
once every three years, the industry was grappling with how to make the best use of this financial planning tool.
In broad strokes, a reserve fund study is prepared to identify reasonably foreseeable
repairs or replacement of the physical assets of the corporation and create a funding plan that can accommodate the associated expenditures.
18 CONDOBUSINESS | www.condobusiness.ca
FINANCE FEATURE This can be a sensitive topic for all parties involved in the condominium industry, be they property managers, unit owners or board members. This article will outline some common problems and suggest possible solutions. Understanding objectives Perhaps the biggest misconception in the condominium industry is that a reserve fund study is a fixed schedule, rather than a flexible planning tool. There is typically room to adjust both the building element condition and maintenance (expenditures) and financial (contributions) sides of the equation. Very simply, contributions to the reserve need to be “adequate” to accommodate “reasonably” anticipated expenditures as priorities and circumstances evolve. To be clear, the make-up and condition of the building dictates the reser ve expenditures, not the reserve fund plan. It is the reserve fund plan’s job to reasonably anticipate the expenditures before they occur. It is relatively normal for components to require replacement earlier than expected. It is also relatively normal for components to last longer than predicted. That’s why it’s important to adjust a corporation’s reserve fund plan as new information becomes available. The physical condition assessment portion of the reserve fund study update must be completed a minimum of once every six years, with a financial check-up being completed in alternating three-year intervals. If there are significant changes in priorities or work completed in the interim, however, it may be prudent to reassess the suitability of the reserve fund plan ahead of the three-year mark. Maintaining flexibility It’s rare that a corporation would prefer to conduct their fee collection for reserve fund expenses through special assessments. (Simply planning for special assessments would not be in keeping with the Condominium Act anyway). Contribution increases are difficult for boards to effect at times, and engineers are somewhat sympathetic to that, although their shared responsibility is ultimately to serve the best interests of a condominium corporation. Arbitrarily deferring work to meet financial objectives, however, may lead to less than satisfactory results, despite the immediate short-term financial relief passed on to unit
owners (sometimes at the expense of future owners). The result may be necessarily higher contributions for a compensating period of time until the work is completed, which may be a harder pill to swallow than simply increasing contributions sooner. When a particular item fails sooner than expected, it can often leave a corporation facing a decision between significantly depleting its reser ve or imposing a special assessment. In these cases, the
corporation may have some wiggle room to delay somewhat discretionary expenses within the plan to ease short-term financial requirements. ‘Somewhat discretionary’ refers to aesthetic concerns, rather than the technical concerns or inevitabilities. There’s no sense in re-doing the wallpaper if the penthouse units are flooded every time it rains due to poor roofing and there aren’t enough funds in the reserve at that time to do both.
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FINANCE
Just as building components can last longer or shorter than anticipated depending on specific application, environmental considerations, etc., their costs are also subject to change. Changes in technology, raw material prices and labour shortages are all factors that could potentially affect the reserve. These factors should be accounted for in updates, which essentially reset a half_page_residential_ad_PRINT.pdf plan, but serve to underline how flexibility is important to these plans.
Balancing physical and financial assets It’s important to strike a balance between the physical and financial aspects of the corporation: On one side of the coin, no one wants their physical capital assets to deteriorate. On the other side of the coin, no one wants to needlessly part with their liquid assets, particularly if they’re sitting in a mysterious fund that appears to be doing 1 2015-06-01 12:42 collecting PM nothing other than relatively nominal interest.
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A condominium board must therefore take care to communicate the goals of the reserve fund to unit owners, to keep them up to speed as to why these monies have been set aside. The reserve fund study process should also be interactive, incorporating input from all parties, when it is safe and responsible to do so. All reserve fund studies are a timeversus-funding exercise; however, bear in mind that each of their numbers is associated with a potentially disruptive project. It may not make sense to combine projects in the same year as it is both strenuous on a single year’s cash flow, as well as disruptive to the owners who have to endure multiple projects in the same year. It may be possible to defer work on a practical basis, depending on the corporation’s maintenance strategy. Phasing in work across multiple blocks or sections may effectively string out the impact financially, but would also spread any associated nuisances to the owners over several years. These considerations often have a significant impact on reserve planning, and vary depending on the desires of each corporation. Naturally, with all of the items touched on above there remains the statutory obligation to stay within the limits of the law while keeping the building safe. The current Act leaves much gray area as to what “reasonable” and “adequate” provisions mean with respect to funding. (The proposed Condominium Act reforms, which are now before the legislature, attempt to clarify these terms, amongst countless other matters.) Deferring significant structural work, for example, comes with significant risks, both with respect to life safety and escalating repair costs. Engineers and other reserve fund study providers need to work within these limits in order to provide an effective final study that the condominium board can then adopt as its plan. 1 Bruce Davidson is an engineer with Brown & Beattie Ltd. and an engineer in training with the Professional Engineers Ontario (PEO). He works closely alongside registered professional engineers in preparing many of the reserve fund studies produced out of B&B’s Richmond Hill office.
20 CONDOBUSINESS | www.condobusiness.ca
Royale Grande Property Management
Building trust through knowledge Royale Grande Property Management is a mid-size full service condominium management firm with a diverse portfolio of townhomes, low rise and high rise buildings that span the GTA, from Mississauga to Scarborough, from Thornhill to Lake Ontario. The eight-year-old company prides itself on its certifications, knowledge and experience, and it is no wonder: company owner Michael Kalisperas co-founded his first property management firm in 1992. In 2007, he decided to branch out on his own, and Royale Grande was formed. We spoke with Kalisperas and Yasmeen Nurmohamed, who was brought on as company President this year, on just what makes this property management firm unique. What differentiates you from other property management companies? We are one of only 36 ACMO 2000-certified companies. ACMO 2000 has developed business practices that will promote consistently high-quality customer service. We are the only condominium management firm headquartered in Toronto that is ISO 9001: 2008 certified. The ISO certification has standards to provide guidance and tools for companies and organizations that have
demonstrated they offer a quality management system in all areas of the business, including facilities, staff, training, services and equipment, and that quality is consistently improved. We are audited every three years to maintain our ACMO 2000 certification and annually to maintain our ISO certification. This year, we will be recertifying to the new ISO 9001: 2015 standard. What are some methods you use to prevent resident issues before they start? Preventive maintenance and being proactive is important in maintaining your building. If your building is operating and maintained well, the frequency of breakdowns is reduced, resulting in fewer resident issues. We also like to practice good communication through regular notices, newsletters and town hall meetings. Keeping residents informed of what is happening in their community creates less friction.
What do you look for when hiring contractors? We ensure that the contractors comply with the standard legislative requirements – that they are qualified, licensed, have WSIB certification and liability insurance. We think it is also important for the service providers to be in uniform so that they are easily identifiable. They should also be respectful and personable, as they are working in someone’s home (regardless of whether it is the common area or inside a suite). How are you leveraging new technology in the industry? There are two areas where we can leverage technology – in the communities we manage and within our company. For our communities, we use technology to make our buildings more efficient such as installing a building automation system. We can also use concierge software systems that allows us to better communicate with our residents and keep them informed. As a company, we also want our internal operations to run efficiently so that we can better serve our clients. For example, status certificates are a time-consuming and tedious process that have been replaced by an automated system. The potential purchaser can order it online and receive an electronic copy at their convenience, as the system is available 24 hours per day. The tedious task of putting these certificates together is reduced so that we can allocate those resources elsewhere. As a bonus, the electronic copy is environmentally friendly. What impact do changing demographics have on the property management industry? We live in a very culturally- and generationally-diverse environment, which has most certainly impacted condominium management. It affects how the
company operates internally (the people we work with), the service providers we work with and how we manage our communities, including the boards and residents. Our previous one size fits all approach no longer works. Our approach to managing has to be flexible to accommodate our residents within the confines of the law. Why is it important to be involved with industry groups? Technology and legislation are continuously changing. As a company, you have to evolve or risk becoming extinct. Besides, you do your clients a disservice by not being current. Industry groups provide a forum for exchanging information. What does the future hold for the company? Our growth is strategic as we would like to ensure that we remain flexible in order to continue to provide our clients with exceptional and personalized service. Our focus is on training to ensure that our staff provides the highest quality of service. In the future, we would like to focus more on our partnerships – our staff, clients and service providers. We will also look at the continued centralization of many of the administrative tasks we do, so that managers can focus on managing their community. What is the most important thing a condo board should know about your company? For most owners, their unit is not only their home, but may be their single largest investment. We are part of the team to maintain their building - both the infrastructure and aesthetics – all while being fiscally responsible. We do not just manage buildings; we build communities.
Royale Grande is a full service solution provider for your Condominium Corporation’s needs. We offer complete financial, administrative and physical management services. At Royale Grande, we recognize that each Community is unique, therefore, our service is unique.
Your Partner in Building Great Communities PROUD MEMBER OF
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T 416.945.7902 www.royalegrande.com www.condocloud.com October 2015 23
COVER STORY
BREAKING
YOUR CO HER
COVER STORY
NEWS
NDO E
BY MICHELLE ERVIN
“Etobicoke condo owners demand ‘justice’ after fee increase” –Sept. 11, CBC News
“Two hurt in Toronto as Four Seasons penthouse window shatters, showering street with glass” –Sept. 10, National Post
“Smoker’s fight to light up inside his condo unit heads to B.C. Supreme Court” –Sept. 7, CTV News October 2015 25
COVER STORY
“Don’t let the fact that you may feel that you need to respond or react to the media presence get in the way of the fact that you have a job to do.”
If it seems like condos are in the news a lot, it may simply be a testament to the sheer number of Ontarians living in them. As industry members — and now politicians involved in the Condominium Act overhaul — regularly point out, one in 10 Ontarians have chosen this unique type of home ownership and condos account for half of all new homes being built. A condo community can make the news for any number of reasons — a
tragic and unexpected event occurs, an owner publicly airs their grievances w ith the b o ard or m anag ement , or a corporation gets tied up in a court battle with a compelling human interest sto r y. T he o d d s of any o ne c o n d o community making the news are likely low, but it’s impossible to predict what will attract headlines, column inches an d p er h a ps even m ake p r imetime newscasts.
26 CONDOBUSINESS | www.condobusiness.ca
That’s why experts both inside and outside the industry recommend putting a basic media protocol in place. It’s not only about short-term crisis management but also long-term reputation management. Dean McCabe, vice president of operations for W ilson Blanchard M an a g ement , c au ti o ns th at c o n d o managers need to be careful when repor ters show up at a proper t y — especially if they lack media training. A manager’s priority, he says, is to tend to the situation at hand. “Don’t let the fact that you may feel that you need to respond or react to the media presence get in the way of the fact that you have a job to do,” says McCabe. If, for example, a fatality has occurred on the property, that job may involve securing an area and communicating with residents. Even if the manager isn’t dealing with a crisis requiring their full attention, that doesn’t mean he or she has to respond immediately to a request for comment. In fact, adds McCabe, managers should know they can call head office, where at least one person should have media training, for support. He had to put these protocols into practice when he got a call from a manager about one of the first cases of falling glass at a downtown Toronto condo. T he buil d in g’s m an a g er h a d cont acted the cit y and p olice, who b l o c ke d of f t h e a re a; t h e b u i l d i n g depar tment and insurance company had arrived; and the manager phoned head office to communicate what had happened and mentioned that media were on site.
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COVER STORY
“Because these are situations that may involve litigation at a later date, you want to make sure that you control the message.”
McCabe recalls rehearing with the manager the four things the manager was to say if approached by reporters in the 45 minutes it would take him to race to the site: “We’re investigating what happened; our primary concern is safety, of the residents and of the people in the area; the police have taken charge of that; and we’ll be cooperating fully.” Ultimately, the manager was never approached by media, he says, but it was important that the manager was prepared. Depending on why a condo makes the news, it may not be the manager’s place to speak to the media but the board’s. In situations where a board is called on to comment, the property manager would normally call the corporation’s legal counsel, says condo lawyer Denise Lash. And if there’s time, it may be appropriate to hold a conference call with the board. Taking down the reporter’s name, the story angle and the article deadline can help buy time to craft a response, she notes. Before a corporation is thrust into the spotlight, says the condo lawyer, the board members should choose a media spokesperson from amongst themselves. In future, board members should know to direct interview requests to that spokesperson. “The worst thing that can happen is multiple people speaking without a clear message,” says Lash. “Because these are situations that may involve litigation at a later date, you want to make sure that you control the message.” The spokesperson should confer with the corporation’s legal counsel ahead of any interview to determine what that message is. Sometimes it is critical to give a reporter the history of a situation for context. Broadly speaking, the media spokesperson should be coached to stick to the facts.
28 CONDOBUSINESS | www.condobusiness.ca
COVER STORY
“If you go beyond factual, that’s when you can get into defamation,” she says. And if a matter is before the courts, the corporation’s legal counsel may need to step in and act as spokesperson. Lash got one of her own major turns as spokesperson as legal counsel for the condo corporation that in 2010 won Ontario’s first court order forcing a unit’s sale. She was quoted in the Toronto Star at the time as calling the case “extreme” but necessary based on the danger the owner, who was accused of physical violence and racial insults, posed to neighbours and the property. A condo corporation’s interest in handling media attention well comes down to its reputation. Boards may not give their building’s brand much thought, but there are good reasons to, according to crisis management expert Allan Bonner. One is to increase unit prices. Bonner has observed post orders that fundamentally misunderstand the needs of news organizations. A s Mc C abe recognizes, he says management firms have to consider their own reputation, which may be implicated in a negative news story by association. And Lash’s advice to train a media spokesperson is straight out of his playbook. The crisis management expert adds that condo communities should develop a policy on when and why that spokesperson should speak to the media, and with what goals. Fortunately, a one-time event outside of the corporation’s control is unlikely to haunt the community, as brand is built up over time. Bonner uses his own condo to illustrate that all neighbourhoods have their pros and cons. “I live in the old Irwin Toy Factory with a great history,” he says. “One hopes that the meth story [an explosion at a Liberty Village condo attributed to a drug lab] is long gone. The neighbourhood is also known for traffic (but I used to live near Sporting Life), influx of 905ers (but I used to live in the club district), and lack of transit (but I used to live in Burnaby before Skytrain).” If a c ond o c or p oration wants to mitigate the effects of a negative news stor y, Bonner suggests developing a reputation-enhancing website including the neighbourhood’s history, information and photos.
W ith the 24 / 7 n ature of me d ia operations, stories cycle in and out of the public consciousness at a rapid clip. It’s the cumulative effect of repeat appearances in the news that condo corporations have to worry about. “If a building gets a bad reputation, it’s hard to come back,” he says. “The bad rep can come from bed bugs, drugs, squabbles and so on.” 1
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FINANCE FEATURE
Reserve fund investing with bonds On July 15, 2015, the Bank of BY DANIEL CORREIA Canada announced that it had lowered the overnight rate to 0.5 per cent. This
means that the rate at which it loans money to the banks came down an additional 0.25 per cent from the previous low
of 0.75 per cent. The Bank of Canada’s move essentially forced the hands of the financial institutions to, in turn, lower their lending rates and GIC rates.
October 2015 31
FINANCE
Financial institutions are offering a dismal average one-year return of about one per cent on one-to-two-year GICs. That is difficult to swallow for retirees looking for protection, but it’s even more difficult to swallow for condo corporations, when one of their two sources of investment (GICs and bonds) is paying a fraction of what it used to pay. How can a board of directors possibly ke e p u p w i t h t h e g r o w i n g p r i c e s of goo ds and ser vices with a yield of one per cent? Five -year GICs pay two per cent, on average, in this rate environment, but can a board justif y locking in all its funds for five years at two per cent to the unit holders of the corporation? What about the expenses during the five -year period? How will the corporation access capital to cover expenses when the GIC is locked in for this length of time? Corporations are starving for higher yields and have begun looking at the other type of investment: bonds.
Bonds: Great in the right hands, dangerous in others Consider a board member looking at two eligible reserve fund investments: a GIC paying 2.05 per cent or a Province of Quebec bond paying 3.56 per cent. Which would the board member likely choose? Of course, the Quebec Bond. What are the details, though? The GIC pays 2.05 per cent, either annually or compounded, for five years and is locked in for the entire term. The bond pays 3.56 per cent, either semiannually or at maturity; has a 25 -year term; and can be sold before maturity, but the amount could be more than, less than, or equal to the amount invested. Would the board member choose the bond knowing this? It depends on the board’s view, knowledge in buying fixed income, its corporation’s financial situation and its investment manager’s expertise in investing on behalf of condo corporations. Before buying bonds, a board needs to understand yield curves and decide how the bonds will be managed (and by whom).
32 Untitled-3 CONDOBUSINESS | www.condobusiness.ca 1
Reserve fund investing 101 The ultimate goal of investing reserveallocated funds is to keep maintenance fees low. That’s it. If the reserve fund grows much more than expected, then the board can decide whether or not to allocate additional funds to the reserve fund from the maintenance fees collected the following year. The design of the fund isn’t to lower maintenance fees, or to make so much that cheques need to be sent back to unit holders because too much money was made. The Ministry of Consumer Services restricted reserve fund investing to eligible securities in the Condominium Act. Its rationale can be considered as two-fold: First, and most importantly, this mitigates a reserve fund loss of capital; and second, this allows boards to grow the funds so that they can keep up with future rising costs of goods and services (i.e. inflation).
15-08-10 3:56 PM
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The risks and available options If a corporation has a time horizon longer than five years, meaning that the reserve fund will have major expenditure years beyond a five-year period and will have significant cash (either current reserve cash or incoming cash contributions) to cover them, then bonds should be incorporated into their reserve fund investment plan (RFIP). As with any investment account, knowing the duration of holdings and withdrawal times will help with positioning, but a lack
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The term “yield” implies that an investment is on a yield curve, which is the relationship between yields and time for a specific security. There are three types of curves. The normal curve is where yields increase over time. Long-term investments have higher yields than short-term investments. The inverted (inverse) yield curve is where yields decrease over time. The investor will obtain a high relative yield for shorter-term investments. The flat yield curve is where yields are constant over time. Where the investment lands on the yield curve will dictate the future value of a bond relative to others. Consider the 25-year Quebec bond paying 3.56 per cent. If it sits on a normal yield curve, the price of the bond will fall because of the inverse relationship between rates and prices. This means that selling it prematurely would likely lead to a loss. The best option is to buy and hold. If the bond is on a flat curve, the price of the bond will vary insignificantly. This means that selling it will serve no purpose for gain. The best option is to buy and hold. If it sits on an inverted curve, the price of the bond will go up. This last scenario is the ideal scenario for a particular security based on having more options; keep the bond and make 3.56 per cent, which is higher than the other bonds being issued, sell the bond for a gain and use the investment funds or re-invest into lower paying bonds. The decision between using the investment funds or re-investing into lower paying bonds is dictated by the management style. Passive bond management minimizes the impact of interest-rate risk on a bond portfolio. With this style, no attempt is made to predict the direction or magnitude of interest rates. This is a buy-and-hold approach. Active bond management attempts to profit from interestrate risk by predicting the direction or magnitude of interest rates. There also exists a blend of both management styles.
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FINANCE
in planning can result in losses despite the Condominium Act’s best efforts. If a corporation buys a 25 -year bond today and is then in a position that forces a sell in three years, it can incur a loss — especially if rates rise within those three years. Losses can be magnified by a sharp rise in interest rates. How should corporations approach bond buying? The board needs to make a decision on which style, passive or active, is best suited for the corporation. Then it should select an investment manager who is clear on which style should be used. Bonds are best managed in the hands of professionals who understand the characteristics and covenants of bonds. Remember that bonds are more complicated than stocks. Buying bonds that have a high yield could expose the corporation to losses if the investment manager has not completed the RFIP and invested the corporation’s money with due diligence. Despite the lower rates dictated by the Bank of Canada, condo corporations with healthy reserve funds and a long-term time horizon can look to bonds to give them a
lift in yield and protect their reserve fund principal investment. Albeit, this requires the right type of planning, and hopefully, the right type of investment manager. 1 Daniel Co rre i a , C I M ®, i s t h e l e a d wealth advisor with the Guild Wealth Advisory Group with TD Wealth Private Investment A dvice. He is an active member of both ACMO and CCI and w o rks w i th p ro p e r t y m a n a g e m e nt companies and industry professionals. For more information, visit www.guildwealth.com. Guild Wealth Advisory Group consists of Daniel Correia, Investment Advisor. Guild Wealth Advisory Group is part of TD Wealth Private Investment Advice. The information contained herein has been provided by TD Wealth Private Investment Advice and is for information purposes only. The information has been drawn from sources believed to be reliable. Where such statements are based in whole or in part on information provided by third parties, they are not guaranteed to be accurate or complete. The information
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FINANCE
A practical alternative to the dreaded special assessment BY LOU NATALE The condo corporation loan has AND PAUL PITTANA become a practical alternative to the dreaded special assessment. In the past, condo corporation
financing was offered by just a few boutique lenders. Rates and fees were
quite high as these private lenders dominated this unique lending space. Today, as more lenders, including some major banks, offer condo corporation financing, pricing and terms of condo corporation loans have become much more competitive, making financing much more palatable to a board and unit owners. 36 CONDOBUSINESS | www.condobusiness.ca
FINANCE
Before discussing financing further, it’s important to understand why a condo corporation might contemplate a loan and what other options are available to cover reserve fund shortfalls. Reserve fund shortfalls Before the current C ondominium Act came into force in 20 01, condo corporations in Ontario were not legally required to complete a reserve fund study (RFS). All condo corporations have since been required to update their RFS every three years, and newly registered condo corporations must complete their first comprehensive reserve fund study within the first year of registration. The introduction of the RFS requirement lef t many older condo corporations scrambling for resources to fund major repairs and upgrades. Even some newer condos lack suf ficient re s e r ve s in t h e e a r l y ye a r s . B ot h scenarios have posed a major financial strain to condo boards facing large capital expenditures. There are a number of reasons why a condo corporation could potentially e n d u p w i t h a s h o r t f a l l fo r m a j o r repairs and capital projects, including poor capital planning, deferring major repairs or replacements, a desire to keep maintenance fees artificially low, avoiding a special assessment, or an indecisive board. Essentially, condo boards have four possible choices when faced with reserve fund shortfalls: 1. Defer major c apit al projec ts and upgrades. 2. Phase the work and fund it through higher condo fees. 3. Levy a special assessment. 4. Take out a condo corporation loan. Evaluating the options While a board may consider deferring major capital work, once an engineer deems work essential, the board has a duty to its unit owners to complete the repairs in a timely manner. Deferring work may possibly expose directors to liability, and potentially increase risk of further property damage and costs to the condo corporation. Phasing major work is typically not a cost-effective option. Capital work that is
phased over an extended period is subject to potential project cost increases and higher mobilization costs (i.e. construction set- up costs). Besides higher costs, phasing the work can also inconvenience unit owners during an ex tended construction period. When all is said and done, either deferring or phasing work are often not viable options. Inevitably, a board’s decision usually boils down to t wo possible methods of financing capital work where there are inadequate reserve funds: either levying a special assessment on all unit owners, or borrowing the necessary funds from a financial institution that is willing to lend the money. Boards lev y s p e c i al as ses sment s to generate additional funds from unit owners (over and above usual monthly condo fees) to cover unexpected repairs. A board has the ultimate authority to decide if and when a special assessment should be levied. Unit owners often find themselves unprepared for this as they are usually required to pay the special assessment in a very short timeframe. Owners then have to personally deal with the burden of how they are going to come up with the money in such a short period of time. In the worst cases, some unit owners may be forced to sell their properties if they are unable to pay. Special assessments, especially when repeated, are a sign of poor fiscal mismanagement, and could severely impact the resale value of all the condo units on the property. W ith b o r r o w i n g , t h e a p p r o p r i a te amount of funds are available when required, with no delays in scheduling repair work. This reduces project timelines and minimizes overall project costs. Borrowing also eases the financial burd en on unit ow ners by spreading payments over an extended period, sometimes up to 20 years. Unit owners are responsible for paying their portion of the monthly loan payment as part of the monthly common expenses, and are highly likely not required to borrow personally. How financing works Lenders that offer condo corporation financing will lend money for many types of situations. These situations can
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LEGAL
All in the ‘family’
Many condominium declarations state that dwelling units can be used
BY JAMES DAVIDSON AND CHRISTY ALLEN
only as single-family residences (or words to that effect).
Even
if there is no such provision in the declaration, there may be such a provision in the condominium’s rules.
42 CONDOBUSINESS | www.condobusiness.ca
LEGAL
But this begs the question: What is a family? In other words, who is permitted to reside in a unit that can be used only as a single-family residence? Early assumptions Until 2009, it was thought that these sorts of provisions could only regulate how a unit could be used — not who could use the unit. So, it followed, anyone could reside in the unit (subject to occupancy standards), as long as those people used the unit as a single-family residence. This essentially meant that there could be only one kitchen, and also that all of the residents could equally share the living areas of the home. Put differently, there could be only one “living quarters,” and there could be no roomers or boarders. It w as fur ther as sum e d th at any other restriction — i.e. any restriction on who could reside in a unit — would contradict human rights legislation. I n p a r t i c u l a r, i t w a s t h o u g h t t h a t such a restric tion would constitute discrimination on the basis of family status (which of course is not permitted in a condominium).
T h e s e a s s u m p t i o n s w e re b a s e d on court decisions about zoning, most notably the 1979 case of Bell v. The Queen. In that case, a municipal zoning bylaw purpor ted to define the term “family” for the purpose of regulating the users of dwelling units. Ultimately, the Supreme Court of Canada found that zoning by reference to the relationship among the users of a dwelling, rather than to actual use of the dwelling, is beyond the authority of a municipality. As a result, the court found that it was unreasonable (and oppressive) for the municipality to define family for the purposes of regulating the users of a dwelling. The court also found that what is important (in the municipal zoning context) is how the dwelling is being used and not who is using it. Game-changers All of this changed in 20 09 with the court decision in Nipissing Condominium Corporation No. 4 v. K ilfoyl. In the Kilfoyl case, the declaration said that the units could be used only as “one family residences” and also included the
following definition of family: “A social unit consisting of parent(s) and their children, whether natural or adopted and includes other relatives if living with the primary group.” Based on this definition, the condominium corporation asserted that groups of unrelated students were not permitted to reside in the units. The court agreed, saying that “multiple unrelated tenants” constituted a breach of declaration. And in the Kilfoyl case, the court found that this did not contravene Ontario’s Human Rights Code, namely the requirement to avoid discrimination on the basis of family status: “The peaceful use and enjoyment by each family of its own unit ought not be breached by the actions of any individual who does not conform to the contractual obligation entered into in accordance with the declaration when the condominium was purchased. “NCC No. 4’s declaration with respect to the restriction placed on the use of units is designed to promote the renting of units to families and has been interpreted by the corporation to include in that October 2015 43
LEGAL
“In condominiums, families can be defined to exclude unrelated persons.”
definition a more expansive definition of family in order to comply with the requirements of the Human Rights Code.” In 2010, the Ontario Court of Appeal upheld the Kilfoyl decision. In doing so, the court of appeal also found that there was no violation of the Human Rights Code, stating that different principles apply to land use planning versus the validity of a condominium’s declaration and bylaws. So, the Kilfoyl decision established that condominium communities are unique. In condominiums, families can be defined to exclude unrelated persons. The law advances Then, in 2011, the decision in Chan v. Toronto Standard Condominium Corporation No. 1834 advanced this case law. In the Chan case, the condominium’s governing documents said that the units could only be used as single family residences — but contained no definition of family. In those circumstances, the court said that the definition of family contained in the declaration of Nipissing Condominium Corporation No. 4 applied! The Ontario Court of Appeal also upheld the Chan decision. So, taken together, the Kilfoyl and Chan cases indicate that, in a condominium, the use of the dwelling units can be restricted to “families,” and if there is no definition of family in the condominium’s governing documents, it appears that the following definition may well apply: “A social unit consisting of parent[s] and their children, whether natural or adopted and includes other relatives if living with the primary group.” The problem with this definition is that it is extremely narrow. What about a couple with no children? What about someone living alone? What about siblings living together? What about two persons (not in a conjugal relationship) who intend
to live together permanently? It appears that these persons are also excluded from the definition of family noted above. Unique definitions Condominiums with a “single family” restriction should consider creating their own definition of family — either by amending the declaration or by passing a rule. This idea has recently been confirmed in a further court decision, in the case of Ballingall v. Carleton Condominium Corporation No. 111. In the Ballingall case, the court confirmed that it is proper for a condominium corporation to pass a rule to create an alternative definition of family, different from the definition endorsed in the Kilfoyl and Chan cases. The rule must simply be reasonable and consistent with the basic principles behind the “families only” provision in the declaration. This is great news for condominium corporations and their owners, because it means that they have some flexibility in establishing a definition of family for their condominium communit y. T he definition c an also var y somewhat from condominium to condominium, depending on the nature and history of the occupancies in the particular community. In the Ballingall case, the court also considered the potential for different types of grandfathering provisions (grandfathering or exempting of existing rights) to be included in any such rule. Again, this will depend upon the nature and history of the occupancies in the condominium. Creating and enforcing the rule E x p erienc e indic ates that r ules to establish a definition of family can sometimes be contentious and divisive. The Ballingall case is one such example. In each case, take care to introduce the rule with full explanation of the court decisions and the legal principles at play, and with
44 CONDOBUSINESS | www.condobusiness.ca
openness to feedback and suggested revisions from owners. In most cases, owners will ultimately see the wisdom behind passing such a rule, tailored to suit the particular condominium community. Enforcement can be a challenge with many rules. Of course, if a violation is identified, the normal processes are: • One or more cease and desist letters from the b o ard or m an ag ement; followed by • One or more cease and desist letters from legal counsel (perhaps with legal costs claimed against the violator); followed by • Mediation and arbitration, or court process, depending on all of the circumstances. Proving a violation of a single-family provision can pose its own unique challenges — because it may be necessary to gather evidence of the relationship between t h e o c c u p a nt s . D e p e n d in g o n t h e circumstances, evidence may be available from witnesses, from materials received (resp e c ting ten anc ies) pur su ant to section 83 of the Condominium Act, by inspecting the unit, by direct questioning of the occupants, or by other means. Also consider including a provision in the rule requiring the occupants to disclose (to the condominium corporation) the nature of their relationship, only for purposes of confirming compliance with the singlefamily provision. Without a proper definition of family, it may be difficult to interpret and enforce a single -family provision contained in a condominium declaration. In that case, a corporation could be left with the restrictive definition that has been established by the case law. By passing a rule (as case law permits), a condominium can create a common understanding among its owners of what “family” is and who can reside in dwelling units restricted to single-family use. 1 James Davidson is a partner at Nelligan O’Brien Payne LLP, and has been a member of the firm’s Condominium Law Practice Group for more than 30 years. Christy Allen is an associate lawyer at Nelligan O’Brien Payne LLP, and a member of the Condominium Law Practice Group.
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LEGAL
The so-called fourth level of government
Many people, it seems, are keen BY ERIC LAXTON to assert their apparent rights under the Canadian Charter of R ights and Freedoms in a broad array of disputes. The Charter may get
invoked in situations ranging from an eBay purchase gone wrong to matters involving owners, directors and condominium corporations. This can sometimes become a free-for-all of legal misunderstandings and misinformation. The law is generally a complex and nuanced mat ter. That’s why people consult with lawyers who have specialized knowledge and experience. While not many non-lawyers are familiar with things like interlocutory injunctions, other legal concepts, such as the Charter, are more
46 CONDOBUSINESS | www.condobusiness.ca
readily accessible and trickle into the consciousness of Canadians. For every 10 times an individual claims that their Charter rights are being violated, perhaps only once is the Charter actually applicable. Most often, the Charter has nothing to do with the matter. Why
LEGAL
not? Though the Charter is a law that guarantees the civil rights of people in Canada, it only applies to the actions of government. The Charter, therefore, does not generally apply to the private interactions of individuals. A recent case from the B.C. Supreme Court highlights this common misun d er st an d in g . T he c ase d e als particularly with the application of the Charter in a condominium. In Strata Plan NW 499 v. Kirk, 2015 BCSC 1487, an owner disputed his strata corporation’s right to collect strata fees (the Ontario equivalent to a condominium corporation’s right to collect common expenses) and so stopped paying. The corporation registered a lien against title to the unit under section 116 of the Strata Property Act (the Ontario equivalent can be found under section 85 of the Condominium Act). Then, the corporation commenced proceedings for an order for sale of the condominium unit to recover the arrears. The owner opposed the order and asked the court to declare that his
Charter rights had been infringed and that the corporation had acted improperly. T he c or p oration’s d efenc e relie d on a number of provisions in the Strata Property Act to justify its actions, namely its authority to collect strata fees, to lien the unit and to force the sale of the unit to collect money owing. The judge had many reasons for deciding in favour of the corporation as far as condominium law issues go, but this article will focus on the Charter claim. The owner argued that the Strata Property Act’s provisions permitting the corporation to file liens against title based on mere allegations of an owner’s failure to pay strata fees is contrary to principles of fundamental justice. It is worth noting here that the owner was self-represented, and therefore did not have the benefit of a lawyer’s opinion on the merits of his Charter challenge. Section 7 of the Charter holds that everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice. The owner in this case took issue with the corporation’s ability to arbitrarily and unilaterally determine the state of accounts between owners and the corporation without impartial oversight. He argued that this threatened his continued occupancy of his residence and therefore the security of his person. There may be something compelling to his argument. He is not the first to suggest that a condominium corporation’s lien power is extraordinary. But is there a Charter argument? T he C h ar ter o nl y a p p lies to the Parliament and Government of Canada and to the legislatures and governments of each province on mat ters within their authorit y. So does the Char ter apply to governance of condominium properties? That depends on whether the condominium corporation is “government” or whether its activities are “government-like.” Condominiums are sometimes colloquially referred to as “like a fourth level of government.” That description should perhaps now be used
with caution, considering the judge’s decision in this case. The judge found that the interaction between the owners, the rules, bylaws and the legislation is, by nature, a private agreement to use the property in a common purpose. When an owner acquires title to a condominium property, he or she does so with the understanding that bylaws and rules exist to maintain the orderly administration of the condominium’s affairs, including the building, facilities and grounds. Although some of these functions, such as garbage collection, may parallel the functions of a municipal government, the province’s legislation does not replace or invest in the corporation any powers or functions of the province. The judge concluded that condominium corporations are not “government,” nor their activities “government-like.” In law, therefore, a condominium corporation is not like a fourth level of government at all! The Char ter was not intended to protect economic interests, and the o w n e r ’s c o m p l a i n t c o n c e r n e d a n economic dispute: the corporation’s debt claim. The threat of having his home sold was, in essence, a dispute over financial responsibility, and not a Charter-protected right. Since the Charter is under federal jurisdiction, it is likely that a similar analysis and outcome would follow in Ontario. This does not mean, however, that none of the rights in the Charter apply in a condominium setting. While the Charter itself may not necessarily apply, some rights contained in the Charter have become part of the common law, including, for example, the right to free speech. Though, since the right to free speech is another one of those misunderstood laws, perhaps it’s best not to go down that road for now. 1 Eric Laxton is a lawyer at Chappell Partners LLP with particular experience in condominium law, and the editor of Condomaximum, a monthly newsletter on condominium law issues. He can be reached at elaxton@chappellpartners.ca. October 2015 47
MANAGEMENT
Fees: A race to the bottom I t a p p e a r s i n BY ANDREEA DOLNICIANU the last few years that budget time in condominiums
has become a stressful period instead of a time for planning for the forthcoming needs and wants of the corporation. Lately, owners’ minds, despite the variety of clients and condominiums in Ontario, are focused on decreasing expenditures. While the media and economists have not said the country is in a recession, it is quite evident through experience that no one has an appetite to spend money. For this reason, budgeting in condominiums has become less of a realistic approach to cover the costs of the non-profit corporation and more of a process of tr ying to maintain or decrease maintenance fees in a race to the bottom. Herewith, a discussion of the budget process, board and unit owner dynamics, and how management can steer boards toward adopting sound financial plans. The budget process Ty pic all y, the pro p er t y management company prepares the first draft of the budget and presents it to the board of directors several months in advance of the corporation’s year end for review and approval. Managers always keep in mind that high increases year over year are not favourable; however, drafts are p re p are d remem b er in g th at the corporation needs to collect enough money to cover its expenses. Undeniably, if a corporation is in a deficit position because the board of directors approved a lean budget the
48 CONDOBUSINESS | www.condobusiness.ca
MANAGEMENT
p rev i o u s ye a r a n d t h e c o r p o r a t i o n incurred unexpected expenses, management will propose to increase maintenance fees to cover the shortfall. N ot to m e nti o n , au d i to r s a d vo c ate budgeting for a surplus of one month’s worth of maintenance fees to help with cash flow and unforeseen costs. Aside from that, as corporations age, re p air and m aintenanc e o b lig ations become larger in scope and associated costs increase. Other inescapable costs come from insurance premiums hikes specific to the whole industry or related to the specific corporation’s claims history as well as rises in utility prices. The GTA has seen average increases in electricity and water rates of about nine per cent per year. Yes, there are plenty of methods that property managers use to decrease costs and allow for stable budgeting such as tendering maintenance contracts and entering into long-term gas contracts. Never theless, a reasonably prudent person should expect that maintenance fees will increase year over year. Board and unit owner dynamics It is common that only a few people run for the board of directors each year while the majority of unit owners prefer to remain on the sidelines of the action happening in the condominium. Such a situation is especially influential on budget decisions as unit owners demand that the boards of directors keep maintenance fees low or even reduce them. Continuing education is necessary to help owners understand exactly what it takes to run the corporation. T he b o ard of direc tors’ d ynamic s play a key role in the budgeting process and the final decisions. Some boards of direc tors rely exclusively on the treasurer’s opinion. Other boards of directors have one strong character that may rule the conversation and ultimate decisions even if he or she is not the majority because the other
If advice is given in writing to the corporation, the board
directors may be more inclined to adopt a realistic budget. board members will give up the fight for fear of negative ongoing personal relationships. The manager’s duty It is management’s dut y to properly advise the board of directors on realistic budgeting, and there are several ways to objectively present the need for increasing maintenance fees. Some boards of directors are h e s i t a nt to i n c re a s e fe e s fo r fe a r of backlash from unit owners, which is ver y understandable. Owners will almost always agree with the board of directors’ decision if given enough information in a timely manner about the issues facing the corporation. T h a t i s t o s a y, g i v e a s m u c h information as possible to owners with the budget package, including detailed notes, c omp arisons, diag rams, and w h atever othe r info r m ati o n he l p e d the b o ard of direc tors ar rive at its decision. If necessary, have an owner’s information meeting to present the budget and let owners ask questions. It helps to have the auditor at the meeting to d i re c t l y a n s we r q u e s t i o n s f ro m owners where possible and impart their industry knowledge as a professional. At the actual budget meetings with the board of directors, a senior manager should accompany the manager to p resent the b u d g et . S o metimes proper t y managers may be hesitant debate the topic and stand up to the board members in fear of straining the relationship.
Any good argument for increased fees should be well documented with historical data, advice from industry professionals, etc. Furthermore, management should always, through their management report and meeting minutes, document in writing their recommendation and reasoning. If advice is given in writing to the corporation, the board directors may be more inclined to adopt a realistic budget as they should be relying, to a certain extent, on information and direction management and consultants have provided to them. Ultimately, managers must remember that they can only make recommendations; the final decision rests with the board of directors. In some cases, even after hard efforts to convince a board of directors to raise maintenance fees after a decade of keeping them the same, nothing will change. Then, management and the board of directors will have to deal with the repercussions of extreme increases at a later point in time. At the end of the day, the most important thing to remind the board of directors is that they have a fiduciary responsibility to maintain the financial well-being of the corporation. And unrealistic budgeting, in a race to the bottom to lower fees, directly contravenes such duty of care. 1 As a founding partner and president of Comfort Property Management Inc., A nd ree a D o lnic i anu, i BBA , M S c , is dedicated to the condominium industry and educating the general public about issues affecting the communities in which the company operates. October 2015 49
GOVERNANCE
A checklist for setting budget priorities Some may t h in k of budget BY VAN SMITH review as a yawn fest; however, others may spend hou rs work ing out the smallest of details. That’s because a budget is basically
a financial plan — not sexy, but extremely important in the condominium industry. Budgeting is so important that the Condominium Act
requires all corporations to maintain an operating budget and a capital budget for the repair and replacement of major components. Ontario is home to thousands of registered condominiums, each with a unique budget. What makes each unique depends on building construction, occupancy, services, amenities, staffing, weather, and the list goes on. All of these factors contribute to annual expenditures and must be considered by the board of directors when approving an annual budget. The elected directors for a condominium corporation meet annually
50 CONDOBUSINESS | www.condobusiness.ca
to review a preliminary budget — often prepared by the corporation’s management company. This typically takes place in the ninth month of the corporation’s fiscal year, to allow time for review and final approval of the budget before it gets distributed to the unit owners. Management firms put several days into preparing the budget and the supporting documents to justify the budget categories and amounts. Much data is gathered,
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“Sometimes a small group of vocal unit owners make requests such as that the five-year-old gym equipment be replaced. Determine whether items are a priority for the majority of owners or a select few.”
in c lu d ing histor ic al d at a from pr ior ye a r s , new u tili t y r ate s , insu r a n c e estimates, EI rates, WSIB rates, and contracted services, all to assist with budget packages. Setting priorities How does a board determine budget priorities when faced with rate increases? Well, this challenge normally presents itself when increases are excessive. Numerous condominium corporations are faced with double-digit rate increases for different reasons. In new buildings, the second year budget tends to rise significantly due to costs deferred by the developer. In older buildings, unanticipated repairs or higher than anticipated repairs may also lead to dramatic increases. The challenge for most directors is accepting an increase that will have a financial impact on their neighbours and themselves. Consider the following checklist when sitting down as a board to discuss budget priorities. 1. Review director responsibilities: The role of the director is to perform the duties and obligations of the corporation, regardless of cost. If the roof is leaking and requires major repair, the board must budget to repair the roof even if it is expensive and will increase maintenance fees. 2. D etermine who ha s priority: Sometimes a small group of vocal unit owners make requests such as that the five-year-old gym equipment be replaced. A lthough it would be nice to change the equipment, it is likely that the equipment will l ast another 10 ye ars. D eter mine whether items are a priority for the majority of owners or a select few.
3. Maintain the standard: Condominiums are like hotels, as they can either offer several amenities and services, or a just a few. Buildings with high-end and wide -ranging services are generally occupied by people who want to live a certain lifestyle and will pay for those luxury services. Budget to maintain the standard owners have come to expect. 4. C o n s u l t w i t h p r o f e s s i o n a l s : Professionals are able to evaluate buildings and document the condition of items such as the ro of or the underground garage, as examples. T hey are also able to prioritize a m a i nte n a n c e s c h e d u l e to h e l p d i re c to r s p l a n fo r t h e re p a i r s o r replacement of items. 5. Building improvements: Consider establishing an ongoing budget category for building improvements, such as installing an automatic door operator to provide easier access for residents. Some other examples include energy conservation/retrofit projects and signage upgrades. When faced with budgetar y constraints, consider small projects that have a big impact. 6. Operating versus reserve: Although a reserve fund can be used to replace a window, it’s best to budget an amount within the operating budget to handle some replacements. For example, a 10-year-old building with 600 window unit s sh o ul d c o nsi d er an annu al operating budget of one per cent (or six units) for repairs and replacement. The reserve fund should be used for a complete or phased replacement of the windows in accordance with the
52 CONDOBUSINESS | www.condobusiness.ca
reserve fund study. Windows are just one example; the same process applies for all reserve fund items. Over/under budget Setting budgets isn’t a perfect science. The idea is to set realistic estimates based on the information available and stick as closely to that framework as possible. Unforeseen events can lead to budget shortfalls, or more happily, budget surpluses. Here’s a note about budget surpluses, though: Ever heard stories about public sectors unnec ess aril y sp ending all of their budget? This also happens in the private sector, where departments may try to use up remaining dollars before year end. The concern is if they don’t spend all of their budget, then their budgets will be cut in the following year. T his isn’t quite the same in condominiums as the common expenses are collected based on each unit owner’s proportionate share of the corporation’s expenses. If there’s a surplus at the end of the fiscal year, the common surplus can be applied to the reserve fund or used toward future operating expenses. S et ting bud g et priorities involves making difficult decisions. This process can be made more manageable by using the above checklist as a guide. It should help directors focus on meeting their responsibilities by regularly maintaining and improving the building while delivering the services residents expect within the corporation’s means. 1
Van Smith, RCM, is a senior property manager with Malvern Condominium P ro p e r t y M a n a g e m e nt a n d fo rm e r ACMO committee member.
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October 2015 53 Untitled-1 1
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MAINTENANCE
Defogging windows What is the life expectancy of a condominium building? It’s
BY DALE KERR
something of a trick question that was posed to attendees at CCI-Toronto’s Condo 101 course on building maintenance and repair.
Their guesses ranged from 35 to 100 years. The answer came from a prominent condominium lawyer: “Because the Condo Act requires condominiums to be maintained, there is no reason a condominium shouldn’t last 1,000 years.”
O f course, the key element in his s t a te m e nt i s t h e re q u i re m e nt fo r maintenance. Ever y component of a building requires maintenance, from regular inspection and cleaning to eventual replacement to ensure the building as a whole will last that 1,000 years. This is the first in a series of articles that looks at the life expectancies and t h e m a i n te n a n c e re q u i re m e n t s o f different building components. This article addresses windows and specifically insulating glass units (IGUs).
Insulating glass units The most basic IGU (also called a double glazed unit) consists of two lites of glass sealed to an aluminum spacer to create a hermetically sealed, air-filled space between the lites of glass. The still air between the lites of glass provides the insulating value to the window. The insulating value of the IGU can be improved by replacing the air with argon gas, or less commonly with krypton gas, or by replacing the aluminum spacer with a spacer made of a material that is more
54 CONDOBUSINESS | www.condobusiness.ca
resistant to heat flow, such as silicone. The insulating value of the IGU can also be improved by adding additional lites of glass (and therefore air spaces) to create triple or quadruple glazed units, or by adding a low-e or other film material to the glass. Most often, IGUs are glazed directly into the frame of the window, although in some windows IGUs are glazed into operable (sliding or swinging) sash members that are then installed into the overall window frame. The IGUs
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MAINTENANCE
are typically glazed using a wet seal (or glazing tape — a sticky butyl material) on the exterior and a dry seal (a gasket) on the interior. T he seals prevent glass - to - metal contact, w h i c h c o u l d c a u s e g l a s s breakage; the ex terior wet seal also prevents water from penetrating the lower window frame members, or sill tracks. Although the sills have weep holes to the ex terior so that water that gets into the sill tracks can drain back to the outside rather to the inside where it can damage wall finishes.
This can happen if the exterior glazing tape has failed and rain gets into the glazing cavity (the space between the IGU and the window frame). This can also happen if there is a significant amount of condensation on the inside of the windows that finds its way into the glazing cavity. A cap bead of silicone sealant can be applied to the exterior perimeter to stop rain penetration if the glazing tape has failed. If condensation is the problem, reduce the humidity in the building and keep heavy drapes open so the warm interior air has a chance to warm the inside of the window.
Repair and replacement Over time, residents may notice that there is condensation or “fogging” in the Inspection and maintenance inside of their IGUs. This occurs when Residents and property managers can moisture diffuses through the seals of the help ensure they get the maximum life IGU. Desiccant, a material that absorbs out of their IGUs and their windows by moisture, is added to the spacer bar to regularly inspecting and maintaining them. A new standard (to be labelled CSA limit the moisture in the cavity between the lites of glass. Eventually, however, the A 4 4 0.5) is being developed by the desiccant cannot hold any more moisture Canadian Standards Association for high and fogging appears on the interior of the exposure windows, meaning windows installed in high - rise buildings or in IGU. Once this happens, the IGU needs to extreme climates, such as coastal regions. be replaced. This typically happens after It is anticipated that the standard will include a section on window maintenance. about 20 years, but it can occur earlier. Manufacturers typically warrant their The purpose of window maintenance as products for five years against this type stated in the draft standard is: of failure. However, the warranties only cover replacement of the IGU itself, • to ensure windows continue to provide long-term weather protection, security, not the labour for replacement. As the light and ventilation; window itself will last longer than the IGUs, many consultants recommend • to ensure windows remain in good working order; carr ying an annual allowance in the reserve fund starting at 10 to 15 years to • to control water damage to building interiors or wall assemblies from allow for isolated IGU replacement. possible leaks or condensation; and The life of an IGU will be significantly We Do Blinds_OD15_OD Sixth shortened if it is allowed topage sit in2014-10-31 water. • 3:to control energy consumption.
As per the standard, building resi d ent s are ex p e c te d to p er fo r m periodic basic inspection and maintenance tasks for their windows. Residents should visually inspect their windows, minimally in the spring and fall, for any damage, cracks in glass or finishes, fogging of the glass, missing or damaged weather-stripping or gaskets, damaged operating hardware (such as cranks or locks), difficult operation, staining that could be evidence of water penetration, or water standing in the sill tracks. Any problems should be reported to the building management. R e s i d e nt s a re a l s o ex p e c te d to clean the inside of the glass, and other interior window surfaces. In particular, sill tracks should be kept free of dirt that could affect the operation of sliding windows or that could block the weep holes. Replacing broken rollers on sliding sash will also help improve the life of the windows, as rough handling of the sash due to a broken roller can put stress on the sash that will shorten its life expectancy. Properly maintained, windows should last a minimum of 30 years or more. 1
Dale D. Kerr, M.Eng., P.Eng., BSSO, AC C I, is a principal of GRG Building Consultants. With close to 30 years’ experience looking at window systems, including six years as chair and vice-chair of the CSA A440 Standard on Windows, she is an expert on window technology. Dale can be reached at GRG’s Newmarket office at (800) 838-8183.
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Condo Clinics A Toronto city councillor has proposed following the example of a Chicago alderman who hosts annual meetings with condo board presidents. The so-called ‘Condo Clinics’ allow residents to raise municipal issues with their local representative, with city staff on hand to offer guidance
Coun. Shelley Carroll, the local representative for Ward 33 Don Valley East in Toronto, is proposing that the city extend to condo residents the same program-based support available to apartment tenants. Carroll’s motion, calling on the city to do a test run of ‘Condo Clinics,’ was due to be considered at the city’s executive committee on Oct. 20. The concept of ‘Condo Clinics’ comes from a Chicago alderman who hosts annual meetings with condo board presidents, residents and city staff. The meetings alert him to the municipal issues condo residents are facing and allow city staff to direct residents where to go for help. Carroll’s motion recommends that city departments, including City Planning, Municipal Licensing & Standards and Toronto Building, and external stakeholders, such as Tarion and the Federation of Metro Tenants' Associations, come together to develop a pilot program. The motion also prescribes that the program involve one meeting for each of the city’s four community council areas — Etobicoke York, North York, Scarborough, Toronto and East York — as well as a written resource for the public. Carroll acknowledges that condos are governed by provincial legislation, as are rentals, but adds that the city has a role in property standards. “Property standards are set and enforced here in City government, so we should be as available as possible to clarify our standards and provide education and resources on everyone’s roles and responsibilities and who can help when issues arise,” she writes. If adopted, Carroll’s motion will go on to City Council for a final stamp of approval. After conducting the pilot, city staff would be required to report back to council on how it went and the option of making the program a permanent fixture.
58 CONDOBUSINESS | www.condobusiness.ca
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