Corporate Governance of Condominium Corporations in Alberta; Director's Duties

     I have put off writing this blog about the responsibility and duties of Directors of Boards of Directors of condominium corporations for some time.  Whenever I tried to distill a principle worth communicating my mind wandered.  Today a basic principle coalesced.  From my experience as a lawyer I have concluded that many owners do not truly appreciate the basis upon which condominium corporations where developed.  This lack of appreciation forms the basis of many a misunderstanding between owners and in many cases is the source of many unnecessary disputes.  My objective in writing this blog is to summarize the statutory regime upon which condominium corporations are built and how they are managed and then offer some observations related to how boards of directors of condominium corporations can satisfy the legal obligations which the Condominium Property Act (Alberta) imposes on Directors and at the same time manage the expectations of owners of units. 

    The development of the legal concept of the condominium occurred in the second half of the twentieth century and as such it is a relatively new concept.  In respect of residential dwellings, the concept of a condominium ownership allowed owners to share responsibility for their dwellings and the property which was commonly used by owners (“common property”).  Notwithstanding the sharing of responsibility, at the root of all condominiums are individual owners who, like all persons, want to be heard and want to be respected.  However, the sharing of responsibility limits the ability of individual owners to directly influence the management of their dwellings.  In comparison to non-shared responsibility dwellings (ie. single detached homes), owners of condominium dwellings delegate responsibility for the management of their dwellings to a board of directors.  In Alberta the legislation which governs the creation of condominiums and the management of condominium dwellings is the:

Condominium Property Act, RSA 2000, c C-22 (the “CPA”)         

Section 25 of the CPA establishes that condominiums shall be constituted as corporations though not identical to corporations established for business purposes (condominium corporations are generally treated as non-profit corporations) and establishes that the condominium corporation shall consist of “owners of units”:

Condominium corporation 

25(1)  On the registration of a condominium plan, there is constituted a corporation under the name “Condominium Corporation No.         ” and the number to be specified is the number given to the plan on registration.

(2)  A corporation consists of all those persons

                             (a)    who are owners of units in the parcel to which the condominium plan applies 

(5)  The Companies Act and the Business Corporations Act do not apply to a corporation.

 

Though not a business corporation, every condominium corporation has a legal personality and is owned by the owners of the units.  In contrast to business corporations which issue shares to the business corporation’s shareholders and which shareholders liability is generally limited to their investment, ownership of the common property in a condominium corporations is a function of “unit factor”, also referred to as unit entitlement, and owner’s liability is not limited to their investment (ie. the purchase price paid for a condominium unit).  Section 6 of the CPA provides that:

Certificate to show share in common property 

6(1)  The Registrar, in issuing a certificate of title for a unit, shall certify on it the owner’s share in the common property.

(2)  The common property comprised in a registered condominium plan is held by the owners of all the units as tenants in common in shares proportional to the unit factors for their respective units.

Similar to business corporations where shareholders do not typically actively manage a corporation and shareholders instead elect or appoint a board of directors to control the corporation, condominium corporations also elect a board of directors to control the condominium corporation; the CPA states this in section 28:

Board of directors

28(1)  A corporation shall have a board of directors that is to be constituted as provided by the bylaws of the corporation. 

The board of directors is responsible for CONTROLLING, MANAGING and ADMINISTERING the condominium corporation and enforcing the condominium corporation’s bylaws; section 37 and 32 of the CPA address this:

Control and management 

37(1)  A corporation is responsible for the enforcement of its bylaws and the control, management and administration of its real and personal property, the common property and managed property.

                Bylaws 

32(1)  The bylaws shall regulate the corporation and provide for the control, management and administration of the units, the real and personal property of the corporation, the common property and managed property.

(2)  The owners of the units and anyone in possession of a unit are bound by the bylaws.

 

All owners of units and anyone in possession of a unit are bound by the bylaws of a condominium corporation.  The duties and responsibilities of directors of condominium corporation’s board of directors is prescribed by section 28(2):

 

Board of directors

28 (2)  Every member of a board, in exercising the powers and performing the duties of the office of member of the board, shall

                             (a)    act honestly and in good faith with a view to the best interests of the corporation, and

                             (b)    exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

 

Ironically, even though a condominium corporation is expressly stated to not be subject of the Business Corporations Act, this language mirrors that of section 122 of the Business Corporations Act (Alberta):

Duty of care of directors and officers 

122(1)  Every director and officer of a corporation in exercising the director’s or officer’s powers and discharging the director’s or officer’s duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation, and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

In summary, the CPA provides that the owners of units are to elect a board of directors who are delegated responsibility for the enforcement of the condominium corporation’s bylaws and delegated responsibility for the control, management and administration of the condominium corporation’s real and personal property, the common property and any applicable managed property (this concept emerges from bare land condominiums which is beyond the scope of this blog).

Board members, and in aggregate the board of directors upon which they serve, must act honestly and in good faith (this obligation being informed by the obligation to act in the best interests of the condominium corporation) and must not act negligently (that is, exercise the care diligence and skill of a reasonably prudent person in comparable circumstances).  Often disputes between owners and Boards of Directors (or the property managers retained by the Boards of Directors to assist in the enforcement of the condominium corporation’s bylaws and the control, management and administration of the condominium corporation’s real and personal property, the common property and managed property.

Section 67 of the CPA establishes the boundary of “improper conduct” by which all Board members and boards of directors must govern their conduct, by which all owners must govern there conduct and provides that an “interested party” may make application to the Court for relief in respect of the “improper conduct” of, amongst others, a board member, board of directors or an owner:

Court ordered remedy

67(1)  In this section,

                             (a)    “improper conduct” means

                                     (i)    non‑compliance with this Act, the regulations or the bylaws by a developer, a corporation, an employee of a corporation, a member of a board or an owner,

                                    (ii)    the conduct of the business affairs of a corporation in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party,

                                   (iii)    the exercise of the powers of the board in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party,

                               (iii.1)    the conduct of an owner that is oppressive or unfairly prejudicial to the corporation, a member of the board or another owner,

                                  (iv)    the conduct of the business affairs of a developer in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party or a purchaser or a prospective purchaser of a unit, or

                                   (v)    the exercise of the powers of the board by a developer in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of an interested party or a purchaser or a prospective purchaser of a unit;

                             (b)    “interested party” means an owner, a corporation, a member of the board, a registered mortgagee or any other person who has a registered interest in a unit.

 

(2)  Where on an application by an interested party the Court is satisfied that improper conduct has taken place, the Court may do one or more of the following:

                             (b)    direct that the person carrying on the improper conduct cease carrying on the improper conduct;

                             (c)    give directions as to how matters are to be carried out so that the improper conduct will not reoccur or continue;

                             (f)    give any other directions or make any other order that the Court considers appropriate in the circumstances.

To be clear section 67 does not just impose obligations to act properly on board members and Boards of Directors but also provides, among other things, that the failure of an owner of a unit to comply with the CPA, the regulations or a condominium corporation’s bylaws or actions of an owner of a unit which are “oppressive or unfairly prejudicial to the corporation, a member of the board or another owner”  are “improper conduct”.  This is a very significant point and one which is not appreciated by many owners of units.   Owners of units expecting to be treated reasonably by boards of directors owe a reciprocal duty to be reasonable towards board members and boards of directors.

Owners of unit must understand that, generally speaking, the Courts in Alberta will defer to decisions made by Boards of Directors [see 934859 Alberta Inc. v. Condominium Corporation No. 0312180, 2007 ABQB 640 (CanLII)]:

 

[55]            In my view, as a matter of general application, Courts do defer to duly elected condominium boards. However if improper conduct is alleged and a Court is satisfied that improper conduct has taken place, the Court, pursuant to Section 67(2) of the Condominium Act, may then direct and/or grant any of the remedies set out therein.

 

The CPA thus imposes clear obligations on boards of directors and individual directors to act reasonably and in good faith.  If this obligation is not satisfied the Court can conclude that “improper conduct” has occurred.   This obligation is matched by the obligation on owners of condominium units to not act in a manner which is in breach of the bylaws or is  oppressive or unfairly prejudicial to the corporation, a member of the board or another owner. 

This blog is being written in August of 2020.  Condominium corporations are facing a changed operating environment because of the impact of Covid-19 on our society generally and economically.  Recently I have seen the expectations of owners increase due to this dynamic.  Owners must appreciate that board members and boards of directors have obligations which take priority over the interests of any particular owner.   That is, directors and boards of directors must act in the best interests of the condominium corporation which the board of directors serves. 

For example, it would not be appropriate for a board of directors to permit owners to not pay the monthly condominium contribution required by an owner of a unit; payment of condominium contributions by owners is the economic life blood of condominium corporations.  Failure to require owners to pay may be considered to be a breach of the obligation to act in good faith, negligent and, accordingly, improper conduct.  This does not preclude a board of directors agreeing to a deferral on arrears in condominiums contributions which have accrued.  However, boards of directors must impose a reasonable timeline (usually not more than 6 months) to allow owners of units in arrears to bring the owner’s contribution account into good standing.

By way of one further example, boards of directors must be sure to review the bylaws of their condominium corporation prior to making decisions which impact any particular owner.  The bylaws of a condominium corporation, supplemented by the CPA and the regulations, provide instruction on how various issues are to be handled; ie. breach of rules, breach of bylaws, chargebacks for damages due to insured and uninsured perils which are in breach of a condominium corporation’s bylaws, collection of insurance deductibles.  Often important steps are missed by boards of directors and could lead to owners suggesting that boards of directors have acted improperly.

Boards of directors must understand that decisions of boards of directors are either made by an ordinary resolution at a duly convened meeting of the board of directors or by a resolution in lieu of a meeting signed by all board members.  Boards of directors cannot enforce the bylaws of the condominium corporation without satisfying this basic corporate governance principle; boards of directors make decisions by resolution.   Too often boards of directors act causally and make decisions by circuitous email chains or verbally; if decisions are made in this manner, which is not recommended but specifically discouraged, then such decisions should be ratified at a duly called board meeting or by a resolution in lieu of  a meeting signed by all board members.

If boards of directors govern themselves as I have encouraged the likelihood of a dispute occurring with owners will be reduced, not eliminated.  Moreover, it behooves boards of directors to carry on in a manner which satisfies the basic principles of corporate governance and to act in the best interests of the condominium corporation.

The Crossroads of Condominium Corporation Budgets, Covid-19 and Reserve Funds

Post Script:  

The Alberta Government issued an Order in Council on June 1, 2020 which now permits encroachment on reserve funds for purposes of temporarily paying for the control, management and administration of the real and personal property of the corporation, the common property and managed property:

 

https://www.qp.alberta.ca/documents/Orders/Orders_in_Council/2020/2020_169.pdf

Section 27.2 of the Regulations must be met:

2) Before a corporation may transfer funds under this section, the following conditions must be met:

(a) a declaration of emergency has been proclaimed under the Emergencies Act (Canada), a state of emergency or state of local emergency has been declared under the Emergency Management Act or a state of public health emergency or local state of public health emergency has been declared under the Public Health Act, and the declaration of emergency, state of emergency, state of local emergency or state of public health emergency or local state of public health emergency remains in effect; 

(b) the corporation has received lower revenue from contributions compared to the revenue expected from contributions levied on owners as a result of:

       (i)   the declaration or state of emergency,
       (ii)  events that caused or led to the declaration or state of emergency, or
       (iii) events related to the declaration or state of emergency that occurred during the declaration or state of emergency;

(c) as a result of the lower revenue described in clause (b), a shortfall exists between revenue received and expenditures to be paid from the operating fund; 

(d) the corporation has no prohibition in the corporation’s bylaws on using the reserve fund in this manner. 

(4) Prior to transferring funds currently in the reserve fund for a purpose identified in subsection (1), the board must:

a) serve a notification to owners consisting of

1. (i)  a statement of the board’s intention to transfer reserve funds for a purpose identified in subsection (1),
   
2. (ii)  notice of the date when the board intends to make a decision,
   
3. (iii)  a description of any alternative that was considered to transferring reserve funds, and the reason why the alternative was not adopted, and
   
4. (iv)  a proposed revision to the reserve fund plan that
   
   (A)  identifies the amount of the reserve fund being transferred to the operating fund under this section, and
   (B)  identifies a specific repayment plan that will be used to repay the amount transferred from the reserve fund within 2 years of the date the declaration or state of emergency has ended,

(b) pass a board resolution with a 75% majority of directors eligible to vote that

1. (i)  authorizes a transfer from the reserve fund to the operating fund in accordance with this section, and
   
2. (ii)  approves the proposed revision to the reserve fund plan referred to in clause (a)(iv),
   

     and

(c) serve a notice to owners confirming that the changes to the reserve fund plan have been adopted and provide the revised reserve fund plan to owners.

(5) Nothing in this section is to be read as relieving, limiting or deferring an owner’s obligation to pay any contributions levied by the board. 

Original Blog:


The Crossroads of Condominium Corporation Budgets, Covid-19 and Reserve Funds

Norway has one of the largest sovereign wealth funds in the world; it is estimated to have been built to over $1 trillion.  Ordinarily Norway’s government does not draw from the fund more than what it generates in cash flow.  However, the deficit caused by Covid-19 has led the government of Norway to draw from the fund more than this sum effectively encroaching on the capital of the fund; https://www.bloomberg.com/news/articles/2020-05-12/world-s-biggest-wealth-fund-faces-record-37-billion-withdrawal

The Covid-19 viral infection may be creating a similar dynamic which the Boards of Directors of condominium corporations must face.   The monthly revenue received by condominium corporations may soon or already be insufficient to cover the monthly expenditures of the condominium corporation.  In this circumstance can a Board of Directors encroach upon the Reserve Fund to make up this deficiency?

Condominium Corporations are required to be maintain a Reserve Fund by section 38 of the Condominium Property Act  

Reserve fund

38(1)  Subject to the regulations, a corporation shall, from funds levied under section 39(1)(a) or under section 39.1, establish and maintain a reserve fund that is reasonably sufficient to provide for major repairs and replacement of the following, where the repair or replacement is of a nature that does not normally occur annually:

                             (a)    any real and personal property of the corporation;

                             (b)    the common property;

                             (c)    managed property.

The Condominium Property Act was recently amended to permit withdrawals for payment of the reserve funds study and reports prepared by an expert in examining the condition of the real and personal property of the condominium corporation and any other purpose provided for in the regulations.  However, neither the Condominium Property Act nor the Regulations specifically permit a withdrawal from the Reserve Fund for deficiencies in operating funds.  They do specify the contrary that money in the reserve fund is an asset of the corporation and shall not be distributed or refunded to owners.  For general interest, the Condominium Property Act was recently amended to prescribe what capital improvements were permissible to use Reserve Funds for:

 (4)  For the purposes of this section and section 39.1, the following are not capital improvements:

                             (a)    the replacement of existing real and personal property of the corporation, the common property or managed property with

                                     (i)    the contemporary equivalent of an obsolete property, or

                                    (ii)    a lower cost equivalent of the existing property;

                             (b)    any other replacement prescribed by the regulations.

The Regulations do not assist in this regard.  Section 27 of the Regulations provides that condominium corporations must fund the Reserve Fund in accordance with section 38 of the Condominium Property Act and the corporation shall not commingle monies in the Reserve Fund with the condominium corporation’s operating funds:

Maintenance of reserve fund

27(1)   A corporation must maintain the funding of its reserve fund at an appropriate amount or in an appropriate state so that the requirements of section 38 of the Act continue to be met.

(2)  Except for the purposes of paying for repairs to or replacement of depreciating property, neither a corporation nor any person holding money or dealing with money on behalf of the corporation is to commingle any funds that make up the corporation’s reserve fund with the corporation’s operating funds or any funds of any other corporation or other entity.

(3)  Neither a corporation nor any person holding money or dealing with money on behalf of the corporation is to commingle any funds that make up the corporation’s reserve fund with the funds that make up any other corporation’s reserve fund.

From these sections, the conclusion which must be drawn is that condominium corporations cannot follow Norway’s approach and encroach on the condominium corporation’s Reserve Fund to fund an operating deficiency.   However, does the existence and impact of Covid-19 change this general principal?

Though decided prior to the recent amendments to the Condominium Property Act the Court of Queen’s Bench in Scotwick Realty Services Inc. v. The Owners: Condominium Plan No. 7510479, (https://www.canlii.org/en/ab/abqb/doc/2003/2003abqb550/2003abqb550.pdf) commented on the ability to use monies from the Reserve Fund in emergent situations.   Though the case dealt with an expenditure not contemplated by the Reserve Fund Plan, a question can be asked whether the Court’s commentary could apply in situations of great urgency (ie. Covid-19) to allow condominium corporations to use monies from the Reserve Fund to make payment of operating expenditures.  Again, on the face of it based on section 38 of the Condominium Property Act and section 27 of the Regulations the answer is a clear NO!  However, the question can be asked if an argument supporting such encroachment can be based on the decision in the Scotwick Realty Services Inc. case.  The Court of Queen’s Bench stated:

[15] The next question is then the consequences of there being an unexpected expenditure from the reserve fund. One possible interpretation of the Act is that the corporation is not permitted to make any expenditure from the reserve fund unless that expenditure is anticipated in the reserve fund study and the reserve fund plan. In my view, this is not the correct interpretation of the Act. Preparing a reserve fund plan that projects many years into the future is always going to be a bit of a guessing game. The exact timing of the expenditure and the exact quantum of the expenditure will always be an estimate only. I note that Regulation 23 specifically states that the study is to be an “estimate”. That the estimate will not always be accurate is obvious.

Boards of Directors could argue that the circumstances of Covid-19, the concomitant closure of the Courts and the impact of this on the ability of the condominium corporation to collect unpaid contributions is a special case not precluded by the section 38 of the Condominium Property Act and section 27 of the Regulations.  This Board of Director’s decision would not be without risk as this position is not supported by the act or the law and as such is a weak argument.  Moreover, an owner could assert that such conduct of the Board of Directors is “improper” (section 67 of the Condominium Property Act) based on the clear breach of the Condominium Property Act and the Regulations.  However, some may think that Covid-19 has created an unprecedented situation that required a Board of Directors of a condominium corporations to run this risk.  Covid-19 has created tremendous financial pressure on Boards of Directors who remain responsible for managing the condominium corporation’s revenue and expenses.  As such these desperate times may be motivation for Boards of Directors to take such risks.  However, Boards of Directors should think long and hard before taking this very likely unlawful step.   

As an alternative to encroaching on the Reserve Fund and commingling monies from the Reserve Fund with the operating account, Boards of Directors may, to assist financially strapped owners, elect to amend their budgets to reduce the amount of money being collected for the Reserve Fund.  Such decision, though is likely still in breach of the Condominium Property Act and the obligation of the Board of Directors to fully fund the Reserve Fund.  Notwithstanding the action is still a breach of the Condominium Property Act, it may be less offensive to the Court because it does not involve allowing funds which have become part of the Reserve Fund to become commingled with the operating account.   If the Court concludes that this lesser step of a Board of Directors is permissible in light of Covid-19, the Board of Director’s has an obligation to remedy the impact on the Reserve Fund.  The Court commented in the Scotwick Realty Services Inc. case on the obligation of the Board of Directors to repay the funds removed from the Reserve Fund:

[19] One must then go on to consider what happens if an unexpected expenditure is made from the fund. This will, in many cases, put the fund in a deficit position, particularly when the expenditures are of the magnitude being experienced in this case. In my view, this takes the condominium corporation back to Section 38(1), which I have noted requires that the fund at all times, "provides sufficient funds that can reasonably be expected to provide for major repairs and replacement". Regulation 27(1) states that this requirement must "continue to be met". The only conclusion that I can reach is that a Board confronted with an unexpected expenditure then has a duty to revisit the reserve fund plan and make any necessary adjustments to the reserve fund levy to accommodate this unexpected expenditure. In some cases, a whole new reserve fund study might be needed. In other cases, the Board might simply wait for the 5-year anniversary of the reserve fund study, at which time the Act requires a new study in any event. In other cases, the Board could make a special levy, as was done in this case. The Board is also at liberty to fund such expenditures from its general operating account. The Board could also increase the reserve fund levy so that the reserve fund will be back on track. In most cases, the Board will probably use a combination of these techniques.

As such any impact of a Board of Director’s decision on the Reserve Fund must be remedied in future. 

The writer queries if the longer the catastrophic impact of Covid-19 occurs if it will be more likely that Covid-19 will be remembered as a time when what was normal conduct of the Board of Directors gave way to what was most practical?